U.S. Markets close in 4 hrs 59 mins

Edited Transcript of CWCO earnings conference call or presentation 12-Nov-19 4:00pm GMT

Q3 2019 Consolidated Water Co Ltd Earnings Call

George Town Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Consolidated Water Co Ltd earnings conference call or presentation Tuesday, November 12, 2019 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David W. Sasnett

Consolidated Water Co. Ltd. - Executive VP & CFO

* Frederick W. McTaggart

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

================================================================================

Conference Call Participants

================================================================================

* Gerard J. Sweeney

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* John H. Bair

Ascend Wealth Advisors, LLC - President

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, thank you for joining us today to discuss Consolidated Water Company's third quarter ending September 30, 2019.

Joining us today is the Chief Executive Officer of Consolidated Water Co. Rick McTaggart; and the company's Chief Financial Officer, David Sasnett. (Operator Instructions) 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 will be made available for telecom replay via instructions in today's press release, which is available in the Investor Relations of the company's website.

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

Sir, please go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Chuck, and good morning, everyone. Thanks for joining us today on the call. As you saw from the earnings release we issued earlier this morning, we advanced our business in a number of areas in Q3.

However, our financial performance was not as good as the same quarter last year due to an unusual confluence of factors across our operating segments.

Revenue generated by our bulk water segment was lower due to new rates that came into effect earlier this year in Grand Cayman, under new long-term operating and maintenance contracts that we won through competitive bidding processes. We believe that our bulk segment revenue and gross profit have now stabilized with the full impact of these new contracts reflected in our Q3 results.

While manufacturing revenue was slightly lower in the quarter compared to the same quarter last year, our project backlog has been growing, therefore we don't see Q3 as indicative of a trend in our manufacturing segment, and we expect to report a year of strong revenue growth and profitability for this segment as demonstrated by our year-to-date results.

For the 9 months of the year, we achieved improvement across the board with total revenue up 7%, gross profit up by 9% and net income up by 18% compared to the first 9 months of last year.

Q3 underscores the importance of further diversifying revenue by adding complementary service and product offerings as well as expanding our geographic presence and customer base.

This effort began with the acquisition of Aerex in 2016. We have since strengthened our executive team and Aerex's capabilities with the addition of a new VP of Manufacturing earlier this year, who is overseeing the expansion of our Aerex operations.

We recently acquired 51% of PERC Water Corporation, a water infrastructure provider which has expanded our product offerings and presence in the U.S.

This synergistic acquisition also provides a platform to expand our core business of designing, constructing and operating desalination plants into water-short regions of the U.S.

Before I talk more about this acquisition and other operational highlights, I'd like to turn the call over to David, who will walk you through some of the financial highlights of the quarter.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Rick. Good morning, everyone. Hopefully everyone's had a chance to read our press release, which came out earlier this morning. For the third quarter of 2019, our revenue declined 12% to $15.9 million, which was driven primarily by decreases of $1.4 million in bulk water sales, $711,000 in services revenue and $181,000 in manufacturing revenue.

The decrease in bulk water sales was due to the lower rates that came into effect in February for water supplied from the Red Gate and North Sound plants as well as lower rates that came into effect in July for the North Side Water Works plant under the recently obtained new contracts with the Water Authority-Cayman for these facilities.

The decrease in services revenue was due to lower fees generated under our management services agreement with OC-BVI, and it's important to note the last year's revenues also included $710,000 from a refurbishment project we completed for our affiliate in the British Virgin Islands.

Our manufacturing revenue was lower due to slightly fewer active projects. These decreases were partially offset by a marginal increase in retail revenue, which was due to an increase in the volume of water sold by Cayman Water.

Our gross profit was $6.7 million for the third quarter compared to $7.1 million in the year ago period with gross margin as a percentage of revenue improving from 39.5% to 42.2%.

Net income in the third quarter attributable to stockholders was $1.7 million or $0.11 per basic and diluted share compared to $4.6 million or $0.30 per basic and diluted share in the year ago quarter.

This decrease was primarily due to last year's quarter including the substantial non-recurring income from a legal settlement that was obtained by our equity investee in British Virgin Islands.

{ For the first 9 months], revenue increased 7% over the same period last year to $51.2 million. The increase was primarily driven by increases of $5.7 million in manufacturing and $1.1 million in retail revenue.

Manufacturing revenue increased due to an increase in orders and production activity.

Retail revenue improved due to a more than 2% increase in the volume of water sold by Cayman Water, with this increase attributable to lower rainfall in 2019 as compared to 2018.

We traditionally sell more water in Grand Cayman during the first half of the calendar year when the number of visitors is typically greater and local rainfall is less as compared to the back half of the year.

