Consolidated Water Co Ltd (CWCO) 2020 Q3 法說會逐字稿

Good morning. Thank you for joining us today to discuss Consolidated Water Co.'s Third Quarter of 2020 Results. Joining us 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.

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 section of the company's website.

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

Thank you, Gary, and good morning, everyone. Thanks for joining us on today's call. I hope everyone as well. Fortunately, Consolidated Water has not been impacted by the adverse conditions created by the pandemic as much as others. Our team has worked diligently throughout the pandemic to ensure that we are able to continue our operations and pursue additional projects that can strengthen our business.

During the third quarter of 2020, we managed to generate substantial revenue growth and return to profitability from Q2. Over the first 9 months of the year, we were also profitable, generating nearly $11 million in cash from operations. Our Q3 top line growth is largely due to the $3.2 million in revenue contributed by our new PERC Water subsidiary. PERC's core business, which provides engineering, construction and management services for water treatment infrastructure in the United States has met our expectations so far this year in spite of the pandemic. And so far, we've seen no material impact from the COVID-19 pandemic on its day-to-day operations.

The management team at PERC has been focused on increasing its recurring revenue through multiyear operating contracts. And consequently, PERC was awarded 4 operating contract renewals and 2 new operating contracts during the first 9 months of this year. I'll provide more details about the growth opportunities we see with PERC later in the call.

Our retail segment experienced a decline in revenue in Q3 compared to last year mainly due to the continuing closure of the borders in the Cayman Islands to tourist travel, and this is in response to the pandemic. It was also lower because of much wetter weather conditions in the Cayman Islands during the third quarter. The Seaport and airport in the Cayman Islands have been closed to tourists since March, which has reduced visitors and tourism to nil.

However, as of the 1st of October, residents and property owners have been allowed to return to the Cayman Islands, subject to quarantining for 14 days after arrival. This has allowed flights from the United Kingdom and the U.S. to resume on a reduced schedule. To encourage more long-term visitors, the Cayman Islands government recently implemented a Global Citizen Concierge Program whereby tourist visas are granted to individuals and families who wish to reside and work remotely in the islands for up to 2 years. These developments are very encouraging and can help bring much needed economic activity back to these islands. The Cayman Islands have actually been very successful in keeping the country COVID free for many months and mitigating pandemic-related damage to its economy. And this is one of the strong selling points they present for their Global Citizen Concierge Program.

We are also encouraged by recent positive announcements regarding COVID-19 vaccines and believe that the Cayman Islands are well positioned to quickly rebound from the economic downturn created by the pandemic once the vaccine is available and regular tourism resumes. While these are all positive developments, we expect that our retail segment will continue to be negatively affected until the United States, which is the principal source of tourists for the Cayman Islands, has recovered from the pandemic.

Our bulk water operations in the Cayman Islands and the Bahamas have continued to operate without incident and have been much less affected by the pandemic than our retail business. However, our bulk segment revenue that is generated in the Bahamas and the Cayman Islands declined slightly period-over-period due to factors unrelated to COVID-19. Bulk water revenue decreased last quarter compared to prior year due to lower energy costs, which reduced the energy pass-through charges to our Bahamian customer. Bulk water gross profit margin was lower due to higher scheduled maintenance costs for our Bahamas operation.

The COVID-19 pandemic has caused unprecedented complications for the majority of industries and companies, but we believe, nevertheless, that we are well positioned to execute our growth strategies with a very strong balance sheet with over $38 million in cash to support our ongoing key business development initiatives.

Our core operations and mission of providing affordable, quality drinking water through our highly energy-efficient desalination plants as well as wastewater treatment services through advanced water treatment and recycling facilities continues to be a public health and economic necessity for our customers in the Caribbean and the United States.

Now before I go further, I'd like to turn the call over to our CFO, David Sasnett, who will take us through the financial details of the quarter. I'll then return to provide more detail on our operational activity and our outlook for the remainder of the year. David?

Thanks, Rick, and good morning, everyone. Despite the challenges presented by the current economic environment and the COVID-19 pandemic, our revenue in the third quarter increased 11.2% to $17.7 million compared to $15.9 million in the same period of last year. This increase is largely due to the addition of $3.2 million in revenue from PERC Water, which we acquired in October 2019. We also saw a slight increase in our manufacturing segment revenue of approximately $187,000. The incremental PERC in manufacturing revenue was partially offset by revenue decreases in our retail and bulk segments of $1.3 million and $400,000, respectively.

