Consolidated Water's (CWCO) CEO Rick McTaggart on Q4 2020 Results - Earnings Call Transcript

Consolidated Water Co. Ltd. (NASDAQ:CWCO) Q4 2020 Earnings Conference Call April 1, 2021 11:00 AM ET

Company Participants

Rick McTaggart – President and Chief Executive Officer

David Sasnett – Executive Vice President and Chief Financial Officer

Conference Call Participants

Gerry Sweeney – Roth Capital

John Bair – Ascend Wealth Advisors

Operator

Good morning. Thank you for joining us today to discuss Consolidated Water Company's Full Year 2020 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'll open the call to your questions. [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 yesterday'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 Company’s CEO, Rick McTaggart. Sir, please go ahead.

Rick McTaggart

Thank you, Tom. And good morning, everyone. I hope everyone is staying safe and healthy.

Despite the unprecedented challenges caused by the pandemic in 2020, we increased our total revenue by 6% to a record $72.6 million. Our services segment was the biggest contributor with services revenues up to $12.9 million with $12.5 million of that amount generated by our PERC Water subsidiary that we acquired in October 2019.

Likewise, services gross profit increased to $3.2 million versus just about a $0.5 million in 2019.

PERC Water provides design, engineering, construction, and management services for water treatment infrastructure in the arid Southwestern U.S. It provides a platform upon which we can expand our core business of designing, constructing, and operating desalination plants to North America. PERC also presents opportunities for additional recurring revenue from operating and maintenance contracts, as well as design-build projects that can eventually turn into operating contracts.

There's a lot more to talk about in terms of progress we made last year on our growth strategies for 2021. But before going further, I'd like to turn the call over to David who will take us through the financial details for the year. I'll then return to add some additional comments around our operational activity and outlook. David?

David Sasnett

Good morning, everyone. As Rick mentioned, and as it has for many other companies, the COVID-19 pandemic has created unprecedented challenges for us. But despite these challenges, we remained profitable in 2020, we increased our revenue, maintained our financial condition and liquidity, and continued to pursue new opportunities to grow our business both organically and through acquisitions.

Our total revenue in the full year of 2020 increased 6% to a record $72.6 million. This increase was driven by an increase of $1.2 million in services revenue, which as Rick mentioned, was due to the acquisition of PERC Water to our services segment in late October 2019. The increase in our services segment revenue was offset partially by decreases in revenue for our retail, bulk, and manufacturing segments of $3.5 million, $2.7 million, and $1.2 million respectively.

Our retail revenue declined due to a 13% decrease in the volume of water sold on Grand Cayman Island as a result of the tourist restrictions, which were in effect for the last nine months of 2020 on Grand Cayman Island.

The decrease in bulk segment revenue was due to the two new water supply contracts that commenced in February and July of 2019 with the Water Authority of Cayman at a lower per gallon rate than the contracts they replaced. And our bulk segment revenue also decreased due to a decline in revenue of approximately $1.5 million for our Bahamas operation, which arose from lower energy prices which correspondingly reduced the energy pass-through component of CW-Bahamas’ rates.

The decrease in our manufacturing segment revenue was due to a decrease in the orders in the fourth quarter of 2020.

Gross profit for the full year of 2020 was $26.8 million or 36.9% of revenue, compared to $28.3 million or 41.1% of revenue in 2019. This decline was largely attributable to decreased revenue generated by our retail water segment, and to a lesser extent bulk and manufacturing segments.

For 2020, net income attributable to Consolidated Water shareholders was $3.7 million, which equates to $0.24 per fully diluted share as compared to $12.2 million or $0.80 per fully diluted share in 2019.

