Consolidated Water Q3 2021 Earnings Call Transcript

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November 14, 2021

There are 4 speakers on the call.

Operator

Good morning. Thank you for joining us today to discuss Consolidated Water Company's 3rd quarter 2021 results. Hosting the call today are Chief Executive Officer of Consolidated Water Company, Rick McCaggart and the company's Chief Financial Officer, David Saffnett. 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.

Operator

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.

Speaker 1

Thank you, Kate. Good morning, everyone. Thanks for joining us on today's call. I hope everybody is well. During the Q3, the continued cessation of tourism on Grand Canyon due to COVID-nineteen Resulted in our retail segment revenue growing at only about 5% compared to the same Year ago quarter, about 1% higher volume.

Speaker 1

And these numbers are still well below historical levels because of the border closures in Grand Cayman. However, our Bulk Water segment revenue increased 13% to $6,900,000 performing better than anticipated. It also increased for the 1st 9 months of 2021, up 8% to 19,800,000 In the Q3, our manufacturing segment revenue, which is generated by our Airex subsidiary, decreased as a result of reduced orders from a major customer. This was expected from last year, which is why early last year we began strengthening our manufacturing sales team at Aerex and focused them on new market sectors to diversify Our product mix and customer base. As a result, all of our manufacturing revenue that was recognized in Past quarter was from new customers and or products.

Speaker 1

And in the 1st 9 months of the year, we generated manufacturing revenue of $3,200,000 from new customers and products. Our services revenue increased 6% to $10,500,000 in the 9 months of the year, which accounted for 21% of our overall revenue compared to 17% in the same year ago period. This was driven by growth in our Perf Water subsidiary. Now before I go further, I'd like I'll turn the call over to our CFO, David Fastenet, who will take us through the financial details for the quarter.

Speaker 2

Thanks, Rick. Good morning, everyone. Thanks for joining us today. As Rick mentioned, we continue to face significant challenges as a result of the current environment These are many companies, but despite these challenges, we've maintained our strong financial foundation as we pursue new opportunities and we continue to pay dividends. Yesterday, we issued our quarterly press release, which is available on the Investor Relations section of our website.

Speaker 2

We reported that revenue Total $16,400,000 in the 3rd quarter, an increase of 7% from the same quarter last year. The decline reflects decreases of $141,000 in Services segment revenue and $2,200,000 in Manufacturing segment revenue. These decreases were partially offset by revenue increases of $254,000 in our Retail segment and $807,000 in our bulk segment. Our retail revenue decreased excuse me, increased due to a 1% increase in the volume of water sold by pavement water. The sales volumes for both 20.21 2020 Significantly below the historical volumes for the retail segment prior to 2020 as a result of the continuing cessation of tourism on Grand Cayman, which due to the water restrictions initiated in March 2020 in response to the COVID-nineteen pandemic.

Speaker 2

The increase in bulk segment revenue was attributable to an increase in energy costs for Consolidated Water Bahamas, which increased the energy pass through component for CW Bahamas rates. The decrease in services revenue was due to the Cline and plant construction revenue was $525,000 which was partially offset by an increase of $385,000 in revenue from replacing this loss revenue. In late July, this customer communicated to Aerex that it's expected to recommence its purchases of its specialized product for Merex in 2022 and in subsequent years, but communicated that such purchases would be substantially reduced annual amounts as compared to both the amounts that we purchased from Aeryx in 2020 and prior years, And it's below what we had expected and anticipated to be repurchased. Our efforts to replace this revenue, previously generated The revenue from existing and new customers have been adversely impacted by the current economic environment, which has increased raw material costs, resulted in raw material shortages and extended delivery time for such materials to Aerex. We have also been adversely affected excuse me, we believe these shortages and delivery days have also adversely affected the financial condition of Aries' current and prospective customers.

Speaker 2

Gross profit for the Q3 of 2021 was $5,700,000 or 34 7% of revenues and its compared to $6,200,000 or 35.2 percent of revenues in the Q3 of last year. The Q3 of 2021 net income attributable to Consolidated Water shareholders, which includes the results of discontinued operations, is $286,000 or $0.02 per basic and fully diluted share. With respect to our balance sheet, Our accounts receivable balances related to our Bahamas subsidiary amounted to $21,400,000 at the end of the 3rd quarter, This was up from the $16,800,000 at the end of last year. We believe the delays in collecting CW Bahama's Seamless have been extended by the severe adverse impact of COVID-nineteen on the Bahamas government's revenue sources. Based upon our discussions and collection history with the Bahamas government, we believe our accounts receivables from the WSC are fully collectible.

