Q3 2021 Consolidated Water Co Ltd Earnings Call

Good morning, Thank you for joining us today to discuss consolidated water company's third quarter 2021 results hosting the call today are chief Executive Officer of consolidated water company, Rick Mctaggart, and the company's Chief Financial Officer, David Sasnett following their remarks.

Next we'll open the call to your questions.

I don't need time during the call you may join the Q&A by pressing Star then one on your Touchtone 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 looking statements made by management during the call I'd like to remind everyone that today's call is being recorded and will be made available for telecom replay via instructions in yesterday's press release, which is available in the investor relations of the company's website.

Now I'd like to turn the call over to consolidated water company CEO, Rick Mctaggart, Sir. Please go ahead.

Thank you Kate good morning, everyone. Thanks for joining us on today's call.

The body as well.

During the third quarter, the continued cessation of tourism on Grand Cayman.

COVID-19 resulted in our retail segment revenue growing at only about 5% compared to the same year ago quarter on about 1% higher volume.

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 9 million performing better than anticipated.

It also increased for the first nine months of 2021 up 8% to $19 8 million.

In the third quarter, our manufacturing segment revenue, which is generated by our Eric 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 air X 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 this past quarter was from new customers <unk> products and in the first nine months of the year, we generated manufacturing revenue was $3 2 million from new customers and products.

Our services revenue increased 6% to $10 5 million in the first nine 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 PERC water subsidiary.

Now before I go further I'd like to turn the call over to our CFO, David Sasnett, who will take us through the financial details for the quarter.

Thanks, Rick Good morning, everyone. Thanks for joining us today.

Rick mentioned, we continue to face significant challenges as a result of the current environment as do many companies, but despite these challenges we maintained our strong financial foundation as we pursue new opportunities and we've continued to pay dividends.

Yesterday, we issued our quarterly press release, which is available on the Investor Relations section of our website.

We reported net revenue totaled $16 4 million in the third quarter, a decrease of 7% from the same quarter of last year.

The decline reflects.

This is a 141000 and services segment revenue and $2 2 million in manufacturing segment revenue.

These decreases were partially offset by revenue increases of 240 254000 in our retail segment.

And 807000, and our bulk segment.

Our retail revenue decreased excuse me increased due to a 1% increase in the volume of water sold by Cayman water.

Sales volumes for both 2021, and 2020 are 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 is due to the border restrictions initiated in March 2020 in response to the COVID-19 pandemic.

Okay.

The increase in bulk 70 segment revenue was attributable to an increase in energy costs for consolidated water Bahamas.

Which increased the energy pass through component CW Bahamas rates.

The decrease in services revenue was due to the decline in plant construction revenue of $525000.

Which was partially offset by an increase of $385000 in revenue from operating and maintenance contracts attributable to new customers.

The decrease in manufacturing revenue in the third quarter of 2021 was due to the loss of the orders from Eric's former largest customer.

Had not yet been successful in replacing this lost revenue.

In late July this customer communicated to Eric's that it expected to recommence its purchases of a specialized product <unk> in 2022 and in subsequent years, but.

But communicated such purchases would be at substantially reduced annual amounts as compared to both the amount to the purchase of <unk> in 2020 in prior years and it was below what we had inspected anticipated they would purchase.

Our efforts to replace this revenue previously generated from this customer will revenue from existing and new customers has been adversely impacted by the current economic environment, which has increased raw material costs.

<unk> didn't raw material shortages and.

And extended the delivery costs for such materials to Eric's.

Yeah.

We have also been adversely affected excuse me, we believe these shortages and delivery days have also add.

Adversely affected the financial condition of their current and prospective customers.

Gross profit for the third quarter of 2021 was $5 7 million or 34, 7% of revenues as compared to $6 2 million or 35, 2% of revenues in the third quarter of last year.

For the third quarter of 2021 net income attributable to consolidated water shareholders, which includes the results of discontinued operations was 286000 or two cents per basic and fully diluted share.

With respect to our balance sheet, our accounts receivable balances related to our Bahamas subsidiary amounted to 21.

4 million at the end of the third quarter.

Which was up from the $16 8 million at the end of last year.

We believe the delays in collecting CW Bahamas receivables have been extended by the severe adverse impact of COVID-19 on the Bahamas government revenue sources.

Upon our discussions and collection history with a promise government.

We believe our accounts receivables from the WMC are fully collectible and in fact, the Bahamas government and Dws C continued to make intermittent payments on these accounts receivable such as payments amounted to approximately $6 9 million in the third quarter and $15 6 million in the first nine months of 2021.

Furthermore, in October 2021, we received a $2 $4 million payment that further reduce these accounts receivables.