Our retail revenue was lower due to an 18% decrease in the volume of water sold as a result of the temporary cessation of tourism on Grand Cayman in response to the COVID-19 pandemic. As Rick mentioned earlier, the decrease in bulk segment revenue was due to CW-Bahamas' lower energy costs that correspondingly decreased the energy pass-through component of CW-Bahamas' rates. Our manufacturing revenue increased as a result of shift in our production mix to higher revenue projects.

Gross profit for Q3 totaled $6.2 million or 35% of total revenue. This represents a decline of 7.4% from the $6.7 million in the same quarter of last year and represented 42.2% of total revenue.

In the third quarter of 2020, net income from continuing operations attributable to Consolidated Water shareholders was $1.8 million or $0.12 per basic and fully diluted share. This compares to $2.3 million or $0.15 per basic and fully diluted share for the same period of last year.

With respect to our balance sheet and financial condition, our accounts receivable balances related to our Bahamas business amounted to $18.4 million as of September 30, 2020, which was essentially the same balance that we had as of December 31, 2019. However, due to payments we received from the Bahamian government in October, as of October 31, 2020, our Bahamas receivables from the Water and Sewage Corporation of the Bahamas had been reduced to approximately $15.1 million.

Historically, CW-Bahamas has experienced delays in collecting its accounts receivable from the WSC. When these delays have occurred, we held discussions and meetings with representatives of the water and sewage corporation and the Bahamas government. As a result, payment schedules are developed for WSCs delinquent accounts receivable. All previous delinquent accounts receivable from the WSC were eventually paid in full. And as a result, we have never been required to provide an allowance for doubtful accounts for Bahamas receivables.

We believe the delays we have experienced in collecting CW-Bahamas' receivables were extended due to the impact of Hurricane Dorian, which devastated the Northern Bahamas in September 2019. We also believe the delays are attributable to the economic impacts of the COVID-19 pandemic on Bahamas Government's revenue sources.

As of September 30, 2020, our cash and cash equivalents totaled $38.2 million. Our projected liquidity requirements for the balance of 2020 include capital expenditures for existing operations of about $150,000 and about $1.3 million for dividends payable. Of course, our liquidity requirements may also include future quarterly dividends if such dividends are declared by our Board. Our dividend payments amounted to approximately $3.9 million for the 9 months ended September 30, 2020. And approximately $5.1 million for the year ended December 31, 2019.

Now I would like to turn the call back over to Rick.

Thank you, David. I'd like to share a little more about our manufacturing business. This segment is entirely comprised of Aerex, our manufacturing subsidiary based in Fort Pierce, Florida. Aerex is primarily a custom manufacturing shop, so its contracts are typically shorter term than those in our other businesses. As David mentioned, our manufacturing segment results for the quarter benefited from a favorable production mix that resulted in an increase in its revenue and gross profit for the third quarter.

In October, Aerex's largest customer informed us that it expects to suspend its purchases until the first quarter of 2022 due to inventory management reasons. We've been focused for some time now on diversifying Aerex's customers and products and believe that we have a good opportunity to replace some or all of this anticipated lost revenue by increasing sales of other products, Aerex manufacturers for existing and potentially new customers. Bidding activity for the -- for new water treatment projects in our current market area remains robust and PERC through its strong presence in the Southwestern United States is helping Aerex to expand its market into that area.

The addition of PERC has been highly complementary to our existing business and overall mission supporting our pursuit of water reuse projects and other emerging opportunities with a comprehensive suite of solutions for improving water infrastructure. PERC also provides us a solid platform on which to expand to North America, our core business of designing, constructing and operating seawater desalination plants.

In the third quarter, we acquired an additional 10% of PERC from another shareholder for $900,000, raising our ownership to 61% and underscoring our confidence in the PERC business model and its markets. PERC represents the principal component of our services segment and has maintained its positive performance since we acquired a controlling interest in October of last year. We are especially encouraged by the prospects in this area of our business as PERC continues to actively pursue various potential new projects and contracts. Several of these could have a substantial positive impact on PERC's results of operations should we ultimately be successful in capitalizing on these opportunities.

