Earnings Call Transcript - CWCO Q4 2021

Operator, Operator

Good morning. Thank you for joining us today to discuss Consolidated Water Company's Full-Year 2021 Results. Hosting the call today is 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. At any time during the call, you may join the Q&A queue. 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 instructions in yesterday's press release, which is available on the Investor Relations section of the Company's website. Now, I'll turn the call over to Consolidated Water Company's CEO, Rick McTaggart. Please go ahead.

Rick McTaggart, CEO

Thank you, Anthony, good morning, everyone. Thanks for joining us on today's call. As you saw from our earnings release yesterday, 2021 was a challenging year for the company due to the impact of the pandemic on certain areas of our business. While our retail and manufacturing segments performed below historical levels, we made progress growing our business in other areas. On the call today, I'd like to talk about what produced these results and the foundations we continue to lay to support our future growth and expansion. Last year, our bulk segment was our biggest revenue contributor and biggest incremental revenue contributor, increasing $2.5 million compared to 2020. Our services segment was our second biggest incremental revenue contributor by $947,000. While our manufacturing revenue declined during the year due to adverse economic conditions, and retail revenue declined due to the cessation of tourism in Grand Cayman during the pandemic, the challenges and opportunities presented to us during this period further validated the importance of diversifying our manufacturing segment revenue by expanding our geographic presence and customer base. In 2021, we successfully integrated our sales team across four business segments, led by our recently promoted Executive Vice President of Business Development, Mr. Brent Brodie. We expect our manufacturing segment to strengthen this year, supported by our integrated sales team, which is leveraging the relationships and excellent reputation that PERC has developed over many years with potential customers and engineering advisors in the Southwest United States. This integrated sales approach is providing opportunities for Aerex to pursue projects in this water-scarce area of the country in addition to its primary sales market in Florida. And on the desalination side of the business, our manufacturing segment is fully integrated in three projects that we are pursuing in Hawaii, California, and Grand Cayman. We believe that having Aerex’s design and manufacturing capabilities in-house makes us more competitive on these three important projects, each of which includes design, construction, and long-term operation of seawater desalination plants for municipal customers. Our retail segment with operations in Grand Cayman continued to be adversely impacted by the pandemic during 2021. We operate four seawater desalination plants that produce piped drinking water for our retail utility business and another three seawater desalination plants for our bulk water customers in Grand Cayman. In total, we produced all of the piped drinking water on Grand Cayman, which is home to about 95% of the country's population. We are extremely encouraged by the recent easing of COVID-19 restrictions and the return of tourism to the Cayman Islands as the country’s Phase V reopening plan continues. In fact, we've already seen a 7% increase in water sales in our retail service area during the first two months of 2022 compared to the same period last year. And with just about a day left in March, we have already produced almost 15% more water than in March 2021. Just last week, the Cayman Islands welcomed back its first cruise ship in two years, the Disney Magic. It is the first of a series of ships scheduled to visit Grand Cayman over the next month. Naturally, we expect the resurgence of tourism to help our retail water sales return to normal levels over the coming months as hotels and businesses begin to serve the thousands of tourists and vacationers coming back to the Islands. Now, before I talk a little more about the year and the outlook for 2022, I'd like to turn the call over to David, who will take us through the financial results for the year.