In 2019, reportedly, stayover tourist numbers continue to exceed 2018, which was supported by the additional capacity of the recently expanded airport in Grand Cayman. This indicates that 2020 may be another record year for stayover visitors in our exclusive utility franchise area.

The growth in our retail revenue was also due to increased energy prices, which increased the energy pass-through component of our retail revenue rates by $400,000.

The increase in manufacturing and retail revenues for the first 9 months was partially offset by decreases in services and bulk revenue.

The decrease in services revenue was due to lower fees generated under our management contract and the $710,000 in plant refurbishment fees for OC-BVI that I mentioned earlier.

As with Q3, the 9-month decrease on bulk water revenue was due to the lower rates that came into effect in February for water supplied by the Red Gate and North Sound plants as well as lower rates that came into effect in July for the North Side Water Works plant.

Gross profit for the first 9 months increased 9% to $21.2 million, with gross margin as a percentage of revenue improving from 40.9% to 41.5% as compared during the first 9 months of 2018.

Net income attributable to our stockholders for the 9 months ended September 30, 2019, was $10.4 million or $0.69 per diluted share, up 18% from the $8.8 million or $0.58 per diluted share that we reported for the same period last year.

With respect to our cash position, cash and cash equivalents totaled $42.0 million as of September 30, 2019, as compared to $31.3 million as of December 31, 2018.

The increase in cash resulted primarily from net income we generated from operations and the cash we received from the sale of CW-Belize. Our projected liquidity requirements for the remainder of the year include capital expenditures for existing operations of around $500,000, approximately $600,000 to be extended -- expended for NSC's and AdR's development activities for our Mexico project and approximately $1.3 million for dividends payable.

Our liquidity requirements now also include future quarterly dividends since such dividends are declared by our Board.

It's important to note that our dividend payments amounted to approximately $3.8 million for the first 9 months of this year. And this wraps up the financial results from the third quarter. I'd like to turn the call back over to Rick now. Rick?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, David. As we work to expand our product and service offerings and geographic reach, our mission remains focused on providing water services to areas in the world where the supply of naturally occurring potable water is scarce, and particularly where reverse osmosis technology is economically and environmentally feasible.

Desalination is increasingly coming into play in many places around the world. Today, nearly 90 million cubic meters of water is being produced daily by more than 18,500 desalination plants in operation around the world.

These plants are providing drinking water to more than 300 million people according to the International Desalination Association.

And the global water desalination market is showing no signs of slowing. It's expected to see steady expansion, growing at a projected CAGR of 9.5%, which means it will nearly double from current levels to reach 37.6 billion by 2026.

Several factors are driving this growth. Populations are booming in many water-stressed regions of the world, including parts of the U.S. and especially in the Southwestern states.

In addition, drought is occurring in many regions that not long ago had ample supplies. Advancements in technology are also playing a key role, making desalination more energy and cost efficient.

Historically, we've focused on seawater desalination projects in the Caribbean region where governmental and private customers long ago embraced the design, build, own, operate project delivery model. But increasingly, the U.S. is providing opportunities for desalination as well as other types of water projects using this or similar project delivery models, especially in the Southwestern states.

This is true of California with the Pacific coastline providing access for extensive desalination opportunities. In fact, in California alone, there are 11 desalination plants currently operating with 10 more being proposed.

Arizona, which is perpetually short on water and facing a Colorado River supply shortage, is currently looking at ways to treat its estimated 600 million acre feet of brackish water deposits using desalination. Because its total dissolved solids content is lower than seawater, brackish groundwater for desalination is often considered to be a more economical alternative.

Beyond producing potable water, water management challenges are also creating a growing demand and opportunity for wastewater treatment and reuse projects. For California, Arizona, Texas and Florida alone, which are states in which we are actively pursuing projects, the anticipated CAGR for wastewater treatment facilities and operations is several times larger than the corresponding category for water.

For these 4 states, the CAGR for the next 5 years is projected to be 8% and the combined total available market for wastewater treatment facilities is expected to grow from $2 billion to over $3 billion. Our acquisition of a controlling interest in PERC Water, based in Southern California, represents a major step toward addressing this growth market and its many emerging opportunities.

We've been evaluating PERC Water for some time and determined they are highly complementary and synergistic to our existing business and mission. Similar to our existing approach, PERC provides their customers with a comprehensive solution for deploying or upgrading their water infrastructure.

They develop, design and build state-of-the-art facilities for both water and wastewater recycling, then provide ongoing operational and management services to keep these facilities operating at peak performance.

Since its inception in 1998, PERC Water has completed and continues to support numerous water infrastructure projects, including new facilities, facility upgrades, short- and long-term operations services and asset management engagements.