While the COVID-19 pandemic does not appear to be getting any closer to ending, we think our business is stable in the current environment. We have gone through 2 full quarters of lockdowns with the various companies that we operate. And while sales in our retail business remained lower than normal, our other businesses are operating status quo or are improving.

Looking ahead, our healthy financial condition and ample liquidity provide us with a solid foundation necessary for dealing with the challenges of the current economic environment. And we are well positioned to take advantage of opportunities that may arise to expand or enhance our operations, especially as conditions eventually improve. The strong growth drivers inherent to our markets will continue to persist over the long-term regardless of the pandemic, and this bodes well for consolidated water as we work to enhance shareholder value over the months and years to come.

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

(Operator Instructions) Our first question is from Gerry Sweeney with ROTH Capital.

I was wondering if you could provide a little bit more information on PERC. Specifically, maybe how large their pipeline is or backlog? How large the backlog is versus a couple of quarters ago? And how much visibility you have into sales for the next couple of quarters?

And then part 2 on PERC would be, how much is recurring revenue versus engineering and construction?

Gerry, we've added a risk factor in our 10-Q that talks about the amount of revenue that potentially could not be renewed from these operations and management contracts. Assuming that those contracts are renewed, I think what you're seeing with PERC right now is substantially all of their revenue is of a recurring nature because they're for operations and maintenance contracts. PERC also has an element of their business, which is a design build. But at the moment, that particular revenue doesn't constitute very much of their total revenue.

I think what excites us about the business is they are pursuing a number of design-build contracts, which are very significant, as we said earlier, in terms of size and revenue. We can't provide any assurances to win these contracts, but they certainly have a number of interesting targets. And then they continue to pursue the operations and maintenance business as well. But with the exception of the fact that perhaps these contracts ultimately may not be renewed and as Rick mentioned earlier, we just -- we just gained new contracts and renewed, I think, a total of 4 for this year. So we'd like to think of that business as recurring that we'll get renewals from all those contracts.

How many total contracts does PERC have today?

I don't have that number off the top of my head because it's changed -- somewhere around 20.

Okay. Okay. That's helpful. I just was -- wanted a magnitude versus for being renewed. And these design-build opportunities, is there an opportunity that they themselves lead to an O&M opportunity?

Yes. Some of these contracts -- I mean, their business is very similar to our desalination business. Often, we'll build a plant for third parties and run it for them or operate the plant and sell the water, as we do in Grand Cayman. Similar possibility exists for PERC business. They could build a plant and make money off selling the plant, then at the same time, they could enter into an O&M contract to run the plant.

Got it. Switching gears to the retail side. Obviously, it's going to be -- that's going to face headwinds until a vaccine comes out. And as you said, the United States starts to rebound. But specifically about the quarter, would you know how much impact was rain versus tourism? And just even broad brush is fine and out of curiosity there.

The best thing I could say is looking at what the volume drop was in the second quarter, which I think was a couple percentage points less than what it was in the third quarter. So I mean, it went from, I think, 15% to 18% down. And maybe that other 3% is related to the rain. Maybe it's not. I mean it's really hard to determine, but it did go up in the third quarter.

Got it. And then final question, in the -- I was reading the Q, and you have a note there about the Rosarito project. I think you submitted. If I read it right, nonrecoverable assets of $51.1 million, one, is that correct? And two, any type of time line or thoughts on how that moves along and develops?

Well, I'd like to hope that it develops quickly, but it's a legal issue now, Gerry. So it's very difficult to say how long that's going to take. And the total is closer to $56 million. So there's a certain amount in pesos, and then there's a certain amount in U.S. dollars that we've...

Got you. Sorry. I apologize. This has and in additional on the peso line, saw that.

We -- I can assure shareholders, we are working very hard and looking at every way possible to recover that money. So I'm spending a lot of my time on that right now. So I can't tell you when it could get worked out. But...

They really haven't given us response to that yet, Gerry, so...

Okay. So they've been a little bit quiet. What about other potential assets? I think you own the land, I think that's on the balance sheet in around $21 million, if my -- I read it a little while ago, but is there an opportunity to monetize any of the assets other than some of that nonrecoverable amount that you submitted?

No. There's nothing. We have some receivables that are due from the government that we're collecting in the ordinary course of business, the value-added receivables. That -- and then we have the land. That's it.