Now, turning to our financial condition, our accounts receivable balances related to our Bahamas business amounted to $16.8 million as of December 31, 2020, as compared to $18.4 million for the same time of the previous year. Historically, CW Bahamas has experienced delays in collecting its accounts receivables from the Water and Sewerage Corporation of The Bahamas. When these delays occur , we hold discussions and meetings with representatives of the Water and Sewerage Corporation and the Bahamas government. As a result, payment schedules are developed for WSC’s delinquent accounts receivable. All previous delinquent accounts receivable from the WSC were eventually paid in full. As a result, we have never been required to provide an allowance for doubtful accounts for Bahama receivables.

We believe the delays we have experienced in collecting CW-Bahamas’ receivables were initially extended due to the impact of Hurricane Dorian, which devastated the Northern Bahamas in September 2019, and those delays have been further extended as a result of the economic impact of the pandemic on the Bahamas Government’s revenue sources. We eventually see Bahamas accounts receivables will eventually be collected in full.

As of December 31, 2020, our cash and cash equivalents totaled $43.8 million and working capital of $66 million. Our projected liquidity requirements for 2021 include capital expenditures for existing operations of about $6.3 million and about $1.3 million for dividends. 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, 2020.

That summarizes the brief discussion of our financial results, and I'll turn the call back over to Rick.

Rick McTaggart

Thanks, David. Our services segment led by PERC Water was our best-performing operating segment last year as David mentioned, and we expect PERC to continue consistent performance in 2021. Two of our more challenged segments have been retail water and manufacturing. Retail segment performance directly reflects the impact of the pandemic on tourism in Grand Cayman. And we believe that that segment of our business will eventually return to normal as vaccines become more widely administered, and the Island opens up again for normal tourism. Our manufacturing segment is entirely comprised of Aerex Industries, our subsidiary based in Fort Pierce, Florida. Aerex is primarily a custom manufacturing shop. So its contracts and project cycles are shorter term than those in our other business segments.

In the first quarter of 2020, we acquired the remaining 49% interest in Aerex, which we had not owned. G&A expenses for our manufacturing segment in 2020 decreased by about $0.5 million as a result of a decrease in amortization expense for certain intangible assets associated with the initial acquisition of Aerex. These assets became fully amortized in early 2020. This manufacturing business has not been significantly affected by the pandemic. However, as we discussed in our previous calls, Aerex’s largest customer informed us last October that it expects to suspend – well, it has suspended its purchases until the first quarter of 2022 due to inventory management related factors. While we can't make any guarantees, we do anticipate that this customer will resume purchasing in Q1 of 2022.

Meanwhile, we've been taking steps to replace this lost revenue by increasing sales and other products, Aerex – sales of other products Aerex manufacturers for existing and new customers. Aerex was recently awarded contracts to manufacture two municipal water treatment projects that had targeted in Florida, one of which was awarded at the end of 2020 and the other just last month. We anticipate the earlier awarded projects will begin production in our shop this month, and the second project will begin production in the third quarter of this year, so we see these contracts positively impacting our manufacturing revenues beginning in the second quarter of this year. We are also targeting three additional $1 million plus manufacturing projects in Florida. And if we’re successful in obtaining this, these additional projects would likely commence in late 2021 or early 2022.

Now a little bit more about our services business. With its comprehensive suite of solutions for improving water infrastructure, PERC has strengthened our existing business and overall mission, supporting our pursuit of water reuse projects and other emerging water treatment opportunities. As a principal component of our services segment, PERC has maintained its positive performance since we acquired a controlling interest in October 2019. In the third quarter of last year, we acquired an additional 10% in PERC for $900,000, which increased our ownership to 61%. Securing this additional ownership demonstrated our competence in PERC and the growing markets they serve.

Last year, existing PERC clients granted renewals of four operating agreements, including water, wastewater and advanced water treatment in California. PERC also obtained three new operations and maintenance contracts in California, and commenced those operations during 2020. Already this year, PERC completed contract negotiations and has begun operating another three facilities for high profile clients in the Los Angeles and Arizona markets. Such contracts provide recurring revenue to PERC typically in one-year increments and our renewable for various terms from three to five years.