For this, they have won numerous industry awards recognizing their innovative designs and highly efficient project delivery model. In addition to several water and wastewater recycling projects currently underway, PERC Water provides us a platform to expand our core business of designing, constructing and operating desalination plants into water-short regions of the U.S.

PERC Water is also complementary to our Aerex business, which fabricates water treatment equipment for a diverse number of industries involved in wastewater treatment infrastructure.

On the other hand, Consolidated Water brings specialized capabilities, greater access to capital and other important resources to PERC, which will allow PERC to take better advantage of its fast-growing markets.

Regarding our Rosarito Mexico project, we had major positive developments earlier this year, including congressional authorization, approval of a significant portion of the debt financing for the project and obtaining additional rights of way for the aqueduct. Certain steps remain to be completed by the State of Baja California government before we can begin construction, most notably obtaining the revolving credit line required for the state's payment trusts for the project.

The state's project activities have been delayed as of late, in part due to the transition to a new recently elected administration.

However, we expect the state to recommence its project development efforts by the first quarter of next year, and we're encouraged by the new governor's recent public comments communicating his support for the project.

In addition to Mexico, as I've mentioned, there are many other water-scarce areas of the world that need solutions, especially as water stress continues to increase with the growth in populations, urban expansion and food production.

Desalination doesn't fit every need, especially for landlocked areas, and water planners typically strive to obtain a portfolio of water sources to solve water challenges for their communities.

In this light, we believe that the diversification of our offerings with PERC Water provides a new leg to support our growth objectives. Their advanced wastewater treatment and reuse expertise gives us another offering to support the growth and quality of life of local committees where desalination is not an option. As David mentioned, we continue to have ample liquidity on our balance sheet to explore these opportunities, expand into new markets and diversify our revenue streams.

PERC Water exemplifies the high-quality opportunities we continue to pursue to drive growth and enhance shareholder value.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question will come from Gerry Sweeney of Roth Capital.

--------------------------------------------------------------------------------

Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

--------------------------------------------------------------------------------

On the PERC Water side, is it possible to give us a little bit of, maybe, insight into either their backlog as well as typical project size and margins, things along those lines so we have a little bit of an idea of what to expect as you integrate the company?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Gerry. This is David. We disclosed their historical revenues in our 8-K filing. I think we also disclosed it in the press release for PERC Water. Other than that, we just sort of want to -- we're not disclosing anything else until we have actual results to report. So sorry about that.

--------------------------------------------------------------------------------

Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

--------------------------------------------------------------------------------

No problem. Switching gears a little bit, bulk water side. Obviously, you did mention lower fees in the quarter had some impact on the revenue, but any variance in the volumes or was this a pretty, sort of, standard quarter that we could use for future reference?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, I think it's pretty standard, Gerry. I mean, the volume variations don't have much impact on the revenues. Most of our bulk sales are on fixed fees. So we could probably bump up the sales by 10% or 15%, it would have just a small impact on the revenues.

--------------------------------------------------------------------------------

Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

--------------------------------------------------------------------------------

Okay. So that should be very steady on a go-forward basis. Anything on the seasonality front or is this more of a very steady on a 4-quarter basis?

--------------------------------------------------------------------------------

Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [7]

--------------------------------------------------------------------------------

Steady.

--------------------------------------------------------------------------------

Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [8]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [9]

--------------------------------------------------------------------------------

The big issue you have is seasonalities in our retail segment, Gerry.

--------------------------------------------------------------------------------

Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [10]

--------------------------------------------------------------------------------

Okay. And then finally on the Aerex side, still -- I mean, very solid quarter in terms of the margin profile. I've asked this in the past, I'm not sure if you'll provide it, but what drives the margin currently? Is it product specifics or contracts specifically? And any insight into how we should look at that on a go-forward basis?

--------------------------------------------------------------------------------

David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [11]

--------------------------------------------------------------------------------

I think the historical margins we've generated from Aerex are around 30%, Gerry, somewhere around 30%, 31%. I think this quarter, it was up to 37%. We had a couple of very profitable projects that grow the margins up just for this quarter. I mean, I don't see anything that's going to change Aerex's historical margins, and we certainly -- I don't think we'll be doing 37% a quarter going forward. So I mean, I think they do around 30%, that's our expectations for the business.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

John H. Bair, Ascend Wealth Advisors, LLC - President [13]

--------------------------------------------------------------------------------

I imagine that you've been working closely with the Bahamian authorities regarding the damage and the rebuild efforts after Hurricane Dorian. So I was wondering if you could provide us with any insight as to their expectations on the impact on any tourist travel and how that might affect your revenues as well as the local situation with the inhabitant -- the locals usage. And secondly, do you foresee that this rebuild effort might cause delays -- further delays than normal with collecting on account receivables from them?

