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Edited Transcript of CWCO earnings conference call or presentation 18-Mar-19 3:00pm GMT

Q4 2018 Consolidated Water Co Ltd Earnings Call

George Town Mar 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Consolidated Water Co Ltd earnings conference call or presentation Monday, March 18, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David W. Sasnett

Consolidated Water Co. Ltd. - Executive VP & CFO

* Frederick W. McTaggart

Consolidated Water Co. Ltd. - CEO, President & Director

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Conference Call Participants

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* Hasan Doza

Water Asset Management, LLC - Senior Investment Analyst

* John Bair

* Michael E. Gaugler

Janney Montgomery Scott LLC, Research Division - MD of Utilities & Infrastructure and Senior Analyst

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Presentation

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Operator [1]

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Good morning, and thank you for joining us today to discuss Consolidated Water Co.'s year-end December 31, 2018. With us today is the Chief Executive Officer of Consolidated Water Co., Rick McTaggart. He is joined by the company's Chief Financial Officer, David Sasnett. (Operator Instructions)

I'd like to remind everyone that today's call is being recorded and will be made available for telephone replay via instructions in today's press release, which is available in the Investors section of the company's website.

Now I'd like to turn the call over to Consolidated Water Co.'s CEO, Rick McTaggart.

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [2]

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Thank you, Melissa, and good morning, everyone. Thanks for joining us today on the call.

As you saw from the earnings release we issued earlier this morning, 2018 was, indeed, a great year for Consolidated Water, and we made progress growing our business on several fronts. On the call today, I would like to talk about what produced these strong results and about the foundation we continue to lay in support of our future growth and expansion. We achieved improvement across all business segments, with total revenues up by 11%, gross profit up by 11% and net income up by 84% compared to 2017.

Now before I go further, I'd like to turn the call over to David, who will take us through the financial details for the year, after which I will return to discuss our recent operational achievements and our outlook. David?

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [3]

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Thanks, Rick, and good morning, everyone. Hopefully, everyone's had a chance to look at our press release, which was issued this morning.

Our total revenues for 2018 increased 11%, reaching $65.7 million. This increase reflects higher revenues across all 4 of our operating segments, which consist of retail, bulk, manufacturing and services.

In 2018, our retail water segment represented 39% of our total revenue, with bulk water at 47%, services came in at 3%, while manufacturing generated about 11% of our consolidated revenues. Gross profit for 2018 amounted to $26.7 million or 41% of revenues. This was a significant improvement from the $24 million in gross profit or 40% of our total revenues for 2017.

In 2017, we recorded an impairment loss for our CW-Bali subsidiary of $1.7 million. This was based upon the operating losses it had generated and our projections of its future cash flows at that time. However, in 2018, Bali did not materially impact our results of operations. The carrying value of its assets have been reduced to almost 0, and the operating loss we recognized for Bali this year was around $200,000.

We also recorded an impairment loss of approximately $1.4 million in 2017 to reduce the carrying value of the goodwill we recorded in connection with the Aerex acquisition. This was based upon our projections of its cash flows at that time. According to our current projections of Aerex's future cash flows, no impairment loss for the Aerex goodwill was required for 2018.

Our general and administrative expenses on a consolidated basis remained virtually flat in 2018 at $18.7 million. Other income, net, for 2018 increased to $2.7 million as compared to $1.5 million in 2017. This was related to incremental income of nearly $2.3 million generated by our investment in OC-BVI in 2018, and that was connected to a -- or resulted from a litigation settlement that affiliate received during the year.

We had incremental interest income in 2018 of about $283,000 arising from higher interest-earning balances. These items more than offset the incremental expense impact of about $1.2 million arising from the revaluation to fair value of our put/call options associated with our Aerex acquisition, which was completed back in 2016.

Our net income for 2018 was $11.3 million or $0.75 per share on a fully diluted basis. This is up 84% from the $6.1 million or $0.41 per share on a fully diluted basis that we reported for 2017. Our net income from continuing operations for 2018 was $10.2 million or $0.68 per share. That's compared to $5.1 million or 34% per share for last year.