David W. Sasnett, CFO

Thanks, Rick, and good morning, everyone. Thanks for joining us today. As Rick mentioned, we are encouraged by the easing of travel restrictions but we continue to face significant challenges as a result of the current economic environment. Despite these challenges, we've maintained our strong financial foundation as we pursue new opportunities, and we have continued to pay dividends. Yesterday, we issued our earnings release for 2021, which is available in the Investors section of our website. We reported that revenue totaled $66.9 million for our 2021 fiscal year, which is a decrease of 7.9% from 2020. This decline reflects decreases of $847,000 in retail segment revenue and $8.4 million in manufacturing segment revenue. This decline was partially offset by an increase of $2.5 million in our bulk segment revenue and $947,000 in our services segment revenue. The reduction in our retail revenue represents a 4% decrease in the volume of water sold by Cayman Water. This is due to the closing of Grand Cayman Island to all tourism back in March 2020 in response to the COVID-19 pandemic. The decrease in manufacturing segment revenue was due to the loss of orders from Aerex’s former largest customer, and we discussed this in previous calls and in our public filings. Aerex has made efforts to replace this revenue generated from this customer with new revenue from existing and new customers. However, this effort has been adversely affected by continuing negative economic conditions. For example, we are experiencing increases in raw material costs, raw material shortages, and extended delivery times for our raw materials. We believe these same factors have also adversely affected the overall financial condition of Aerex’s current and prospective customers. Rick will go into detail about Aerex's key strategic initiatives later on in this call. The increase in our services segment revenue was due to an increase of approximately $3.2 million from operating and maintenance contracts attributable to new customers, which helped to offset a decline in plant construction revenue during the year. The increase in our bulk segment revenues is attributable to an increase in energy costs for CW Bahamas, which increased the energy pass-through component of CW Bahamas rates. The increase was also due to a lesser extent by a 5% increase in the volume of water sold by CW Bahamas. Our gross profit for 2021 was $23.5 million or 35.2% of revenue, compared to $26.8 million or 36.9% of revenue in 2020. Our net income from continuing operations attributable to Consolidated Water stockholders for the full-year of 2021 was $3.4 million or $0.43 per basic and diluted share. That's compared to net income of $8.6 million or $0.56 per basic and diluted share for 2020. Total net income attributable to Consolidated stockholders for the full-year 2021, which includes the results for discontinued operations, was $876,000 or $0.06 per basic and fully diluted share. This was down from net income of $3.7 million or $0.24 per basic and fully diluted share for the previous year. I'd like to speak briefly about our balance sheet now. Our accounts receivable balances related to our CW Bahamas business totaled $21.5 million at the end of 2021, which was up from $16.8 million at the end of the previous year. These receivables are due from the Water and Sewage Corporation of the Bahamas. Last month, we received correspondence from the Ministry of Finance of the government of Bahamas, that set forth a payment schedule providing for the gradual reduction of CW Bahamas delinquent accounts receivables due from the Water and Sewage Corporation over the course of 2022. Such correspondence also indicated that the government intends to return all of CW Bahamas accounts receivables from the Water and Sewage Corporation to current status. We appreciate the government's renewed focus on paying CW Bahamas receivables, given the economic impact the pandemic has had on the Bahamas. It's important to remember that the Bahamas government always eventually pays 100% of CW Bahamas receivables and that we have never been required to record an allowance for doubtful accounts for our CW Bahamas receivables. As of December 31, 2021, our cash and cash equivalents totaled a healthy $40.4 million, and our working capital exceeded $69 million. Our debt was only $200,000, and the stockholders' equity attributable to the CW shareholders totaled $157.6 million. So this completes my financial summary. I'd like to turn the call back over to Rick now.