Yes. I mean the land is separate from that $56 million, I should say, correct?

No, no.

No, no.

That's included, Gerry.

So it's included.

It's just -- we're following a parallel path by listing the land for sale. So if we can get that sold earlier, then that comes out of the claim.

(Operator Instructions) The next question is from John Bair with Ascend Wealth.

Could you shed some more information on the geographical footprint of PERC? And are there markets -- is it expanding any? In other words, a geographical reach of them and see more opportunities outside of their current primary markets?

Yes. So their primary contracts are in California. They have other contracts in Arizona. We're working on projects with them in Oregon, additional projects in California. We're trying to get them into the Florida market. We're working with them here out of the Coral Springs office and out of our Aerex facility in Fort Pierce to pursue some opportunities that we see here in Florida that would fit well with them. So that's kind of what we're looking at, at the moment. I mean we see some additional opportunities in Arizona. We're working on some projects there. I think that pretty much covers it. But California is the primary market.

John, there -- it's a pretty active market, both California and Arizona. And we're also looking at the project too in Utah also. We're very encouraged by the prospects for. There's a lot going on in that area of our business.

With the municipalities being impacted by COVID and so forth, are you seeing any -- you're saying it's active, but are you seeing any hesitation or pushout on proposed projects or whatnot? And do you have any sense as to -- I mean, everybody is talking about an infrastructure bill, it's going to be coming out and so on and so forth. And I imagine that there could be some benefits there for you.

Yes. So because PERC, there is operations contracts and design build. And as David mentioned earlier, I mean, at the moment, most of the revenues are from the operating contracts. So the troubles with the municipalities is actually, in my view, help PERC to get some of these extensions on the operating contracts, and we have opportunities to get new operating contracts with municipalities that may be cash strapped and are trying to optimize limited resources.

The design-build stuff, for sure, has slowed down a little bit, and that's reflected in the fact that we don't have any major design-build projects going right now this year. So we're trying to make up for certain lacking in the markets and with other areas such as the operations contracts, which we see as a positive growth area right now.

Okay. And with those tight budgets, are they trying to chip away on the terms of contract renewals and so forth to where you're being pressured at all in that regard?

Well, there's always some pressure. I mean municipalities talk about going to rebid and that sort of thing. So we've had to negotiate on some of them, but nothing I would say significant. I mean I think we're already pretty cost effective to these places versus operating the facilities themselves. So I haven't seen a real tightening in the margin on these renewals this year, nothing material.

Okay. And last question. It sounds like you're pretty much focusing on the South, Southwest part of the U.S. What about any potential internationally? Pretty much focused on the U.S. business at this point.

Yes. Nothing international at the moment. We look at the Caribbean, but the pandemic's really made it challenging to even move around to some of these places. So we're just focusing on the U.S. right now primarily.

Very good. Good luck with -- trying to get Rosarito behind this.

Thank you very much, John.

(Operator Instructions) The next question is a follow-up from Gerry Sweeney with ROTH Capital.

Just wanted to follow-up since little bit of space there. Are you looking at any acquisitions still? Any comments on that front?

We're always looking at acquisitions, Gerry. We got a couple of things that we're looking at now. And we'll keep everybody posted if that develops, but some pretty exciting stuff in my view.

Okay. I didn't mean I think that you weren't looking, so I apologize. But are they more U.S.-based? Just out of curious, if you can maybe give a little bit of...

Yes.

(Operator Instructions) 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.

I'd just like to again thank everybody for joining us this morning for being shareholders. And I look forward to speaking with you again toward the end of March next year when we release our 2020 full year results. Have a nice holidays and stay safe.

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 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 and 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 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.

Factors that would cause or contribute to such differences include, but are not limited to; one, continued acceptance of the company's products and services in the marketplace; two, changes in its relationships with the governments of the jurisdictions in which it operates; three, the outcome of its negotiations with the Cayman government regarding a new retail license agreement; four, 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; five, the collection of its delinquent accounts receivable in the Bahamas; six, its ability to integrate and profitably operate its recently acquired subsidiary PERC Water Corporation; seven, the possible adverse impact of the COVID-19 virus on the company's business; and eight, 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, including, 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 like to remind everyone that this call will be available for replay starting later this evening and running through November 24. 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 attending today's presentation. This concludes the conference call. You may now disconnect.