Turning to our balance sheet. Cash and cash equivalents totaled $31.8 million as of December 31, 2018, as compared to $45.3 million as of December 31, 2017. The decrease reflects increases in accounts receivable as well as capital expenditures related to property, plant and equipment and construction in progress. Accounts receivable increased from $14.7 million at December 31, 2017, to $24.2 million at December 31, 2018. This increase is attributable to our Bahamas subsidiary.

Property, plant and equipment at December 31, 2018, was $9.2 million, higher than the prior year-end balance as a result of expenditures we made to refurbish our Windsor plant in The Bahamas and, to a lesser extent, capital expenditures made in Grand Cayman. Our Windsor plant expenditures amounted to about $11.9 million. The money we spent in Grand Cayman, around $3.1 million, of course. These additions were offset by almost $5.5 million in depreciation expense that we recorded for the year.

Our construction in progress increased by approximately $4.2 million due to the expansion of the -- in Grand Cayman of our Abel Castillo Water Works plant and the addition of a new water storage plant -- tank for this plant. It's important to note that the Windsor refurbishment project was completed in the fourth quarter of 2018 and the Abel Castillo plant was commissioned last month. And with respect to our increase in accounts receivable, it's important to note that based upon recent correspondence from The Bahamas Ministry of Finance, we expect the collection of our accounts receivables in The Bahamas to improve significantly over the coming quarters.

Our projected liquidity requirements for 2019 include capital expenditures for existing operations of $4 million, $2.5 million to be expended for NSC's and AdR's project development activities related to our Mexico project and approximately $1.3 million for dividends payable. Our liquidity requirements may also include future quarterly dividends if such dividends are declared by our board. Our dividend payments amounted to approximately $5.1 million for the year ended December 31, 2018.

So this wraps up the financial results for the year, and I'd like to turn the call back over to Rick.

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [4]

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Well, thanks, David. Our 2018 results show that our dedicated teams representing each of our segments have been working very hard to improve shareholder value. Our primary objective is to provide water services in areas of the world where the supply of naturally occurring potable water is scarce, especially where the use of reverse osmosis technology is economically feasible. While we believe that many water-scarce countries in the Caribbean and other select markets present significant opportunities for our business model, not all areas of the world present ideal environments for further development due to changing economic, political or other conditions and, consequently, may present opportunities for strategic divestment.

Last December, we initiated the sale of our bulk water operations in Belize to the government-run Belize Water Services. And last month, we completed this sale for a total of USD 7 million. All totaled, we have since been able to repatriate $12 million from Belize, which we plan to deploy toward our growth initiatives in 2019 and beyond.

In terms of new developments, we have continued to advance our 100 million-gallon per day seawater desalination project in Rosarito, Mexico. Last month, we were able to secure for the project 2 critical permits: one, for the extraction of seawater to supply the desalination process; and a second permit for the discharge of concentrated seawater, which is a by-product of the desalination process. Preparing the environmental studies, public consultations and permit applications has been a multiyear process, and we're pleased to have finally reached this milestone in the project.

This is an important project for both Consolidated Water and the local population of Mexico. The state and federal authorities have expressed that this project is of paramount importance to this area of Mexico and rightly so. The rapidly growing coastal cities in Baja California, Mexico have become heavily dependent on the overtaxed Colorado River. The aqueduct from the river to the coastal region crosses several earthquake zones, and any failure along the hundreds of miles of canals and pipelines could seriously interrupt water supplies to the coast. The Rosarito plant will serve to diversify the region's water resources and secure drinking water supplies in Baja California, Mexico for decades to come.

In February 2018, we executed a share subscription agreement with our partners in Mexico for the balance of the equity funding required for the project, marking a major step forward. In June 2018, we engaged Suez as the engineering, construction and procurement contractor for the project. And recently, the Inter-American Development Bank or IDB approved a credit facility for up to USD 200 million to be used for construction and project development. This represents a substantial portion of the financing required to complete the first phase, and we expect the remaining to follow according to schedule.