Rick McTaggart, CEO

Thank you, David. One of our key strategic initiatives has been to build out a more diversified book of business for Aerex. For those unfamiliar, Aerex is a custom and specialty manufacturer of water treatment-related systems and projects. It also provides design, engineering, management, operating, and other services applicable to commercial, municipal, and industrial water production. As I mentioned earlier in the call, we fully integrated our sales team across our business segments in 2021. This has particularly benefited Aerex by further diversifying its client base and geographical market. As we reported last year, our Aerex sales team has been focused on developing and redeveloping relationships with large engineering consultants and general contractors who provide design and construction services to the municipal water market. In 2021, about 77% of our manufacturing revenues came from various municipal water projects. The municipal water market is cyclical, and while bidding activity for municipal equipment supply has slowed in recent months after a strong post-COVID burst of activity, Aerex is maintaining a much stronger contracted orders backlog than this time last year. Unfortunately, like many companies over the last several months, Aerex has been adversely affected by supply chain challenges, including material shortages, price increases, and logistical delays that have impacted its manufacturing processes. Certain municipal orders that we had expected to be completed in the last half of 2021 were pushed into this year, and we're now seeing about $2.6 million in orders pushed into next year, 2023. In response to these challenges, Aerex engineers are working with suppliers and customers to find solutions to avoid these delays by implementing design changes and/or substituting equipment and materials while always ensuring that our products meet or exceed customer requirements. We've also been working on other areas to expand our product offerings and presence in the U.S. As you know, in October 2019, we acquired a controlling interest in PERC Water Corporation, an award-winning water treatment and reuse infrastructure provider and manager. It currently operates primarily in the Western United States. PERC expands our service offerings and provides us with a new platform in the Western United States for expanding our core business of designing, constructing, and operating water desalination plants. And as I mentioned earlier, we're currently pursuing three projects, two of which are in the Western United States. PERC's team has increased bidding activity in primary markets for new plants and asset management contracts, and they are currently pursuing more than a dozen potential design-build and asset management projects. PERC has developed an excellent reputation with municipalities and developers in the Southwest as a company that delivers design-build water treatment projects on time and at the most competitive cost. PERC's unique custom design report offering provides potential clients with a 20% design plus a not-to-exceed construction cost estimate, which the client can use for planning in comparison with other project delivery models. PERC provides clients with a single point of responsibility for design, construction, and commissioning of municipal water treatment projects. By comparison, other project delivery models typically used in municipal projects, such as design-bid-build, consist of multiple points of responsibility, which ultimately increases the cost of the project to the client. PERC's innovative wastewater treatment plant design features minimal land use, neighbor-friendly facilities, maximum noise and odor control, and maximum cost efficiency. Once the plant is commissioned, PERC is also able to operate the plant using its highly skilled workforce of licensed operators. PERC currently operates two of the most advanced water reuse plants in California for the Water Replenishment Districts in Los Angeles. The combination of PERC's and Consolidated's unique experience operating complex membrane-based water treatment plants permits us to pre-qualify to bid for similar new projects and operating contracts. Our plan to expand service revenues in the wastewater reuse market is supported by our strong balance sheet and growing pipeline of potential projects. And I'm looking at our international operations outside of the United States. As I mentioned earlier, the easing of COVID-19 restrictions and the return of tourism to the Cayman Islands has been very encouraging to see after many months of lockdowns and travel bans. On February 18th, the Cayman Islands government dropped all on-island COVID testing for vaccinated travelers and they no longer require post-arrival COVID-19 tests for fully vaccinated travelers. The quarantine period for partially vaccinated and unvaccinated individuals was also reduced from 10 days to 7 days. The government significantly increased the occupancy limits on gatherings, which facilitates the return of conferences and conventions to the Islands. In fact, I know one of my friends is actually attending a conference in May there. In addition to the return of cruise ships to the Island, major airlines including American, Delta, Southwest, and United have resumed their flight routes to Cayman earlier this month. As a result of these positive indicators, we see our retail water sales returning to normal levels over the coming months as hotels, restaurants, and other tourism-related businesses return to service the island's visitors once again. In fact, as I mentioned earlier in the call, we have seen our retail water sales increase by 7% in January and February compared to last year, and production is actually up by 15% so far in March. We are also seeing potential for expansion of our business on the island. In January, we submitted a multi-million-dollar bid to design, build, and operate a new 2.6 million-gallon-per-day desalination plant in Grand Cayman for the government-owned water utility. We anticipate hearing the results of that bidding process by the middle of next month. Our Bahamas operations through our Bahamas government customer supply all of the piped water on the island of New Providence, Bahamas. New Providence is the most populous island in the Bahamas with about 275,000 residents or 70% of the country's population. This includes Nassau and Cable Beach, which Nassau is the political capital and commercial hub of the Bahamas. We're seeing a rapid return of tourists to the Bahamas, and although higher tourism numbers don't necessarily translate to higher water sales for us, it does bode well for the overall financial health of the Bahamas. As David mentioned, our receivable balance in the Bahamas is still high, but we recently received assurances from the highest levels of government that the balances will be brought current by early 2023. In closing, we believe that our management team and board have charted the best course for the company to recover in 2022 from the impacts of the pandemic and to grow our business by focusing on water-scarce regions of the Western United States. We believe that our extensive experience, excellent track record, and novel approach to designing, building, and operating both seawater desalination facilities and wastewater treatment and recycling plants, as well as our strong cash position and relatively low overhead burden, continues to give us a competitive advantage over other companies, some of which are much larger than us. Looking ahead in 2022, we remain very optimistic about our growth prospects. Our optimism is buoyed by the ongoing return of tourism to Grand Cayman and our increased project bidding activity in the U.S. and internationally. We see these as strong catalysts for growth in 2022 and beyond. With that, I'd like to open up the call, Anthony, for questions.

Operator, Operator

We will now start the question-and-answer session. Our first question comes from John Bair with Ascend Wealth Advisors. We will proceed now.

John Bair, Analyst

Good morning.

Rick McTaggart, CEO

Hey John.

David W. Sasnett, CFO

Good morning, John.

John Bair, Analyst

I have a couple of quick questions. You mentioned that about 77% of Aerex's business is coming from the municipal market, and I assume that most of that involves funds that were already earmarked for that work; is that correct regarding the municipals?

