Q2 2021 Consolidated Water Co Ltd Earnings Call
[music].
Good morning, Thank you for joining us today to discuss consolidated water company's second quarter 2021.
Hosting the call today is the Chief Executive Officer of consolidated water company, Mr. Rick Mctaggart and the company.
The natural officer, Mr. David Sasnett.
Following their remarks, we will open the call to your questions all.
All participants will be another can only mode should you need assistance. When you said never conference specialist by pressing Star then zero.
To ask a question you May press Star then one on the Dutch coming phone to withdraw your question. Please press Star then two.
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.
I'd like to remind everyone that today's call is being recorded and will be made available for telecom replay via instructions in Yesterdays press release, which is available in the Investor Relations.
The company's website.
Now I'd like to turn the call the work of consolidated water Company CEO Rick Mctaggart. Please go ahead.
Thank you your rationality.
Good morning, everyone. Thanks for joining us on the call today.
Everyone is well.
Our second quarter 2021 results reflect the continuing adverse impacts of the pandemic on certain segments of our business.
As well as an adjustment to the carrying value of our manufacturing segment necessitated by new order projections for <unk> historically largest manufacturing customer.
Improved performance of our bulk water segment as well as growth of our services segments, partially offset these impacts.
Our services segment revenue increased 8% to $3.8 million, which accounted for 23% of our consolidated revenues.
This was up from 18% in the second quarter of last year.
Our PERC water subsidiary was responsible for this growth in our services segment.
Based in Southern California, PERC operates and maintains water treatment and reuse facilities.
Under contracted engagements with.
Each have renewable terms that range from one to five years with the majority having renewal dates beyond this year.
During the second quarter PERC generated about 90% of its revenue from such contracts with various entities in California and Arizona.
Revenue from our bulk water segment increased 14% to $6.7 million in the second quarter due to higher volume sales and electricity pass through charges.
Oh quarter gross profit increased 21% to $2.3 million compared to the second quarter of last year.
However, our retail water segment continued to be adversely affected by the pandemic due to a moratorium on tourism and border restrictions that the Cayman Islands government enacted in March of last year to safeguard their population from COVID-19.
According to the most recent statistics only 651 reported infections in two Corona virus related deaths have occurred in the Cayman Islands since the pandemic began.
The Cayman Islands government strategy to protect its citizens from the pandemic has been similar to that of other Commonwealth countries like Canada, New Zealand, and Australia, which have been acted strict lockdowns extended quarantines and criminal penalties for breaches of pandemic protocol and regulate.
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Recently, however, government officials announced the five phase border reopening plan through November of this year, which is available on the official Cayman Islands government website.
The final phases of the plan, which includes the reopening of the islands to a limited number of vaccinated tourists are contingent on achieving at least an 80% vaccination rates of the local population.
The vaccination sorry, the vaccination rate is currently at 68% and has not moved much in the past several weeks.
Consequently, we would not expect to see any change in the performance of our retail water segment due to the resumption of tourism in Grand Cayman until the first half of next year at least.
Our manufacturing segment revenue declined due to the loss of orders from <unk> largest customer because we have also discussed last quarter. However.
However, while this customer informed us in July 2021.
That they expect to recommence their orders in 2022 and subsequent years, we expect that these new orders will be at much lower volumes than in the past and less than what we anticipated previously.
It was this change in projected future revenue along with the continuing weakness in the economy arising from COVID-19.
That required us to record an impairment loss in the second quarter for our manufacturing segment.
Meanwhile, we continue to focus on other sectors.
And we are we are building a good manufacturing revenue backlog from new projects and new customers, which we expect to offset some of the revenue loss from our largest customer we.
We expect to book revenue from these new projects in the latter half of this year and extending into 2022 as we begin production on these orders.
At the end of the quarter, our cash levels totaled $41.2 million and working capital was $69 million with only about 200000 in debt.
So we believe our strong balance sheet and liquidity position liquidity position us to ride out the current adverse economic impacts of the pandemic.
While enabling us to fund our growth initiatives.
Bidding activity for new projects, and our services and manufacturing segments has increased significantly over the last few months and so we're looking forward to future months and years with great anticipation.
But before I talk further about this I would like to turn the call over to our CFO, David Sasnett, who will take us through the financial details for the quarter.
Dave.
Thanks, Rick and good morning, everyone as Rick mentioned, the pandemic is continuing to create some significant challenges for us as it has for many companies, but despite these challenges we have maintained a strong financial foundation as we pursue new opportunities to grow organically and acquisitive Lee.