We are currently in discussions with existing and potential clients in California that are seeking immediate solutions to their wastewater treatment and potable water problems. PERC’s excellent reputation in the market and its track record of successfully delivering projects through a wide range of project delivery model is very attractive to rapidly growing and resource conscious municipalities and private clients. These clients include golf courses in California that are looking to replace expensive potable water with sustainable reclaimed wastewater for irrigating their landscaping and golf courses. We believe that PERC’s significant experience, designing, building and operating wastewater harvesting facilities provides a competitive advantage in this niche market.

We are also making progress expanding PERC’s business into Central Florida. We expect PERC to have natural synergies with Aerex’s water infrastructure manufacturing capabilities and is already leveraging – PERC is already leveraging Aerex’s client base and excellent reputation in the region. After a long drought, we are finally seeing some bidding activity for seawater desalination projects in the Caribbean region and are carefully evaluating these opportunities.

Those that are new following us know our Mexico project was cancelled by the client in June of last year. We are vigorously pursuing all available legal remedies and courses of action to enforce our rights to recover from the client, our costs and investments in this project. We hope this resolves quickly, but it is a legal matter now and difficult to say how long it will take. Given the legal process and unpredictable timeline, we're not planning to address the topic of Rosarito again until the matter is resolved or unless a special need develops.

Now, looking ahead to the remainder of this year, on the M&A front through PERC we are actively evaluating potential acquisitions and have several irons in the fire. We hope to complete at least one acquisition before the end of the year that will expand our U.S. footprint. For the first quarter of 2021, we expect our manufacturing segment to be down as discussed as we continue to diversify Aerex’s products and solutions with existing and new customers. We expect to see our other business segments continuing to operate at status quo.

However, we see possible tailwinds emerging from the post pandemic reopening of certain markets with this revitalizing in particularly the tourism market and the Cayman Islands. But we're not waiting around for tourism to return, we're actively focused on replacing loss revenues by growing our services and manufacturing businesses discussed and completing strategic acquisitions.

Overall from an operational and financial perspective, we have never been stronger. We have substantially no debt and more than ample liquidity and capital resources to be a great utility partner for the communities where we have the privilege to serve. We plan to continue to expand our business through organic growth, acquisitions and new projects as we further develop and expand the water solutions that we offer. And above all, we will continue to focus on business that will provide increasing value to our shareholders.

So Tom, with that, I'd like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Gerry Sweeney with Roth Capital. Please go ahead.

Gerry Sweeney

Hey, good morning. Thanks for taking my call.

Rick McTaggart

Hey, Gerry. How are you doing?

Gerry Sweeney

Good. Thanks. I wanted to start with retail in the Cayman Islands. Could you give us a little – are the Islands opened up or are they any indication that they will open up as the vaccine rolls out? Any type of thoughts on that process?

Rick McTaggart

Right now, there is air travel back and forth. If you're not vaccinated, you have to quarantine for 14 days in a government approved facility. If you have a vaccination card, then it's only 10 days. So, it's still not really conducive for tourism yet. Once they've talked locally about opening up more, which would mean eliminating quarantine for vaccinated people when they’ve reached I think it's 70% to 80% of the population of the Islands being vaccinated. So, they’re kind of targeting that for May or June, but until they eliminate the quarantine requirement. I think tourism is still going to be down there. And even if it starts back up, it'll be slow because you have to have the vaccine to be able to avoid the quarantine.

Gerry Sweeney

Got you. And obviously, the margins in the retail segment were down. I mean, lots of fixed costs. I mean, and the margins are down, I presume just because the direct result of volumes, is that correct? So what I'm saying…

David Sasnett

Yes. The business…

Gerry Sweeney

As volumes come back of the tourism that should improve as well, slowly?

David Sasnett

Yes. That segment has a substantial amount of fixed cost, Gerry. They own their own plants and distribution systems, and as revenues decline, those costs eat away the margin. So, once revenues come back, the margin will come back.