Rick McTaggart, CEO

Yes. I mean, they're municipal water projects though for Port Saint Lucie and Palm City, various municipal water plants. I don't know where they're getting the funding for these. I mean, we're working through contractors and engineering groups on these projects as equipment suppliers.

John Bair, Analyst

Okay. Where I was going with this is whether or not you're starting to see or have any indication that money is starting to come in from the Infrastructure Bill that might help open up new projects or fund ones that have been on the table and just pending, that kind of stuff. Are you seeing it or able to tell if you're seeing any impact from that? Positive impact?

Rick McTaggart, CEO

Honestly, I am not aware of any specific projects that are tied to that Infrastructure Bill. A lot of this work was being planned and designed even before that bill was passed. So these are things that are multi-year contracts that we are involved. And so I really can't say with any certainty whether that's helped.

John Bair, Analyst

Okay.

David W. Sasnett, CFO

But we've had general discussions with people relative to our business. It seems that we just believe that the Infrastructure Bill will impact the amount of construction that's done, certainly in California and Arizona. And it could be already having an indirect impact. We haven't had anybody come to us and say that this project was a direct result of funding received from the Infrastructure Bill. I don't have that enough time to make that kind of impact yet.

John Bair, Analyst

Yes, there is a lot of discussion about replacing lead pipes and similar issues. I am not sure if that falls within your area of expertise or Aerex's, but I wanted to mention it.

Rick McTaggart, CEO

We don't.

John Bair, Analyst

Okay.

Rick McTaggart, CEO

That wouldn't impact us at all.

John Bair, Analyst

Okay. And then the other question is, your statement about Aerex had become fully integrated with the projects. So and my understanding is right that your sales force is now working kind of hand-in-hand with the PERC folks. So that PERC wins a contract or whatever that they will be utilizing Aerex products within the design and construction, is that?

Rick McTaggart, CEO

That's exactly it, yes. And they're also marketing Aerex's products to potential customers that don't necessarily involve PERC's. We were able to bid on a project in Arizona that we became aware of through our PERC sales team. We had individual sales guys for Aerex, for PERC and for our legacy businesses and that's all been united under Brent, who's running that now. I think it's been very effective.

David W. Sasnett, CFO

John, where it makes sense, we employ Aerex to make equipment for any plants that we will be building. But the exciting part of this is that we now have an Aerex sales team through PERC on the Western coast of the United States and in Arizona. And Aerex never had the opportunity previously to reach out to those areas of the country. And we think Aerex will be very competitive bidding on projects there. As Rick said earlier, they don't really directly involve PERC, but PERC has the relationships for the customers in the context to lead these opportunities to Aerex and give them a chance for them.

John Bair, Analyst

That sounds very encouraging. You've mentioned about the raw material demands and so forth, the pressures there. Are you seeing anything in the way of personnel issues, turnover, that kind of thing that's affecting you at all?

Rick McTaggart, CEO

No. I mean, we're aware of the demand for operators, for example, in our PERC business, the management team has been very attentive to that to make sure that we don't have that sort of turnover. I think we offer very competitive employment terms and we want to make sure we stay that way. On the customer side, I mean, there seems to be a willingness to absorb these extra costs, certainly on projects that we're looking at, so something that might have been 20% cheaper two years ago, the customers are still moving on those projects. Most of them are.

David W. Sasnett, CFO

But let me point out, John, that our customers are having issues too relative to the number of things. So that's why these orders that Rick mentioned were pushed from 2022 to '23. This will therefore settle out, and we won't have to see this going forward, but for the short-term, we have a smaller part of our revenue from this year to next year.

John Bair, Analyst

Very good. Thanks for taking my questions. I'll let somebody else go forward. Thanks.

Rick McTaggart, CEO

Thanks, John.

Operator, Operator

Our next question will come from Ada Castle with PSP Capital Management. You may now go ahead.

Unidentified Analyst, Analyst

Hi, I just wanted to follow up on the Aerex topic. Since they are located in Florida and you're trying to manufacture for California and Arizona, would you be looking to open a manufacturing facility in the Southwest?

Rick McTaggart, CEO

No, we don't have any plans for that. I think the facility we have in Florida is completely capable of servicing those regions. Just as some of our competitors are actually located in California and they regularly participate in the Florida market here. So we're trying to make it a little bit more uncomfortable for them in their home market.

