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Edited Transcript of GWRS earnings conference call or presentation 7-Mar-19 6:00pm GMT

Q4 2018 Global Water Resources Inc Earnings Call

Phoenix Mar 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Global Water Resources Inc earnings conference call or presentation Thursday, March 7, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Heather Krupa

Global Water Resources, Inc. - Controller of Supporting Growth Strategy

* Michael J. Liebman

Global Water Resources, Inc. - Senior VP, CFO & Corporate Secretary

* Ron L. Fleming

Global Water Resources, Inc. - Chairman, CEO & President

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Conference Call Participants

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* Gerard J. Sweeney

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

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Global Water Resources Inc. Fourth Quarter and Full Year 2018 Conference Call. (Operator Instructions) I would like to remind everyone that this call is being recorded on March 7, 2019, at 1:00 p.m. Eastern Time.

I would now like to turn the conference over to Heather Krupa, Controller. Please go ahead.

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Heather Krupa, Global Water Resources, Inc. - Controller of Supporting Growth Strategy [2]

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Good morning, everyone, and thank you for joining us on today's call. Yesterday, we issued our 2018 year-end financial results by press release, a copy of which is available on our website at www.gwresources.com. Speaking today is Ron Fleming, Chairman, President and Chief Executive Officer; and Mike Liebman, Chief Financial Officer. Mr. Fleming will summarize the key events of the quarter, following which Mr. Liebman will review the financial results for the year ended December 31, 2018. Mr. Fleming and Mr. Liebman will be available for questions at the end of the call.

Before we begin, I'd like to remind you that information presented today may include forward-looking statements. These forward-looking statements involve assumptions, risks, uncertainties, estimates and other factors that could cause actual results to differ materially from those contained in the forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on any forward-looking statements, which reflect management's views as of the date hereof and are not guarantees of future performance.

For additional information regarding the factors that may affect future results, please read the sections Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations, included within our latest Form 10-K filed with the SEC. Such filings are available at www.sec.gov.

Certain non-GAAP measures may be included within today's call. For a reconciliation of these measures to the comparable GAAP financial measures, please see the tables included in yesterday's earnings release, which is available on our website. Unless otherwise stated, all amounts discussed are in U.S. dollars.

I will now turn the call over to Mr. Ron Fleming.

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Ron L. Fleming, Global Water Resources, Inc. - Chairman, CEO & President [3]

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Thank you, Heather. Good morning, everyone, and thank you for joining us today. We are very pleased to report our fourth quarter and full year 2018 results. 2018 was an exciting year for Global Water with the company achieving successful results throughout our business, including with compliance and safety, organic growth and acquisitions and completion of many significant improvement projects within the communities we serve. First and foremost, our employees successfully completed the year with no recordable safety events -- incidents and no environmental compliance violations. We have now achieved over 564 consecutive days without a recordable safety accident and over 1,061 days without an environmental compliance violation. These remarkable achievement show the dedication and care of our employees as we provide exceptional performance and the delivery of safe and reliable utility service.

Additionally, Global Water was named finalist in 2018 Environmental Excellence Awards by Arizona Forward for our effective implementation of Total Water Management. We appreciate the recognition of our dedication to managing scarce water resources for the benefit of the communities we serve.

Turning to financial performance. Revenues for the year increased 13.8% to $35.5 million, up from $31.2 million driven primarily by a $2.5 million recognition of revenue under the infrastructure, coordination and financing agreements as a result of the completion of capital improvements that increased the capacity of our Palo Verde utilities' wastewater reclamation facility. The increase in revenue was also due to growth in active connections of 12% and approved rate increases, partially offset by reductions due to tax reform. This 12% connection growth rate consist of 5.2% organic growth and acquisitions.

Acquisitions completed in 2018 included Global Water-Turner Ranches Irrigation, a nonportable irrigation water utility in Mesa, Arizona and Global Water-Red Rock Utilities, a water and wastewater utility with service areas in Pinal and Pima counties of Arizona. Turner added 963 connections and approximately 7 square miles of service area. Red Rock added more than 1,735 connections and approximately 9 square miles of service area. Our staff has already applied their operational and technical expertise in on-boarding Turner and Red Rock, improving efficiency and reliability of these utilities to better serve our customers.