Gerry Sweeney

Got it. So that is what I wanted to know, yes okay. Switching gears, I think you mentioned PERC won three contracts just this year, or a couple of questions or just going to try and bracket things out a little bit. How many contracts does PERC have in total now and are those three projects, are all the projects around the similar size? I just wanted to see – I'm just trying to gauge the impact to be quite honest.

David Sasnett

The projects are relatively small.

Rick McTaggart

The new ones this year.

David Sasnett

Yes, the new ones…

Rick McTaggart

Relative to two of the ones that they got last year. I mean, there were two projects last year that were very sizeable. The ones this year probably about represent maybe a third of that – about the third of the revenues that the new project represented last year.

David Sasnett

Yes. We disclosed the number of active contracts as of December 31. That is contracts after that day, Gerry, just check our 10-K, I think it's 27 operating contracts at the end of the year if my memory serves me correct.

Gerry Sweeney

Got it. I will.

David Sasnett

In the contracts range, I mean, they can be for $250,000 a year to over $1 million a year. So…

Gerry Sweeney

Okay.

David Sasnett

Yes, $3 million I hope for our largest one. So – but nevertheless, they all are – they all generate good profits and it's great to have them, because typically what we've seen is the client renews these usually for the full three to five years.

Gerry Sweeney

Got it. So, I was a little under the weather, had second COVID shot yesterday. So I didn't get a chance to read the 10-K. One more question PERC. You were looking at acquisitions in that. Any other details you can give in terms of, is it actually operating assets or specific areas, just curious as to what the focus is on the acquisition front?

Rick McTaggart

Yes. I mean, as you know, Gerry, we love operating contracts, longer term. You can't get them more than sort of five years here in the states, so that's long-term for the state. Operating companies that would expand our geographic footprint really take us into markets that are benefiting from all these movements of people from the pandemic. So that's kind of what we're looking at.

Gerry Sweeney

Got it. I'll jump back in queue. Thanks.

Operator

We actually currently do not have anybody in the queue. Gerry, if you would like to ask your next question.

Gerry Sweeney

Okay. Can you hear me?

Rick McTaggart

Yes.

Gerry Sweeney

I'll ask one more. So bulk was down, I think 27 million to 24.3 million, but 1.5 million of that was energy, so there was only a marginal decline from volume? Is that a fair assessment?

Rick McTaggart

Yes. The impacts or the things that affected bulk revenues last year compared to 2019, was the energy which was significant. That's just a pass-through charge, so in dollars we don't lose anything from that, and just the final impacts of the – the full year impact of the change in contract terms with the two Water Authority contracts. So, if you remember in 2019, we reduced our prices there to retain those operating contracts for three plants there in Grand Cayman. So that's done. I mean, you won't see anything 2020 to 2021 or comparatively on the Cayman Islands’ bulk differences unless there's some energy – variation -- energy cost variations again, but it's likely to go up. I think energy is already going up this year. So you're likely to improve.

Gerry Sweeney

So you are likely to --

Rick McTaggart

Yes. Those pass throughs will probably go up pretty significantly over the course of this year.

David Sasnett

You know that the pass through were Bahamas. Gerry, keep in mind that new contracts in Grand Cayman were structured differently. And it used to be that we would pass through the energy charges to the customer, but now they pay the energy directly themselves, so it's not part of a revenue component. So, even though we had a significant decline in our bulk revenue for the Cayman Islands, the P&L impact is not as great at all because the revenue and the cost of revenue grossed up by those energy charges that are no longer being paid by us.

Gerry Sweeney

Got it.

David Sasnett

So that's why we have revenue, the margins weren't hurt at that.

Gerry Sweeney

Got it. Yes. Also, what about the Bahamas? There's a bulk component there and any of that feed some of the tours locations and is there a pretence – I know the Bahamas are coming back because I know people are doing spring break in the Bahamas. So I'm just curious as to potential rebound and tourism in that region?

