Earnings Call Transcript - CWCO Q4 2022

Operator, Operator

Good morning, and thank you for joining us today to discuss Consolidated Water Company's Full Year 2022 Results. Hosting the call today is the Chief Executive Officer, Consolidated Water Company, Rick McTaggart; and the company's Chief Financial Officer, David Sasnett. Following their remarks, we will 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 it will be made available for telecom replay per the 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 Company's CEO, Rick McTaggart. Sir, please go ahead.

Rick McTaggart, CEO

Thank you, Joe, and good morning, everyone. Thanks for joining us today. As you saw in our earnings release issued yesterday afternoon, we reported a 41% increase in our revenue to a record $94.1 million for the full year of 2022. We generated increased revenues across all four of our business segments last year. Our retail water revenues benefited from a 12.5% increase in the volume of water sold in Grand Cayman and this large increase was due to the return of tourist activity to the Cayman Islands. Our Services segment revenue increased by $15 million with most of this due to the progress of PERC Water on the construction of a new $82 million advanced water treatment plant in Goodyear, Arizona. We announced this contract in May of last year. The project is progressing as planned and we anticipate recognizing significant additional revenue from this project this year and until the construction is completed in mid-2024. Also in Q4, we broke ground on the new desalination plant that we designed and are presently constructing on Grand Cayman under a 10-year design build and operate contract with the Water Authority of the Cayman Islands. We also announced this project in May of last year. The revenue we recognized from this contract also contributed to the year-over-year increase in Service segment revenues. We expect the revenue generated over the approximate 11-year term of this contract to total about $20 million based on January 2022 values. We anticipate the majority of this $20 million to be generated by the construction of the desalination plant during the first 18 months, with the rest earned from the operation of the plant over the following 10 years. So that's how we get to the 11.5-year term. In October, we announced a milestone win for PERC with the award of an expanded 10-year $49.2 million contract to operate and maintain two advanced water treatment facilities in Southern California. This contract was the longest or is the longest-term contract that PERC has ever signed. This win affirms the world-class services that PERC provides and supports our plans for growing this segment of our business in the Western U.S. region that has experienced unprecedented drought conditions over the last 10 years certainly. In all, we secured more than $150 million in major multi-year projects in 2022, which we expect to have a positive impact on earnings over the coming quarters. Now before discussing more about these projects and our outlook for the rest of the year, I would like to turn the call over to our CFO, David Sasnett, who will take us through the financial details of the year.

David Sasnett, CFO

Thanks, Rick, and good morning, everyone. Yesterday, we announced our full fiscal results for 2022 in a press release, which is available in the Investors section of our website. As mentioned by Rick, our revenue for 2022 was $94.1 million, reflecting a 41% increase from the $66.9 million reported in 2021. This growth was fueled by revenue increases across all four of our business segments: $3.8 million in Retail, $6.2 million in Bulk, $15 million in Services, and an additional $2.3 million in Manufacturing. The rise in retail revenue was mainly due to a 12.5% increase in water sales volume on Grand Cayman, alongside higher energy costs that boosted the energy pass-through component of our water rates and a better rate mix. The Bulk segment revenue increase was attributed to higher energy costs impacting the energy pass-through component of CW-Bahamas rates. Our Services segment saw revenue growth due to higher plant design, construction revenue, and operating and maintenance revenue, with significant contributions from PERC’s water treatment plant construction in Goodyear, Arizona. The Manufacturing segment revenue increase was driven by heightened production activity. Our gross profit for 2022 was $30.4 million, representing 32% of total revenue, a 29% increase from the $23.5 million or 35% of revenue in 2021. Net income from continuing operations for 2022 was $8.2 million or $0.54 per share, an increase from $3.4 million or $0.23 per share in 2021. Including discontinued operations, net income attributable to consolidated water stockholders was $5.9 million or $0.38 per share, up from $876,000 or $0.06 per share in 2021. Moving on to our balance sheet, our cash and cash equivalents were $50.7 million at year-end, compared to $51.1 million at the end of the September 30, 2022 quarter. As of December 31, 2022, our working capital was $69.9 million, our debt stood at $300,000, and stockholders' equity totaled $159.7 million. For 2023, our projected liquidity requirements include approximately $14.1 million in capital expenditures for ongoing operations, including $2.8 million for replacing the West Bay desalination plant and about $7.5 million for a new desalination plant on Grand Cayman. In October 2022, we exercised our option to acquire the remaining 39% of our subsidiary PERC Water, completing the transaction in January 2023 for approximately $7.8 million, consisting of $2.44 million in cash and 368,383 shares of common stock valued at about $5.4 million. We also paid around $1.4 million in dividends in January 2023, alongside any future dividends determined by our Board. In the third quarter of 2022, we secured a $10 million revolving credit line with Scotiabank in the Cayman Islands to support our short-term financing needs, although we have not yet needed to use this borrowing line. This concludes our financial overview for the quarter, and I will now pass the call back to Rick.