In July, we completed an equity raise with net proceeds of $14.6 million. The proceeds are being used to fund acquisitions and for working capital and other general corporate purposes. Additionally, the company secured a 2-year revolving line of credit of up to $8 million to support the company's growth initiative. This line remains unused as of today.

The company received an extension from the IRS until the end of 2019 to defer the remaining gains realized from the disposition of Valencia Water Company. With the currently planned capital improvement projects for 2019, we expect to have fully defer the remaining gain by end of year 2019.

Finally, we've had the opportunity to add fresh perspective to our Board of Directors with the addition of Debra Coy, a national and international water industry expert; Brett Huckelbridge, the capital markets and fund manager expert; and most recently, David Rousseau, President of the combined largest wholesale water and power entity in the state of Arizona. Combined with my new role as Chairman and the designation of as Dave Tedesco as Lead Independent Director, we believe the talents of our directors will support the next phase of our mission to be a leader in customer service and water resource management as we continue to grow.

Moving on from these accomplishments, I wanted to highlight organic growth further. For 2018, single-family dwelling permits in Maricopa and Pinal counties were up to 22,437 units or 13% over 2017, which was 12% over 2016 units. The forecast remain strong with 2019 projected to see approximately 20,000 -- 27,000 single-family dwelling permits.

Importantly, the data for the city of Maricopa submarket continues to be very strong. As a reminder, in 2017, we realized a 59% increase over 2016, with the total of 865 single-family dwelling permits being issued that year. That was enough to be the largest year-over-year increase of any submarket in Metro-Phoenix. In 2018, permit growth is up another 18% over 2017 with 1,022 permits issued. This acceleration supports our long-stated position that as sustained growth continues in Metro-Phoenix, we will get a larger market share of new homes based on the amount of lot and infrastructure capacity that exists.

Before turning the call over to Mike to review the year-end 2018 financial performance in greater detail, I want to again layout our primary objectives. Global Water will continue to meet our primary mandates to provide safe, reliable and sustainable service to our customers and partners, which is our primary charge and is our mandate because it is critical to successfully managing growth and long-term value creation. Then, we will take a disciplined approach to grow reoccurring EBITDA by driving top line revenue growth and while creating operational efficiencies and managing controllable expenses. Hitting preestablished financial budgets in operating as an efficient utility benefits both our ratepayers and our shareholders. We will make further capital improvements into the communities we serve as necessary, and we will routinely analyze our dividend policy as we go.

Finally, we will pursue acquisitions with consolidation benefits. Consolidation will complement the strong position and growth of our core regional assets, and we are committed to continue to pursue similar opportunities, both big and small. As proven by our recent acquisitions, this consolidation can help improve our industry as a whole and provide many benefits to the customers and communities we have the privilege to serve.

I will now turn the call over to Mike.

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Michael J. Liebman, Global Water Resources, Inc. - Senior VP, CFO & Corporate Secretary [4]

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Thank you, Ron. Hello, everyone. Total revenues for the year were $35.5 million, which was up $4.3 million or 13.8% compared to 2017. This increase is primarily driven by the $2.5 million of ICFA revenue recognized, 5.2% organic connection growth and acquisition connection growth of 2.5% and 4.3% from Turner Ranches and Red Rock, respectively. These benefits were offset by a reduction to revenue as a result of tax reform. Specifically, we reduced revenue by $790,000 in 2018 to reflect the impact of tax reform. However, if you remove the reduction to revenue from the impacts of tax reform and the increase to revenue from ICFA revenues, revenue increased by $2.6 million or 8.3%.

Operating expenses in 2018 were $26.2 million compared to $23.9 million in 2017. This is an increase of $2.4 million or 10%. Notable changes in operating expenses included increased operating and maintenance costs of $680,000. This increase was primarily driven by the additional costs associated with Turner Ranches and Red Rock acquisition of $286,000 as well as an increase in expenses such as utilities, property taxes, contract services, which all increased as revenue increases.

Secondly, we had increased general and administrative costs of $1.1 million. This increase was primarily driven by an increase in professional fees, deferred compensation and personnel expense. And lastly, we had increased depreciation expense by $561,000 due to an increase in fixed assets associated with our capital expenditures plan as well as the added depreciation associated with the acquisitions of Red Rock and Turner Ranches.

Now to discuss other expense. Other expense for 2018 was $4.4 million, which was an increase of $990,000 compared to 2017. This increase was primarily due to a decrease in the Valencia earn-out of $890,000. 2018's growth rate in Valencia's service territory was 2.3% in 2018 compared to 6.5% in 2017.