The possible exception of this liquidity matter relating to CW Bahamas, we're not presently aware of anything that would lead us to believe we will not have sufficient liquidity to meet our needs.

As of September 32021, our cash and cash equivalents totaled $40 4 million, our working capital was $69 3 million, we had only $200000 in debt.

And our stockholders' equity totaled $157 4 million.

So this completes my financial summary, I would now like to turn the call back over to Rick.

Thank you David.

Like many companies our manufacturing segment has been adversely affected by supply chain challenges.

<unk> material shortage is price increases and logistical delays.

Which have directly impacted our manufacturing processes.

And 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 as certain orders, we had expected to complete in this last half of 2021 and as a result, we expect revenue from our manufacturing segment for the second half of 2021 to be about equal to its revenue for the first half of this year.

It is 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 advise these municipalities.

We see this further supporting revenue diversification and reduce customer dependent and concentration.

It's important to recognize that municipal jobs have a longer lead time and delivery time, which are usually and 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.

Third 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 two 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 States.

And our team was recently Shortlisted and invited to bid for a multi decade design build operate project in Hawaii.

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 guaranties required by this potential client.

Our extensive experience in designing building and operating these seawater desalination plant allowed us to be Shortlisted to bid for this major project.

If were successful in obtaining a contract and winning the bid.

It would be our first seawater desalination plant in the United States.

We are also closely following the progress on two other early stage seawater desalination projects, one in Texas and another in southern California.

PERC, which is based in southern California operates and maintains.

Water treatment and reuse facilities under contracted engagements, which have renewable terms at a range from one to five years.

At this time, approximately 44% of PERC revenue for the first.

Nine months of this year was generated under O&M contracts that expire at various dates through December 2022.

And these contracts are typically renewable on an annual basis.

During the third quarter PERC generated about 95% of its revenue from such contracts with various entities in California and Arizona.

PERC continued to grow its recurring revenues in the third quarter by signing a new five year contract to provide operating and maintenance services.

We're a wastewater plant of the gaming and entertainment business in Southern California.

We expect this the O&M contract to generate revenue of about 400000 per year.

New project opportunities for PERC booth sole sourced and competitively bid continued to be strong.

And include bids for two major projects that were submitted in the first nine months of this year.

First bid is for a design build contract for a large wastewater treatment facility in California.

We are leading a very strong engineering and construction team for this important project and we're one of the three teams.

<unk> submitted bids for this.

We were also recently.

Selected as the preferred bidder for another perspective project the wastewater recycling plant in southern California.

And we're currently in contractual negotiations with the client.

We expect to hear whether PERC has selected finally for each of these projects by early next year and based on this overall increased bidding activity that reflect strengthening market demand. We believe <unk> 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 20th.

We see the reopening is 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 is 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 new $2 6 million gallon per day seawater desalination plant in Georgetown Grand Cayman.

This project 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.

Bids are due in early January for this project and the client is expected to make an award sometime in the second quarter of next year, So stay tuned.

Our strong balance sheet and liquidity supports our efforts to expand 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 and 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 in Grand Cayman. We are also seeing increased project bidding activity in the United States and the Caribbean.

And all of these represent potential major catalysts for growth for our company in 2022 and beyond.

Now with that Kate I'd like to open up the call for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.

Withdraw your question. Please press Star then two.

My first question is from Gerry Sweeney of Roth Capital. Please go ahead.

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

Hey, Jerry.

Yes.

Wanted to start with the retail segment, obviously, it's great news that came out is opening up.

Do you have any sense of how well prepared.

Tourism industry has for this opening up a hotel staffs ready to go or will that be a little bit of a headwind for a period of time.

Well I mean, I don't have any sort of detailed information Jerry but.

I mean, I think it's going to take it.

At least a few months to ramp up.

The business again there.

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 cancelled the reopening previously, but this one seems to be on schedule. So youre.

Youre not going to have full airlift capacity.

Until February next year.

But it's a good backlog picture, yes, without a doubt at least with open pit.

Get the ball Rolling and then they the Hawaiian seawater desalination deep South project.

Curious is that a pre.

<unk> project or is that a you know municipal funded opportunity.

No Thats a municipal project carry 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 is not being bid until next year early next year.

And then on the on the <unk>.

Xiaomi Cayman Islands, one I don't know if you would want to answer this or can answer it but is there since you have a few plants. There in the caymans is there even a chance to sort of have a competitive advantage in terms of I don't believe the right term is bundling, but you do have some manpower station on the island.

Access to equipment et cetera that could be I don't know cross shared between projects is that a potential or.