Rick McTaggart, CEO

Thanks, David. So looking at our retail operations in Grand Cayman, we've been pleasantly surprised by the rapid return of tourism to the island, which appears now back to normal levels in early this year. Last August, all COVID-related restrictions for travel to the Cayman Islands were eliminated by the government and cruise ship visits returned. It has been reported that airlift capacity to the islands is still 10% to 15% less than early last year due to challenges in the aviation industry. However, this seems to be driving up ticket costs more than limiting the number of visitors to the island. According to a recent local paper posted an article posted last week, rental cars are selling out, boat trips are being booked weeks in advance and hotel rooms are in demand across the islands. Overall, for 2022, visitor numbers to the Cayman Islands were still below pre-COVID levels. However, so far in 2023, it looks like the islands may see a full return to historical levels soon. As I mentioned earlier, during the fourth quarter, we broke ground for the new Red Gate Seawater Reverse Osmosis plant that we're building in Grand Cayman for the Water Authority. Construction is now well underway with the main structural parts of the building completed in February. So looking ahead at desal opportunities, we continue to follow some very interesting opportunities for desal projects in a more active Caribbean market, which we haven't actually seen for quite a few years. We're hopeful that our strong regional presence will give us a decisive advantage in what's becoming a crowded competitive landscape in this market. We are also awaiting the official announcement of the contract award for the designing, building and operating of a new 1.7 million gallon per day seawater desalination plant in Honolulu, Hawaii. We did this project in June last year, and we've been extending our bid at the request of the client several times now and we anticipate an award announcement to be made sometime soon. This project in Hawaii is comparable to the types of projects that we've successfully completed in the Caribbean over the last 50 years. Just note in August, the company will celebrate its 50th anniversary. We believe our extensive experience designing, building and operating seawater desalination plants coupled with PERC's deep knowledge and strong relationships in the U.S. design-build market puts us on the short list as a top company for this project and similar projects in the future. Looking at PERC, our California-based company, their performance continues to exceed our expectations. We have successfully integrated and are growing its operations by enabling it to capitalize on our financial strength and leverage our management expertise and other corporate resources. You can see from last year's result, PERC was a big factor in our improved financial performance. In May last year, PERC won the contract to design, construct and commission a 4 million gallon per day wastewater treatment facility in Arizona for Liberty Utilities. We believe PERC was awarded this project from Liberty because of our unique project delivery model. Under this model, we provide our clients with a full turnkey solution, where they only deal with PERC as opposed to several engineering companies and contractors and this for all aspects of the project, including design, cost, schedule and plant performance. Our process enables us to design, construct and commission water treatment plants on an accelerated schedule and at a lower overall cost compared to traditional design to build project delivery models. This Arizona project is proceeding as planned and generated $9.5 million in revenue for us in 2022. Looking ahead, we are following one potential seawater desalination project and a couple of wastewater recycling opportunities in Southern California, all of which look very interesting. California very much likes to recycle wastewater and we believe that we are a prime candidate with PERC for such projects given PERC's award-winning designs and long track record of high-quality operations and maintenance. Now looking at our Manufacturing business. We were pleased to see continued quarterly and year-over-year growth in our Manufacturing segment. During the quarter, we began to see some relief from supply chain constraints and challenging economic conditions. This allowed us to advance more of our large order backlog through the manufacturing process. We continue to leverage our manufacturing capabilities to enhance our competitiveness across our other business segments. For example, our manufacturing business is providing air piping, stainless steel piping for PERC's water project in Goodyear, Arizona. Similarly, our manufacturing operation provided all of the reverse osmosis equipment for the two seawater desalination plants we are currently building on Grand Cayman, one for ourselves and one for the water authority and we expect that Aerex will continue to provide piping and similar equipment for all future projects we might obtain. So looking ahead, we expect improved results from our Manufacturing business. On the acquisition front, we're presently evaluating two potential transactions. If completed, the first one would be complementary to PERC Water. The second would involve a partnership for the development and introduction of membrane process technology to an industrial and mining application. Our 2022 results reflected our successful acquisition and integration of PERC Water and how we effectively applied our financial and management expertise to grow exponentially. Also looking ahead, we see many positive factors driving continued growth for Consolidated Water. These include the continued recovery of tourism in Grand Cayman, the ongoing construction projects there in the U.S., as well as increased project bidding activity in the U.S. and the Caribbean. We expect that more than $150 million in major multiyear projects that we secured in 2022 will have a greater positive impact to our earnings in future quarters. And with this supporting our positive outlook for continued growth in our Services segment. We believe all of these activities and trends are strong indicators for continued growth and positive returns ahead. So, Joe, I'd like to now open up the call for questions.