And we have continued to pay dividends.
Revenue totaled $16.7 million in the second quarter, which decreased 13% from the same quarter over the prior year.
This decline includes a decrease of 292000 in our retail segment revenue and $3.2 million manufacturing segment revenue.
The decreases in these two segments were partially offset by revenue increases of 846000 in our bulk segment.
287000 in our services segment.
Retail revenue declined due to a 2% decrease in the volume of water sold by Cayman water.
The sales volumes for both 4041 have been significantly below the historical volumes for the retail segment prior to.
2020, due to the continued moratorium on tourism in Grand Cayman.
The increase in bulk segment revenue was due to an increase in CW Bahamas revenue of 844000.
Due to higher energy costs, which correspondingly increased the energy pass through component of CW Bahamas rates.
The increase in bulk segment revenue is also due to a 9% increase in the volume of water sold by CW behind us.
The decrease in manufacturing revenue in the second quarter of 2021 was due to the decrease in orders from Eric's former largest customer as discussed previously by Rick.
And.
This customer informed Eric in 2020 that it was suspending its purchases of the specialized products until 2022.
In late July 2021, this customer again communicated to air X that is expected to recommence its purchases of the specialized product for <unk> in 2022, and subsequent years, but it also set such purchases would be at substantially reduced annual amounts in terms of both the amounts you did purchase America in 2020 in prior years.
And from the amounts we previously previously believed they would purchase from us.
We continue to expect although cannot guarantee that the orders for this customer we will resume as they have indicated.
However, as Rick will cover later they are also discussing with us other products that Eric could potentially manufacture for them.
Gross profit for the second quarter of 2021% to $6.1 million or 36% of revenues as compared to $7.3 million or 38% of revenues in the second quarter of last year.
This decline was largely due to lower revenue generated by our retail water operations and manufacturing segments.
Even though total revenue decreased.
Our bulk segment gross profit increased 21% to $2.3 million.
For the second quarter of 2021 net loss attributable to consolidated water shareholders, which includes the results of discontinued operations was $1.7 million or a loss of <unk> 11 per basic and fully diluted share.
But if you exclude the manufacturing segment impairment loss of $2.9 million net income attributable to the consolidated water was $1.2 million.
Our <unk> per basic and fully share fully diluted share.
Turning to our balance sheet.
Our accounts receivable balances related to our Bahamas business amounted to $21.3 million at the end of the second quarter.
Which was up from $16.8 million at the end of last year.
We believe the increase in accounts receivable. This increase resulted from the adverse impact of the pandemic on the revenue sources for the Bahamas and its government.
Such delinquent accounts receivables, we have experienced in the past where eventually paid in full and also given our recent contact with the government of the Bahamas Ministry of finance, but we believe that reducing this balance is a priority for them.
So based upon their payment history. Our majority owned subsidiary CW Bahamas has never been required to provide to the allowance for doubtful accounts for any of us accounts receivables.
Right the periodic accumulation of significant delinquent balances.
And as of June 32021, we had not provided an allowance for doubtful accounts received debit Bahamas accounts receivables.
It is important to note that so far in 2021, and we have received $14.4 million on our Bahamian accounts receivable, including two payments in the last two weeks totalling $5.7 million.
We believe that recent payment history is a clear indication that the Bahamas government is moving towards reducing the balance of these delinquent accounts receivables.
Yeah.
As of June 32021, our cash and cash equivalents totaled $41.2 million and our working capital.
Totaled $69 million, we believe this position affords us more than sufficient financial resources to maintain our normal operations, while still pursuing our strategic initiatives.
And this completes my financial report I'd like to turn the call back over to Rick Thanks, David.
In our manufacturing segment, one of our key strategic initiatives.
Has been to build a diversified book of business for <unk>. It is not concentrated on one specialized product or a large customer.
With this in mind, we have continued to develop our sales channels in order to create a more diversified customer base and product line.
Since we acquired <unk> as revenue has been predominantly from the sales of a specialized water treatment product to one customer.
In the first quarter of 2020 last year.
We increased resources in our sales team and began to focus on other sectors and customers to diversify our revenue base.
As a result in the first half of this year, we generated manufacturing revenue of $2.2 million from new customers <unk> products, which was equal to all of the revenue generated last year from customers.
Other than <unk> major customer.
We presently have contracted project backlog of approximately $9 million from new customers <unk> products, which have begun to impact revenues in the second half of this year and will carry into 2022.
In addition, we have recently bid for $4.8 million of additional work, which we hope to receive news on in the near future.