Rick McTaggart

Yes. The charges in the Bahamas are mainly fixed charges because there's minimum take or pay volumes from the two plants. So there has been a drop in volume I think that we've mentioned in the 10-K. It's definitely not as pronounced as the retail drop in Grand Cayman, but it hasn't impacted revenues because they pay for the capacity, they're essentially in the Bahamas. On the other hand, we are seeing volumes come back up in the last few months; I think some of the hotels have reopened there. So it's not going to make any big impact on our revenues there because of the take or pay practice.

Gerry Sweeney

Take or pay. Gotcha. Got it. Okay. Great, that's really helpful. Already, I'm done if not fortunate. Thanks.

Rick McTaggart

Thanks, Gerry.

Operator

[Operator Instructions] The next question comes from John Bair with Ascend Wealth Advisors. Please go ahead.

John Bair

Thank you. Good morning, gentlemen.

Rick McTaggart

Hey, John.

John Bair

At the risk of beating a dead horse here; just curious on Rosarito if – if anything changed as far as the government willing to change direction and resurrect that so to speak, I guess that's an appropriate way of putting it given the timeframe we're in right now. But if that were to [indiscernible] do you pursue that, or kind of what's your thought process on that is just, over and done with and just try to get it taken care of? Or would you perhaps think of pursuing the project if for some reason were to come back to life?

Rick McTaggart

Yes. I mean, John, I'm not going to answer the question directly. But I will tell you a couple of things that are going on there. I mean, really, our goal is to recoup our investment right now. There is an election coming up in the state for new governor, I think that's in June or July. So there is a lot of campaigning going on down there now. And all the candidates are talking about the acute water shortages there in Baja. So the problem hasn't gone away. The underlying issue, they need water there, they need somebody to build a desalination plant at some point. So there is a lot of discussion about that.

But then the Mexican situation has changed politically, I think and economically over the last few years, and we have concerns about that. So, I can't really say what would happen if somebody approached us to restart the project. I mean, we could end up selling it to the assets to somebody that wanted to complete a project down there. And we could end up doing it ourselves again, or we could end up just going through court to get our reimbursement. So – but we don't have any sort of defined path at this point.

John Bair

Okay, fair enough. Was kind of curious what the general thought process was there, so, very good. Good luck going forward, got a lot of other things in the offering year, so that's good. Take care.

Rick McTaggart

Yes. Thanks, John.

John Bair

Okay.

Operator

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

Rick McTaggart

Thanks, Tom. I appreciate everybody dialing in today and I look forward to speaking with you again in May when we announce our first quarter results. So everybody take care and stay safe, bye-bye.

Operator

Thank you. Ladies and gentlemen, before we conclude today's call, I would like to provide the company's safe harbor statement that includes 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 revenue, future plans, objectives, expectations, events, assumptions and estimates.

Forward-looking statements can be identified by the use of words 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 statement made during this conference call are not guarantees of future performances 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. Factors that would include 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 the governments of jurisdictions in which it operates; the outcome of its negotiations with the Cayman government regarding a new retail license agreement; the future financial performance of its subsidiary that manufactures 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 the company's recently acquired subsidiary PREC [ph] Water Corporation; the possible adverse impact of COVID-19 virus on the company's business; 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's discussion and analysis of financial conditions or results of operations and Risk Factors sections of the company's SEC filings, included, but not limited to, its annual report on the Form 10-K and quarterly reports for Form 10-Q. Any forward-looking statements made during the conference call speak as of today's date. The company expressly disclaims any obligations or undertaking to update or revise any forward-looking statements made during the conference call to reflect any changes in its expectations with regard thereto or any changes in its events, conditions or circumstances of which any forward-looking statement is based, except as where it may be required by law.

Before we could end today's conference call, I would now like to remind everybody that this call will be available for replay, starting later this evening. Please refer to yesterday's earnings release for dial-in replay instructions available via the company's website at www.cwco.com. This concludes our conference call. Thank you for attending today's presentation, you may now disconnect.