Operator, Operator

We will now begin the question-and-answer session. And our first question here will come from Gerry Sweeney with ROTH Capital. Please go ahead.

Gerard Sweeney, Analyst

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

Rick McTaggart, CEO

Hi, Gerard. How are you doing?

Gerard Sweeney, Analyst

Doing well. I wanted to ask a few questions on PERC. Maybe at a macro level. Obviously, there's been a long-term drought in California. This year has been somewhat of an anomaly, lots of rain; some of those drought conditions have been alleviated. No doubt, this is probably a short-term positive for California. But I'm curious if you're seeing any projects or opportunities around slippage or pushing back opportunities or how do we look at that?

Rick McTaggart, CEO

The stuff that we're following, we haven't seen any indication that they're delaying it at this point.

Gerard Sweeney, Analyst

Got it. And then secondarily, obviously, a big year last year for PERC. How much capacity or utilization do they have for projects and managing projects this year and next year? They certainly have a lot on their plate, but I just want to understand that a little bit further.

Rick McTaggart, CEO

Well, I mean I think that we have a great management team there, Gerry, and it's all about finding the right talent and the right people to grow the business. And so far, the team we have out there has been very successful in finding the right people to expand the business. I mean we have several projects on our plate right now that we've had to identify and recruit additional staff, engineers, and project managers. And so far, it's all been working very well. From the standpoint of financial resources, I can let David speak to that.

David Sasnett, CFO

Yeah. It's important to remember, Gerry, that on a lot of these big design-build contracts, we're subcontracting out a major portion of the work. What we really need is the management personnel to oversee the construction process. We've been very successful in hiring the right people so far. And PERC has gained an external reputation in the industry. I think people are excited about the opportunity to work for us. The only true limiting factor we have at this point in time that I see is that we are a $250 million market cap company and we have limited bonding capacity. So that's the only thing that's sort of restricting us at this point in time. At some point in time, our growth will be slowed until we can gain more capacity, and that capacity comes with the completion of the projects; once you finish a project. For example, when we finished the project in Goodyear, Arizona, that will fully have $80 million worth of bonding capacity right there, plus it's a feather in our cap. We demonstrated to the surety that we can complete these projects without issue and so they're willing to raise our cap and take more risk with us. So that's the only thing that slows down at the moment.

Gerard Sweeney, Analyst

Okay, perfect. Regarding Liberty, the $82 million project saw $9.5 million completed in 2022. The scheduled completion is in the first half of 2024, but you need to have the majority of the project done by the end of this year, correct? This means a significant portion of the remaining revenue will be reflected in the income statement.

David Sasnett, CFO

Yes. The majority of the $72 million will be recognized in 2023. When I say next year, I shouldn’t say next year, in 2023, we're into next year.

Gerard Sweeney, Analyst

In 2023, is the revenue consistently spread over four quarters or is a significant portion back end loaded?

David Sasnett, CFO

It's consistently the same. Yes, it's consistently the same because depending on the inputs and in some months, we will invest in more expensive equipment than we do in the following months. Therefore, it will be somewhat sporadic and not entirely consistent.

Gerard Sweeney, Analyst

Got it. And then final question, it sounds like it came in to back coming along pretty good. But do you know what percent utilization or volume or towards levels were in the fourth quarter of '22 versus maybe pre-COVID? I'm assuming fourth quarter was a little bit slower and things really ramped up after the New Year. I'm not sure if that's exactly right. But because I think the restrictions were lifted in October. So it took a little bit of time to get back to sort of full capacity. Just curious if you have any input on that?

Rick McTaggart, CEO

Yes. I don't have those numbers in front of me, Gerry. I mean I can tell you, when we were there in February for our Board meeting, it was very busy. And I think most of the tourist growth has occurred after December 15 of last year when you get into the colder months, but I don't have any figures to quote right.

Gerard Sweeney, Analyst

Yes. That’s fine. I was just curious if it was available. It’s great, if not, no big deal. Okay. I appreciate it and congratulations. Great quarter, great backlog and look forward to 2023.

Rick McTaggart, CEO

Thank you, Jerry. Take care.

Operator, Operator

Our next question will come from Matt Suarez with Investments. Please go ahead.

Unidentified Participant, Analyst

Hey. Good morning. Thanks for letting me ask the question. Obviously, you have an extremely solid balance sheet, but I have a question about your idle Baja and Playas de Rosarito purchase looks like about 10 years ago. Can you let me know what you paid for that land? What the value of it is today? And what your current plans are for that asset?