Speaker 2

In fact, the Bahamas government and the WSC continued to make intermittent payments on these accounts receivable. Such as payments amounted to approximately $6,900,000 in the Q3 $15,600,000 in the 1st 9 months of 2021. Furthermore, in October 2021, we received a $2,400,000 payment to further reduce these accounts receivables. The possible exception of this liquidity matter relating to City of Commerce, we're not presently aware of anything that we believe we do not have sufficient liquidity to meet our needs. As of September 30, 2021, our cash and cash equivalents totaled 40,400,000 Our working capital was $69,300,000 We had only $200,000 in debt and our stockholders' equity totaled $157,400,000 So this completes my financial summary.

Speaker 2

I'd now like to turn the call back over to Rick.

Speaker 1

Thank you, David. Like many companies, our manufacturing segment has been adversely affected by supply chain challenges, including material shortages, price increases and logistical delays, which have directly impacted our manufacturing processes. In some cases, our clients have delayed delivery of our products to next year due to similar issues impacting their businesses. This is pushed out to next year certain orders we had expected to complete in the last half of twenty twenty one. And as a result, we expect revenue from our manufacturing segment for the second half of twenty twenty one to be about equal to its revenue for the first half of this year.

Speaker 1

It's important to note that we haven't lost any orders. And in some cases, we anticipate being able to negotiate pricing adjustments on projects due to these delays. We continue to book new orders and build manufacturing backlog. We have refocused our sales efforts on the municipal water market, which has been very active this past year and is expected to benefit significantly from the recently passed federal infrastructure bill. We are actively building our municipality relationships and sales channels and rekindling relationships with consulting engineers that by these municipalities.

Speaker 1

We see this further supporting revenue, diversification and reduced customer dependence and concentration. It's important to recognize that municipal jobs have longer lead time and delivery time, Usually and they're more complicated in terms of what the client and their engineers require as deliverables. So project revenue recognition on this type of project, which is a custom project, will likely be stretched out over a longer period of time compared to the types of standardized products we historically produced for our former largest customer. This means our manufacturing backlog won't be processed all at once or over just 2 quarters and is more likely to be spread throughout next year. As we mentioned on the call last quarter, there's been an increasing need for seawater desalination facilities in the United Our team was recently shortlisted and invited to bid for a multi decade design build operate project in Hawaii.

Speaker 1

This type of project is exactly what we've been successfully executing in the Caribbean for the past 45 plus years, And we're very comfortable providing the long term operational performance guarantees required by this potential client. Our extensive experience in designing, building and operating these deepwater desalination plants allowed us to be shortlisted to bid for this major project. If we're successful in obtaining the contract and winning the bid, that would be our 1st seawater desalination plant in the United States. We are also closely following the progress on 2 other early stage 2 water desalination projects, one in Texas and another in Southern California. PERC, which is based And Southern California operates and maintains water treatment and reuse facilities under contracted engagements,

Speaker 2

which have been in the

Speaker 1

terms that range from 1 to 5 years. At this time, approximately 44% of Perks revenue for the first 9 months of this year was generated under O and M contracts that expire at various dates through December 2022. And these contracts are typically renewable on an annual basis. During the Q3, PERC generated about 95% of its revenue from such contracts with various entities in California and Arizona. FERC continued to grow its recurring revenues in the Q3 by signing a new 5 year contract to provide operating and maintenance services for a wastewater plant of the gaming and entertainment business in Southern California.

Speaker 1

We expect this O and M contract to generate revenue of about $400,000 per year. New project opportunities for PERC, both sole sourced and competitively bid, continue to be strong and include bids for 2 major projects that were submitted in the 1st 9 months of this year. First bid is for a design build contract For a large wastewater treatment facility in California, we're leading a very strong engineering and construction team This is an important project and we're one of the 3 teams that have submitted bids for this. We're also recently Selected as the preferred bidder for another prospective project, the wastewater recycling plant in Southern California, and we're currently in contractual negotiations with the client. We expect to hear whether FERC is selected Finally, for each of these projects by early next year and based on its overall increased bidding activity that reflect strengthening market demand.