Our manufacturing sales team is doing a great job diversifying <unk> revenue stream, but it will still take more time to hopefully replace the significantly reduced revenue stream from <unk> historically largest customer.
It is important to note that Eric's maintains an excellent relationship with its largest customer and has recently set US request. They have recently sent a request for proposals and quotes for other products.
Earlier this year, Eric passed a highly technical and demanding quality assurance examination performed by another major customer for the purpose of qualifying <unk> for various highly technical manufacturing projects.
We now have that customers clearance to perform this work.
As a result, we expect to continue to receive orders for products other than the specialized product. We have historically made for this customer over the last few years.
Given our success in diversifying our product and client base increased project bidding activity and the magnitude of our current contracted project backlog, we expect a significant increase in manufacturing revenue in the second half of this year as compared to the first.
We are able to sustain and build on the successes over the next couple of years. We would further expect our manufacturing revenue to be back to historical levels with less customer and product risk concentration.
We are also seeing an increase in bidding activity for new design build projects and operating contracts in our services segment through PERC water. In fact PERC is now at its busiest level since we acquired the majority ownership interest in this subsidiary in late 2000, new.
19.
Prospective customers in California, and Arizona are seeking cost effective solutions to their wastewater treatment and potable water challenges, particularly those being caused by the unprecedented drought in the region.
PERC is currently awaiting decisions by clients on design build projects and operating contracts.
We're recently bid which are valued at more than $55 million and could result in recurring revenues of more than $2 million per year over the life of these operating and maintenance agreements.
And after a long dry spell we are currently pursuing two significant seawater desalination projects in the United States.
One is a 30 year design build operate project.
And the other is a manufacturing project.
Our more than 45 years of experience in designing building and operating these seawater desalination plants allowed us to pre qualify for both of these very important projects and if we are successful in obtaining these contracts. These will be our first seawater desalination plants in the United States.
As David mentioned, our strong balance sheet and greater liquidity supports our efforts to expand our.
Our business organically and through acquisitions and new projects. This includes further broadening of our water solutions offerings in target markets as well as pursuing acquisitions and strategic partnerships in seawater desalination and for our services business.
So while we've had many challenges over the past year due to the pandemic.
And all of our opportunities and growth prospects are very encouraging.
We expect improved financial results in the second half of this year as compared to the first six months due to our successful efforts to diversify <unk> revenue and customer base as well as PERC strengthening business activity.
Given the strong industry tailwind potentially enhanced by the major increase in federal infrastructure spending recently passed in the U S. We will continue to focus on those opportunities that will provide increasing value for our shareholders.
And we remain confident that we will emerge from this long pandemic better and stronger than ever.
With that I'd like to open the call for questions.
Rationality.
Yes.
We will now begin the question, we'll now take questions.
A quick question and.
Then one last question Paul.
Yes.
Paul a couple of handful poll for questions. Thank you.
But any final question hooking up.
I would like to withdraw your question. Please.
Thank you.
Okay.
And any thoughts on the logo.
Our first question comes from Gerry Sweeney with Roth Capital. Please go ahead.
Good morning, Rick and David Thanks for taking my call.
Hey, Peter.
I wanted to start on the services side.
Rick.
I believe you said.
I think that $3.8 million, let me make sure I had the right number for services.
Did you say the majority the majority of that is from contract work.
Sort of O&M type structures today and not from project work.
I didn't write down I said that for services, we had we have about $55 million.
An outstanding bids.
It's a mix of design build work and operating contracts.
You were talking about the existing revenue right. Jerry Yes, yes, yes, sorry, yes about 90% of that is O&M work, Okay operations and maintenance contracts part has been very successful in growing that part of the business. We're now seeing an increase in bid activity for design build projects that we hope to increase that percentage of revenue generated by <unk>.
Got you and that $55 million. Rick you were just mentioning about do you know when some of those awards timelines are scheduled to be released or.
Update it.
Yes, I wish it did I mean, a lot of this stuff is moving around because of.
But John Browns.
The client side.
Difficult to project.
Got it okay.
And then I mean in that $55 million is the potential for upwards of $2 million more of additional.
O&M Mark.
And recurring work yeah, Yeah got it okay. That's great.
Manufacturing side I appreciate the actual a little bit more detail on the backlog it is helpful.
You discussed some of the technical aspects of what Eric dosing being qualified.
If we look at the backlog, we see building today and the projects. We're going after is there a material difference in margins.
Of this work versus the work that Eric you should do for the customer.