Now I'd like to say something about our manufacturing operations. Through our Aerex Industries subsidiary, we manufacture and service a wide range of water-related products. We also provide design, engineering, operating and other services that are applicable to the water production, supply and treatment for commercial, municipal and industrial sectors. Substantially all of Aerex's customers are U.S. companies, and in 2018, our manufacturing operations generated about 11% of our consolidated revenues. Our manufacturing segment saw increased revenues as well as significantly improved operating results last year, and we expect to see continued improvements in manufacturing activity over the coming quarters.

In terms of environmental factors, 2018 was a relatively dry year in Grand Cayman. We saw rainfall last year which was 30% lower than rainfall in 2017 and 31% lower than the 30-year average. We believe this lack of rainfall in 2018 helped to drive an 8% increase in the volume of water we sold last year in Grand Cayman. And I've said this many times before, and I'll say it again. We traditionally sell more water in Grand Cayman during the first and second quarters of the year, when the numbers of tourists visiting the area of operation is typically greater and local rainfall is less versus the later parts of the year. For 2019, we anticipate a seasonally stronger first half of the year due to favorable tourism activity in Grand Cayman.

I would like to speak for a moment about our acquisition strategy. Our Board of Directors considers acquisitions a strategic imperative, particularly given our substantial cash on hand. We are currently actively speaking to at least one interested party, and we have our eyes on others. Our ideal target will have an existing water treatment-related business and will give us access to new markets for our existing products and services. We anticipate any necessary funding to be primarily debt given that we have no debt outstanding in an otherwise strong balance sheet.

And just to talk about the industry generally, according to industry researchers, the global market for desalination is expected to double by 2026, reaching more than $37 billion. This industry growth is being driven by multiple catalysts, from shrinking or limited freshwater resources or adverse environmental changes to growing populations, increasing freshwater prices and more favorable regulatory and tax environments. These driving factors bode well for Consolidated Water and our growth and shareholder value over the quarters and years to come.

Now with that, I'd like to open the call for questions. Melissa?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mike Gaugler of Janney.

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Michael E. Gaugler, Janney Montgomery Scott LLC, Research Division - MD of Utilities & Infrastructure and Senior Analyst [2]

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Rick, my call dropped on you about halfway through your comments. I'm just wondering if you covered developments on Grand Cayman in terms of the license agreement?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [3]

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I didn't mention anything about the license, Mike. Those talks are continuing. Slowly but surely, we're making progress there. I just spoke generally about the environment there boding well for the first half of the year for better sales.

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Michael E. Gaugler, Janney Montgomery Scott LLC, Research Division - MD of Utilities & Infrastructure and Senior Analyst [4]

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Okay. Any developments in 4Q on that front?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [5]

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No. We had meetings, and we continue to negotiate with the OfReg on the terms of the new license.

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Operator [6]

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(Operator Instructions) Our next question comes from Hasan Doza of WAM.

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Hasan Doza, Water Asset Management, LLC - Senior Investment Analyst [7]

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Hasan Doza from Water Asset Management. Just wanted to expand on your comment about the M&A. If I heard correctly, you were talking about one active candidate and exposure to water treatment. I just wanted to understand a little bit better. Obviously not going into specifics, but are you kind of referring -- what area geographically would you be most interested in? Is this candidate you mentioned, is this someone with assets in your sweet spot like in the Caribbean? Or would it be other areas where you currently don't have exposure?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [8]

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Yes. Without getting into any specifics, I mean, I think we've talked before with investors about our focus being outside of the Caribbean, really. Now, I mean, the Caribbean is quite slow. There's not many projects there at the moment. We've shifted our focus, really, for the last sort of 8 years to North America and Latin American countries. You could expect us to come up with something in those regions and in regions where we could bring in our expertise operating desalination plants and water treatment equipment efficiently and reliably and piggyback that on a new market venture.

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Operator [9]

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(Operator Instructions) Our next question comes from John Bair of Ascend Wealth Advisors.

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John Bair, [10]

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A couple of questions. With the Belize settlement, am I on the right track here that those moneys would be added to your year-end cash balance by that $12 million?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [11]

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Yes. Some of the money came in before the year-end. And then I think, David, you can correct me. There's certain amount, probably more than half, that came in after year-end, in January.