Unidentified Analyst, Analyst

I have another question regarding your press release where you mentioned potential acquisitions, and it seems your balance sheet is in a strong position to support that. What specific qualities would you be looking for in a potential acquisition?

David W. Sasnett, CFO

We're looking for mainly companies now that would give us an expanded geographical presence for our PERC business. So they would be located in the United States. Maybe operating companies that service wastewater clients, that would be additive to PERC. We're not looking to expand our manufacturing business from that standpoint, which is also in the United States. But we are certainly looking at potential opportunities to expand PERC's footprint.

Rick McTaggart, CEO

And we're also looking at companies involved in membrane technology, if you're very familiar with that. That would perhaps give us access to new markets. There's a number of technologies we've looked at over the years. We continue to look at companies that may give us a competitive edge from a technology standpoint. We've looked at a couple of these recently and we're always interested in enhancing the scope of products that we can offer to our existing customers and even getting into new markets that are potentially highly profitable. Because in each market, that involves being able to bring technology.

Unidentified Analyst, Analyst

Thank you.

Rick McTaggart, CEO

Welcome.

Operator, Operator

Our next question will come from Steve Percoco with Lark Research. You may now go ahead.

Steve Percoco, Analyst

Okay. Thank you. I have a question. If you answer that, I apologize. But can you give us a better perspective on the new plant that you're bidding on in Cayman? Is that going to be additive to the market? Is it going to replace capacity in the market? I presume that Water Authority is going to operate the plant, but maybe I'm wrong about that. If I'm wrong, would you have an opportunity to bid on the operations of that? And then also, where is the plant located? Does it affect your existing owned plants?

Rick McTaggart, CEO

Steve, the project that we bid on was for a design, build, and operate agreement for the water authority. So it's a 10-year operating tail which is included in the contract. There is no financing components though. If we were successful, we would get paid for the plant when it's completed. The plant is located in Georgetown, which is the government utilities service area, so it would not impact our service area or retail business. And I'm not sure what their plans are, on whether this is additive or whether there is an older plant in the area that there has been some talk of them retiring, but we're not sure what they're doing.

Steve Percoco, Analyst

Given the reopening, there's still some uncertainty about the strength of the tourism recovery. I think they would evaluate the situation or at least wait to see how robust the tourism returns. Is that a reasonable assumption, or are they proceeding regardless at this point?

Rick McTaggart, CEO

So the government utilities service area did not experience the declines in demand that we did in our retail area. The government services the population, local population centers. We service the tourism business on Seven Mile Beach, where all the big hotels are located within our service area. So I presume the need for capacity is just based on their normal growth projections, which have not been skewed by the pandemic relative to our demand.

Steve Percoco, Analyst

Okay. Well, great. That's all I had. Good luck with your bid.

Rick McTaggart, CEO

Okay. Thank you very much, Steve.

Operator, Operator

It appears there are no further questions. This concludes our question-and-answer session. I would like to turn the call back over to Mr. McTaggart. Please proceed, sir.

Rick McTaggart, CEO

Thanks, Anthony. I appreciate everybody joining the call today and I look forward to speaking with you hopefully again in May when we release our first quarter 2022 results. Thank you.

Operator, Operator

Thank you, ladies and gentlemen. Before we conclude today's call, I would like to provide a 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 the words or phrases usually contained the word: believe, estimate, project, intend, expect, should, will, or similar expressions. Payments that are not historical facts are based on the company's current expectations, belief, assumptions, estimates, forecasts, and projections toward its businesses and in the industry and markets its business. Any forward-looking statements made during this conference call are not guaranteed to reflect future performance. They 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. Actions that would cause or contribute to such differences include but are not limited to the continued acceptance of the company's products and services in the marketplace, changes in its relationships with the government or the jurisdiction in which it operates, the outcome of negotiations with the Cayman government regarding a new retail license agreement, the collection of delinquent accounts receivable in the Bahamas, the possible adverse impact of COVID-19 virus on the company's business, and various other risks. For a detailed management discussion and analysis of financial condition and results of operations and at risk factors sections of the company's SEC filings, including but not limited to this annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statement made during the conference call speaks as of today's date, and the company disclaims any obligations or undertaking to update or revise any forward-looking statements made during the conference call to reflect any changes and its expectations with regard thereto or any changes in its events, conditions, or circumstances on which any forward-looking statement is based, except as required by law. Before we end today's conference call, I'd now like to remind everyone 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. Thank you for attending today's presentation. This concludes the conference call, you may now disconnect.