David Sasnett, CFO

The land is reflected on our balance sheet at about $21.5 million, which is the amount we paid for it. We are currently marketing the land and trying to sell it. I prefer not to disclose the appraised value because it could suggest that it’s the price we aim to sell it for, but it is significantly higher than what is recorded on the balance sheet. We continue to market this land and want to sell it at the right price, avoiding selling it for anything we believe is considerably below market value. Additionally, the land is indirectly linked to our claim against the Mexican government. We have initiated arbitration in international court against Mexico for the cancellation of their contract with us to build a plant on that land in Baja, California. We are confident that upon selling the land, we will receive more than our original investment.

Unidentified Participant, Analyst

Okay. And if the land does get sold, then it just gets netted out of the current claim?

David Sasnett, CFO

That's correct. I mean whatever the court would award us the damages that we take out the value of the land that we received.

Operator, Operator

Our next question will come from John Bair with Ascend Wealth Advisors. Please go ahead.

John Bair, Analyst

Thank you. Good morning, Rick and David.

Rick McTaggart, CEO

Good morning, John.

David Sasnett, CFO

Hey. Good morning.

John Bair, Analyst

It was a strong quarter with positive momentum. I have a couple of questions. Regarding your M&A activities, if those two proceed, do you expect to adopt a similar structure as you did with PERC and Aerex, where it's not a complete 100% acquisition? Additionally, would you be considering a cash deal, a combination of cash and stock, or what is your approach to this?

Rick McTaggart, CEO

Well, I mean, it's a little early to say right now, but we look at the transaction that is in the best interest of the shareholders. It depends on the size of it, and it depends on the selling parties' willingness to continue in the business and that sort of thing. So, I can tell you that the industrial deal is more of a joint venture-type arrangement. The other acquisition, it's a little early to say how that's going to work out. But we'll do the best that we can for the shareholders, which includes making sure that there's a transition period for the business.

David Sasnett, CFO

John, when we bought the other 39% of PERC, we sold stock as part of the acquisition cost at the request of the PERC minority shareholders. Given the amount of cash we have on our balance sheet, I would presume that most of the acquisition costs or anything we did going forward unless it's a very large acquisition would be just paid in cash and not through the issuance of our stock.

John Bair, Analyst

That's good. Good. I wanted to also ask you in your press release and Rick touched on this in his prepared remarks about the supply chain constraints easing up a little bit. And so, the question is, I'm assuming this means that you were able to get the components that you needed to satisfy the orders that you had sooner than previously expected. Is that the way to look at it?

David Sasnett, CFO

No, I think it's better to look at it as things were really quite terrible before, John. And the supply chain has improved. It's not back to where it was before we had all this economic chaos that was touched off initially by COVID, but then has carried on due to other factors. Our supply chain still isn't humming like it was four years ago. But it's improved to the point where now we can start getting materials and pushing production to the plant. But still, we've seen an increase in costs and a delay in delivery times. It still takes a long time to get some of this stuff. It's just gotten better. It would be the best description for it.

John Bair, Analyst

So, if your input costs have gone up, are you able to pass that along to previous orders that add that on to improve your margins and so forth?

Rick McTaggart, CEO

Some of our contracts, especially the Water Authority contract for the desalination plant, allow for inflation-related adjustments to the purchase cost of the plant, while other orders we might have through Aerex for manufacturing do not. Therefore, it's crucial to secure pricing with suppliers as early as possible for the PERC projects. This means locking in costs for subcontractors and suppliers soon after signing the contract. Any new orders we are receiving through manufacturing are being priced according to the current costs. Consequently, I don't believe we've experienced any significant losses on these orders.

David Sasnett, CFO

No, there's not been a substantial amount of inflationary pressure on our margins yet, John.

John Bair, Analyst

That's good. Hopefully, the margins will continue to improve. I appreciate you taking my questions and wish you good luck moving forward. I'm looking forward to it. Thank you.

Rick McTaggart, CEO

Thank you, John. Take care.

Operator, Operator

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

Rick McTaggart, CEO

All right. Thank you, Joe. I just want to thank everybody for joining us today. Good questions, and we certainly look forward to hearing from you again in May when we release our first quarter results. So have a great day.

Operator, Operator

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 revenues, 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 belief, 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 in the industry and markets related to its business. 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 are not limited to tourism and weather conditions in the areas we serve. The impact of the COVID-19 pandemic, particularly on our retail and manufacturing segments, the economic, political and social conditions of each country in which we conduct or plan to conduct business, our relationships with the government entities and other customers we serve, regulatory matters, including resolution of the negotiations for the renewal of our retail license on Grand Cayman, our ability to successfully enter new markets, 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 discussions or Results of Operations and Risk Factors section of the company's SEC filings, including, but not limited to, its annual report on 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 required by law. Before we end today's conference call, I would 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 your lines.