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [12]

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Yes. The way it works is that the incremental cash to our company was about $5 million. That was received after the end of the year. However, there was a substantial amount of cash there that we couldn't get out of the country. So in total, when you take the money that we received equity in the year and the cash we were able to repatriate in the last half of 2018, the net impact is $12 million in cash. But the increase in the cash balance of the company wasn't reflected at the end of the year. It will be reflected in the first quarter of 2019.

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John Bair, [13]

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Okay. So you still have some outstanding moneys that have not been repatriated. Am I understanding that correctly?

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [14]

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There's $265,000 that was withheld as a retainer for certain warranties that we gave on the sale. And assuming there are no claims against those warranties, we'll get that $265,000 sometime around June or July of 2019. But that's not a large amount. The rest of it, we got all of it, though.

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John Bair, [15]

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Okay, good. That's what I was hoping to hear. My other question regards your financing, the $200 million line of credit in there. Is that applicable to what your ultimate equity position in the project may be? Or is that just kind of a first step of a grand attempt to raise the capital needed to get the project off the ground?

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [16]

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Would you like to take that, Rick?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [17]

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The debt financing portion that I mentioned from IDB is -- it's a substantial portion of the total debt that's required for the project. There are 4 other banks that are in the banking consortium and are at various points in their approval processes. And then on the equity side, I've mentioned in February last year, we had signed a subscription agreement with 2 other parties. That covers the additional equity money that we need for the project, for closing and during construction. The missing piece right now is the balance of the debt, and we'll be working closely with these other banks to close those deals as well.

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John Bair, [18]

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And are you optimistic that, that's going to occur in 2019? And is that moving along satisfactorily, I guess?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [19]

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Well, John, I'm pushing as far as I can. It's really up to the state government to finalize the guarantee structures for the project. And as soon as that's done, we can move forward very quickly.

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Operator [20]

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All right. At this time, that concludes our question-and-answer session. I would like to now turn the call back over to Mr. McTaggart. Sir, please go ahead.

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [21]

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Well, thanks, Melissa. I just wanted to thank everybody again for joining call, and I hope you all can join us in May, when we announce our first quarter results. Take care. Thank you.

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Operator [22]

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Thank you, ladies and gentlemen. Now before we conclude today's call, I would like to provide the company's safe harbor statement that includes important cautions regarding forward-looking statements made during today's call.

The information that we have provided in this conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements regarding the company's future revenues, future plans, objectives, expectations and events, assumptions and estimates. Forward-looking statements can be identified by the use of the word or phrases usually containing the words believe, estimate, project, intend, expect, should, will or similar expressions.

Statements that are not historical facts are based on the company's current expectations, beliefs, assumptions, estimates, forecasts and projections for its business and the industry and markets related to its business. Any forward-looking statements made during this conference call are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Actual outcomes and results may differ materially from what is expressed in such forward-looking statements.

Important factors which may affect these actual outcomes and results include, without limitation, continued acceptance of the company's products and services in the marketplace; changes in its relationships with the government of its jurisdictions in which it operates; the outcome of its negotiations with the Cayman government regarding new retail license agreement; its ability to successfully secure contracts for new water projects, including the project under development in Baja California, Mexico; its ability to develop and operate such projects profitably and its ability to renew existing bulk water supply contracts; its ability to collect its delinquent accounts receivable in The Bahamas; and the ability to manage growth and the other factors, including those risk factors set forth under Part 1, Item 1A, Risk Factors in the company's annual report on Form 10-K.

Any forward-looking statements made during the conference call speak as of today's date. The company expressly disclaims any obligation or undertaking to update or revise any forward-looking statements made during this conference call to reflect any change in its expectation with regard thereto or any change in events, conditions or circumstances on which any forward-looking statements is based, except as it may be required by law.

Before we end today's conference call, I would like to remind everyone that this call will be available for replay starting later this evening and running through March 25. Please refer to today's earnings release for dial-in replay instructions available via the company's website at www.cwco.com.

Thank you for joining us today. This concludes the conference call. You may now disconnect.