Speaker 1

We believe Perks performance in 2022 will exceed this year As new water treatment projects come to market after the low due to the pandemic. Looking at our Cayman Islands business, in October, the Cayman Islands government announced that the country will reopen its borders For nearly all vaccinated travelers this Saturday, November 20. We see The reopening as a major step toward reopening of hotels and resorts in Grand Cayman and expect a gradual return to normalcy for our retail water segment. There's another positive sign, our major customer in Grand Cayman, the water authority of the Cayman Islands Recently invited us to bid for the design, construction and 10 year operation of a nearly 2 point This has gained international attention, so we do expect other companies to submit proposals. However, we believe that our Strong local presence and hyper energy efficient plant design will make us very competitive.

Speaker 1

Bids are due in early January for this project and the client is expected to make an award sometime in the Q2 of next year, so stay tuned. Our strong balance sheet and liquidity supports our efforts to Our business organically and through acquisitions and new projects. This includes further broadening of our water solution offerings and markets as well as pursuing acquisitions and strategic partnerships in seawater desalination and for our services business. Our strong balance sheet has also enabled us to ride out the continued adverse economic impacts of the pandemic, while allowing us to continue to fund important growth initiatives. We see many positive factors coming into play in 2022 In addition to the anticipated diminishing impact of the pandemic and the return of tourism and Grand Cayman, We're also seeing increased project bidding activity in the United States and the Caribbean.

Speaker 1

And all of these represent a potential major catalyst for For our company in 2022 and beyond. And now with that, Kate, I'd like to open up the call for questions.

Operator

We will now begin the question and answer session. The first question is from Gerry Sweeney of Roth Capital. Please go ahead.

Speaker 3

Good morning, Rick and David. Thanks for taking my call.

Speaker 1

Thank you.

Speaker 3

Wanted to start with the retail segment. Obviously, it's great news that the Cayman is opening up. Do you have any sense of how well prepared the Tourism industry as for this opening up and then it's almost fast ready to go or will that be a little bit of a headwind for A period of time.

Speaker 1

Well, I mean, I don't have any sort of detailed information, Jerry, but I mean, I think it's going to take At least a few months to ramp up the business again there. I mean, My understanding is that some of the airlines are not resuming regular service until February. They were They were set to resume in October and the government canceled the reopening previously, but this one seems to be on schedule. So You're not going to have full airlift capacity probably until February next year. Okay.

Speaker 1

But it's a big departure.

Speaker 3

Yes. Without a doubt, right, it's at least open. We're going to hit the ball going on. And then the Hawaiian seawater desalination, the E South project, Just curious, is that a private project or is that a municipal funded opportunity?

Speaker 1

No, that's a municipal project, Kerry. That you should be able to find something out about that if you look around. That's a really nice project. We have a great team together for that and we're hoping to be competitive on that. It's not being bid until next year, early next year.

Speaker 3

Okay. And then on the Georgetown, Cayman Islands one, I don't know if you would want to answer this or can answer it. But Is there an since you have a few plants there in the Cayman, is there even a chance to sort of have a competitive advantage in terms of I don't believe the right terms is bundling, but you do have some manpower station on the island, Access to equipment, etcetera, that could be, I don't know, crawl shared between projects. Is that a potential or Are we overthinking that a little bit in terms of creating the best in class

Speaker 1

Yes. I mean, as I mentioned in the script that our local presence gives us a number of advantages and I guess bundling, if that's what you want to call it, is certainly one of them. We share resources across the 6 plants now that we have there. 7 plant is not going to be a major addition in fixed costs and that sort of thing. I think we do have an advantage from that perspective.

Speaker 3

Got it. Then switching gears to Eric's, it sounds like The refocusing on sales and marketing and shifting to the municipal side is starting to bear, I think, some fruit. But I'm just curious as To I mean the margin profile on that municipal work, it sounds like it is different. It's probably even percentage of accounting driven to a degree. Is that in the same profile as that barge customer or is it lower margin profile Well,

Speaker 1

I mean, once it's a different margin for sure. The municipal work is much more Competitive. And initially the work that we did for this other It was very competitive and we've managed to improve processes and that sort of thing. So the margin is different. Once we start really recognizing some revenues from these projects as they flow through the shop, And I think you get a better sense of that because it's almost all municipal work that we're doing now.