Turning to net income. Global Water had net income in 2018 of $3.1 million or $0.15 per share compared to $4.6 million or $0.23 per share in 2017.

Adjusted EBITDA, which adjusts for nonrecurring events, such as ICFA revenue and also adjusts for option expense in our equity investment in FATHOM, was $15.6 million in 2018, which is down $755,000 or 4.6% compared to 2017. Adjusted EBITDA was down primarily due to the impacts of tax reform of $790,000 and the lost income from the Valencia earn-out of $890,000. These reductions were offset by increases in organic growth of 5.2% as well as the acquisition growth from Red Rock and Turner Ranches.

This concludes our update on 2018 results. I'll now pass the call back to Ron.

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Ron L. Fleming, Global Water Resources, Inc. - Chairman, CEO & President [5]

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Thank you, Mike. It is clear, excluding the revenue reductions caused by federal tax reform and the corresponding corporate rate reductions and the slowdown of our Valencia earn-out, both of which are beyond our control, Global Water's top line and connection growth rates continue to be very strong. As we handle this growth, we intend to remain at the forefront of the water management industry and advance our mission of achieving efficiency and consolidation. We truly believe that expanding our platform and applying our expertise throughout our regional service areas and to new utilities will be beneficial to all stakeholders involved.

We appreciate your investment in and support of us as we grow Global Water to address important utility, water resource and economic development issues in Arizona and potentially beyond.

These highlights conclude our prepared remarks. Thank you. Mike and I are now available to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Gerry Sweeney with Roth Capital.

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

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A question on permits. A lot of talk in the media about slowing housing permits, et cetera, this is obviously on a national basis and as the sale of real estate is local. But -- and Maricopa had some great growth the last 2 years, and you'd put some permit activity in January and February, definitely strong, maybe not as strong as 1 or 2 of the years in the past. But I also know there is a bunch of infrastructure work that's going on in the city with, I think, the bridge over the railway tracks as well as some state routes, I forgot the exact number, but planning around that maybe widening it, et cetera. Any comment on that? And just maybe how that could position Global Water for the next several years?

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Ron L. Fleming, Global Water Resources, Inc. - Chairman, CEO & President [3]

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Yes. Gerry, so you're right. I think it is local, and certainly, when it comes to Maricopa, that's the way I think everybody needs to look at it. So Arizona overall is doing quite well still, and in fact, Maricopa County was the fastest growing county in the U.S. So the more regional numbers look good. Now if you zoom into Maricopa and to further expand on some of the points you made there, there has been nearly $10 billion of investment within a 10-mile radius of the City of Maricopa and that's not obviously well beyond what we're doing there in the city itself. It's the fact that Intel continues to expand their manufacturing facility that's located up the road in Chandler. Major corporation campuses are also being located in and around that Intel area in Southern Chandler. The ADOT, or Arizona Department of Transport, is finishing a very significant transportation freeway project that's going to connect the West Valley of Phoenix around what's called South Mountain. So you don't have to go through Metro-Phoenix anymore to get to North Pinal County, the City of Maricopa. And this area in Chandler that I'm referring to and that project, which adds really 3 lanes of traffic in both directions is expected to be completed in the next 12 months. Then you got things more local to Maricopa, which, as you say, is -- there is a major overpass being constructed over some rail yards that run through the center of the city today. And fortunately, which is a nice asset for the City of Maricopa, there is a Native American community located next to Maricopa that just had $200 million resort and casino expansion. And then you got the $40 million we put in that city over the last couple of years. So there is a lot of investment going on in that basically regional area. And that's because of the long-term belief that everybody has and there is just the growth pattern of Phoenix pushout through South Chandler and Gilbert down to North Pinal County where we've got these major interests. So for all of those reasons, we're very bullish on the long-term potential of the area. And we do think even though January and February saw a bit of a decline in permits issued, even that decline is -- still keeps our growth rate at near 4%, which is 4x the national average for utility growth rate. So all is good on that front, and we hope it's long and sustained.

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Operator [4]

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

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Ron L. Fleming, Global Water Resources, Inc. - Chairman, CEO & President [5]

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Thank you, operator. Just like to thank everyone for participating in our call today and for your ongoing interest in Global Water. Thanks, and we look forward to speaking with you again.

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Operator [6]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.