Are we overthinking that a little bit.

In terms of creating the best in class bet.

Yes, I mean as I mentioned.

Descriptor.

Our local presence gives us a number of advantages.

I guess bundling if that's what you want to accomplish is certainly.

One of them.

We share we share resources across the six plants now that we have there so.

Seven 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.

Got it and 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 some.

Some fruit, but I'm just curious as to the margin profile on that municipal work. It sounds like it is different it's probably given percentage of accounting driven to a degree.

Is that in the same profile as that large customer or is it.

Lower margin profile.

Type work well.

It's a different margin for sure the municipal work is much more.

Competitive.

<unk>.

And.

Initially the work that we did for this other customer was very competitive and we've.

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 flew through the shop.

Thank you get a better sense of that because as Tom was tall municipal work that we're doing now.

But a lot of this stuff as I mentioned is being held up.

Because of delays with the customers and neo delays with material deliveries and that sort of thing so.

Because we David could you.

He explains the accounting better than me, but once we start manufacturing this.

We will start booking the revenues.

Certain milestones.

Yeah.

So Jerry the margins on on this missile Scott.

We were making very high margins on the other stuff.

And as.

As a result, I think going forward, you'll see some margin adjustment, but as Rick mentioned earlier.

Our margins had been adversely impacted because of the utilization of the plant overhead has been very lumpy, yes, yes, we've continued to absorb those costs.

Because it's very hard to replace your workforce you cant terminate people then all of a settlement production increases you go back and higher than market doesn't work that way.

But as we continue to grow the business and you see a greater percentage of Eric manufacturing capacity utilized.

Due to the impact of that fixed operating cost.

<unk> factory overhead becomes less and less on the gross profit percentage.

So you'll see an improvement in gross margin just from the greater utilization of the plant itself.

So no.

With $1 1 million of revenue manufacturing versus three.

Three eight last June completely understand that overhead.

The incremental margins I was just curious maybe even the delta between.

Municipal margins in your other customers.

So we would have an idea.

No I don't think we can give you that number Terry because some of this municipal work at various in market and some of it has very good market on it.

Okay. So.

It's just a matter of the product mix.

No.

We're happy to be in this market, we think it's going to be a very good market for us. It's got good margins and so kind of the back end.

And I completely understand that Oh, and one more question on Ericsson manufacturing.

What is your maybe theoretical capacity.

With that facility and have you ever sort of Max that out.

I know.

Certainly asked for what kind of revenue.

Somebody do it at capacity, because there's going to be different pricing, especially in today's environment.

Just trying to figure out potentially how much revenue.

Facility could too.

If you look at the sales channel.

I can say Jay that prior to purchasing air X. They had years. So they did $19 million revenue I believe somewhere around that 72000 19 million that plant has that potential.

We also have adult team to expand the plant if for some reason, we got major orders that would push us beyond the existing capacity.

We have land available there, which we purchased for the express purpose of expanding production capacity.

Should the demand warranted in the future. So we're well poised, but Eric has the potential to do with this existing capacity.

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

$20 million in revenue is not beyond their reach.

With the right mix of orders given the existing capacity.

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

Next year.

Okay. If you have a question. Please press Star then one.

There are no other questions at this time. This concludes our question and answer session I would like to turn the call back over to Mr. Mctaggart. Please go ahead Sir.

Sure.

Yes.

Just like to thank everybody again for joining today and I hope everybody has a.

A very nice holiday season, and we look forward to talking to you again in March when.

When we release R.

Our year end report thank you.

Thank you, ladies and gentlemen, before we conclude today's call I would like to provide the Companys Safe Harbor statement that includes cautions regarding forward looking 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 side.

Purity 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 believe.

Estimate project intend expect should will or similar expressions.

<unk> that are not historical facts are based on the company's current expectations beliefs assumptions estimates forecasts and projections for its business and the industry and markets related to its business any forward looking statements made during this conference call.

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 continue.

The acceptance of the company's products and services in the marketplace changes in its relationships with the governments of the jurisdictions in which it operates the outcome of its negotiations with the Cayman government regarding a new retail license agreement with <unk>.

<unk> of its delinquent 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 report filings with the Securities and Exchange Commission for more information about risks and uncertainties associated with the company's business. Please refer to them.

Management discussion and analysis of financial conditions or results of operations and risk factors sections of the company's SEC filings, including but not limited to its annual report on the Form 10-K and quarterly report for Form 10-Q.

Any forward looking statements made during the conference call speak as of today's date, the company expressly disclaims any obligation 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 this event.

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 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.

Dot CWC dot com. Thank you for attending today's presentation. This concludes the conference call you may now disconnect.