Speaker 1

But a lot of this stuff, as I mentioned, is being held up Because of delays with the customers and delays with material deliveries and that sort of thing. So because we David could explain. He explains the accounting better than me. But once we start manufacturing this, And then we'll start booking the revenues and you'll

Speaker 3

see Yes, certain milestones, correct.

Speaker 2

Since Jerry, the margins on this initial stuff, We were making very high margins on the other stuff. And as a result, I think going forward, we'll see some margin adjustment. But as Rick mentioned earlier, our margins have been adversely impacted because utilization of plant overheads Yes. We continue to absorb those costs, because it's pretty hard to replace your workforce. You can't terminate people, then all of a sudden when production increases, you go back and hire them up.

Speaker 2

It just doesn't work that way. But as we continue to grow the business You see a greater percentage of Eric's manufacturing capacity utilized, the impact of that fixed operating cost, I think factory overhead becomes less and less on the gross profit percentage. So you're seeing improvement in gross margin just from the greater utilization of the plant itself. So

Speaker 3

No, I can recognize it with $1,100,000 of revenue in manufacturing versus like 3.8 last June. Completely understand that overhead is fixed and there's incremental margins. I was just curious as maybe even the delta between Municipal margins and your other customers, so we would have an idea of

Speaker 2

No. I don't think we can I can give you

Speaker 1

that number, Jerry, because some

Speaker 2

of this municipal work, it varies in margin? Some of it has very good margin on it.

Speaker 1

Okay.

Speaker 2

So it's just a matter of the product mix. It's not that we're happy to be in this market. We think it's going to be a very good market for us with expected margins in

Speaker 3

Got it. And I completely understand that. And one more question on Ericsson Manufacturing. And What is your maybe theoretical capacity with that facility? And have you ever sort of maxed it out?

Speaker 3

And I know I can't necessarily ask for what kind of revenue could a facility do at capacity because there's going to be different pricing, especially in today's environment. But I'm just trying to figure out potentially how much revenue that facility could do if you if the sales channel

Speaker 2

I can tell you that prior to purchasing Earex, they had years where they did $19,000,000 in revenue, I believe somewhere around $17,000,000 $18,000,000 $19,000,000 That plant has that potential. And it's we also have the ability to expand the plant. For some reason, we have major orders So it pushes beyond the existing capacity. I mean, we have land available there, which we purchased for the express purpose of expanding production capacity Should the demand warrant it in the future. So we're all poised Eric says the potential to do with his existing capacity.

Speaker 2

Given the product mix, I mean, that's always a big determinant.

Speaker 3

But I

Speaker 2

mean, dollars 20,000,000 in revenue is not beyond their reach With the right mix of orders, given the existing capacity.

Speaker 3

Got it. Okay. That's helpful. I'll jump back in queue. I appreciate it.

Speaker 1

Thanks, Jerry.

Operator

There are no other questions at this time. This concludes our question and answer session. I'd like to turn the call back over to Mr. McTaggart. Please go ahead, sir.

Speaker 1

I'd just like to thank everybody again I hope everybody has a very nice holiday season. And we look forward to talking to you again in March when we release our year end report. Thank you.

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 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.

Operator

Any forward looking statements made during this conference call are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Actual outcomes and results may differ materially from what is expressed in such forward looking statements. Factors that would cause or contribute to such differences include, but I'm not limited to continued acceptance of the company's products and services in the marketplace, changes in its relationships with the government of the positions in which it operates, the outcome of its negotiations with the Cayman government regarding a new retail license agreement, the collection of its delinquent accounts receivable in the Bahamas, the possible adverse impact of the COVID-nineteen 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 discussion and analysis of financial conditions or results of operations and risk factors section of the company's SEC filings, including, but not limited to, its annual report on the Form 10 ks and quarterly reports for Form 10 Q. Any forward looking statements made during the conference call speak as of today's date.

Operator

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 regards thereto or any changes in its events, conditions or circumstances of which any Forward looking statement is based, except as required by law. Before we end today's conference call, I would like to remind everyone that this 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 atwww.cwco.com. Thank you for attending today's presentation. This concludes the conference call.

Operator

You may now disconnect.

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Consolidated Water Q3 2021
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