Well.
Jerry the former customer is still going to buy from us and it's still going to buy that product from us former largest customer former largest customer but the thing is.
Sure.
It's always tough to get information from them there is regarded on that but.
That business was very high margin work, we think there are a couple of projects out there both with this former customer and with other customers.
That will be able to we'll be able to utilize eric's is unique manufacturing.
Factoring capabilities and generate very healthy margins in excesses, let's say, 30% on those manufacturing contracts.
Really the focus of the business is to grow in areas, where margin group Eric's differentiates itself and can utilize its capabilities to generally higher margin, but there is a substantial amount of work out there that's more basic that Eric is also pursuing.
And that does not generate the kind of margin to this.
Former business did.
So.
If you're looking at historical margins for 2020 in 2019, it's going to be hard to get back to that quickly, but we still think the business out there that eric's is pursuing will be really healthy margins.
Got it so maybe to summarize.
Targeting higher end higher end margin work, however, that's a little bit longer lead time, and youre going to backfill with potentially with some lower margin work.
Yeah bread and butter is kind of set that Eric.
Great.
We are bidding on a lot of stuff and its more commodity.
Type products. So the margins are lower.
We want to keep the operation fully utilized to the extent we can.
Part of the issue in the first quarter and the first six months for <unk> is that.
Its margins are down because we kept all the manufacturing people on staff.
We made a commitment to keep them, even though the production activity was low for the first six months. So youll see margin improve in the second half of the year as production activity increase.
Increases.
Got it it's not easy to say, it's not it's not.
Yes that easy build a workforce and we didn't want to lay off a bunch of people just because there was a delay and then the work that we were getting until the second half.
I completely understand I completely agree I mean, if they're talented you got to keep on learning and.
And manage it so.
Wouldn't have any issues with that and you did say, we're looking for a substantial increase second half versus first half and I don't know if you are substantial but I want to make sure. We're looking for an increase significant.
Significant.
Okay got it I want to make sure.
Finally, maybe just yes.
Well have a better second half than the first half of <unk> and <unk>.
We have manufacturing okay.
Okay got it.
And then just turning to the diesel side, obviously, it looks like the Bahamas looks reasonably well.
And it looks like.
Retail side and they came in or just looking at.
Obviously, there are some bulk there, but retail operations and the payments are going to be slow to rebound with this five opening in that 80% sort of.
Baxter vaccine right.
Back of the envelope.
It looks like retail is probably about $1 million of gross profit drag through this pandemic is that sort of affairs assessment.
Well you can look at the results for the second two quarters of last year.
And in.
Unless there is a huge difference in rainfall patterns. I mean, you have a core group of people. They are they are using the water. The residents and you can expect the second half of this year to look a lot like the second half of last year.
No reason for it.
Any different tier other than rainfall patterns were not increasing rates. So you would think they are using about the same volume of water. They did last year.
I got it I mean, what I was really driving towards was.
Yes manufacturing rebounding you have opportunities in PERC.
Bulk water seems to be doing fine.
At some point we.
I would expect that came in that open up and there is a $1 billion plus of gross profit dollar SEC eventually flow through so.
There are several levers of profitability that can flow through over the next 12 to 18 months.
Correct.
More.
I'm more interested in caymans opening that ask Gerry hopefully that'll be some pain.
And we sooner rather than later.
Got it okay. That's it for me I appreciate it thank you.
Thank you Gerry to Jerry.
Just a reminder, if you have a question.
Debbie joined into the queue.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Mr. Jeremy <unk>.
Paul for any closing remarks.
Yes. Thank you I'd just like to thank everybody who joined this morning.
Stay safe and we'll talk to you again.
In November.
Bye bye.
Rationale IV.
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 90, 95, including but not limited to statements regarding the company's future future plans objectives expectations events.
The assumption.
Forward looking statements can be identified by the use of words or phrases usually containing the way.
Leave estimate project. Thank you.
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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 industrial end markets related to Covid.
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What's you are difficult to predict.
Actual outcomes and results may differ materially from what is expressed.
Such forward looking statements factors that could cause or contribute to such differences.
On a novel limited to continued acceptance of the company's products and services in the marketplace.
Changes in its relationships with the government of the jurisdictions in which it operates.
The outcome of its negotiations with the Cayman Donlin regarding a new retail license agreement.
The collection of bits Delek Quinn.
Accounts receivable in the Bahamas, the possible adverse impact of the COVID-19 virus on the company's business and various other risks as detailed in the company's periodic reports.
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Yes.