--------------------------------------------------------------------------------

Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [14]

--------------------------------------------------------------------------------

Yes, so from the -- your question about the impact, certainly in the areas that we have plants, there was no impact by the hurricane, very little impact. Dorian hit the Northern islands and our main operations are located on New Providence, which is where Nassau is located.

So a lot of displaced people from these Northern islands are in Nassau now in various facilities, housing facilities there, temporary housing, that sort of thing. I mean, I just -- it's all over the TV. I mean, Bahamas has been doing a tremendous amount of advertising indicating that the resorts in New Providence were unaffected by the hurricane and really trying to get the word out that places like Paradise Island and Baha Mar are open for business. There was no damage there. So it was very much limited to Grand Bahama and Abaco Islands. Those places are a mess. I mean, from the standpoint of how it impacts the Bahamas' revenues and budget, I mean, I don't have that information other than what I see in the news and what the Finance Minister's been saying in the papers and that sort of thing, which is available for you to look at. So -- but our business is running smoothly there, there's been no issues.

--------------------------------------------------------------------------------

John H. Bair, Ascend Wealth Advisors, LLC - President [15]

--------------------------------------------------------------------------------

Okay. That's good to hear. The cash balance that you had on hand at the end of September, is that net of the $4.1 million that was used to do the PERC deal?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No. That's not. We closed that...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We closed that in October -- October 24, I believe.

--------------------------------------------------------------------------------

John H. Bair, Ascend Wealth Advisors, LLC - President [18]

--------------------------------------------------------------------------------

Okay. And then it looks like you have a similar structure with that as you did with the Aerex acquisition. I don't recall the terms there, or the time frame, I guess, not so much the terms. Is there anything upcoming potentially that Aerex will become a 100% subsidiary of Consolidated Water?

--------------------------------------------------------------------------------

David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [19]

--------------------------------------------------------------------------------

Well, if you remember the terms of the Aerex acquisition, we had mutual options. We gave Tom Donnick the right to put the stock on us after 3 years, the remaining 49%. We had the right to call the other 49% after 3 years, and that auction period is now in effect. I mean, we went through the 3-year period. Now either party can pull the trigger. So it's possible that Tom can come to us and ask us to buy the company, the other 49%, literally, at any time, and it's possible for us to do the same thing with him. We just have to see how that plays out. I think the purpose of the put/call option is for, one day, us to own 100% of the company.

--------------------------------------------------------------------------------

John H. Bair, Ascend Wealth Advisors, LLC - President [20]

--------------------------------------------------------------------------------

Is that open-ended? Is that an open-ended option?

--------------------------------------------------------------------------------

David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [21]

--------------------------------------------------------------------------------

It doesn't expire, no. It's always in effect. So you figure at some point in time, one of those options will be exercised.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. McTaggart for any closing remarks.

--------------------------------------------------------------------------------

Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [23]

--------------------------------------------------------------------------------

Yes, thanks, Chuck. Thanks to everybody for joining us on the call this morning. And we look forward to speaking with you again in March for our year-end results. Bye-bye.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Thank you, ladies and gentlemen. Now before we conclude today's call, I would like to provide the company's safe harbor statements that include important cautions regarding forward-looking statements made during today's call. The information that we have provided in this conference call includes statements that may constitute forward-looking statements usually containing the words believe, estimate, project, intend, expect, should, will or similar expressions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risk and uncertainties that can cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the company's products and services in the marketplace; changes in its relationships with governments of the jurisdictions in which it operates; the outcome of its negotiations with the Cayman government regarding a new retail license agreement; its ability to complete the project under development in Baja California, Mexico; the future financial performance of its subsidiary that manufacturers water treatment-related systems and products and provides design, engineering, management, operating and other services applicable to commercial, municipal and industrial water production; the collection of its delinquent accounts receivable in the Bahamas; its ability to integrate and profitably operate recently acquired subsidiary, PERC Water Corporation; and various other risks as detailed in the company's periodic report filings with the Securities and Exchange Commission.

For more information about risks and uncertainties associated with the company's business, please refer to the management discussion and analysis of financial conditions and results of operations and risk factors in sections of the company's SEC filings, including but not limited to its annual report on Form 10-K and quarterly reports on Form 10-Q, copies of which may be obtained by contacting the company's secretary at the company's executive offices or from the Investors SEC Filings page of the company's website. Except as otherwise required by the law, the company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Before we end today's call, I would like to remind everyone that this call will be available for replay starting this evening and running through November 19th.

Please refer to the company's -- 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.