Q2 2022 Consolidated Water Co Ltd Earnings Call
Good morning, Thank you for joining us today to discuss consolidated water company's second quarter 2022 results we'll.
Hosting the call today is chief Executive Officer of consolidated water company, Rick Mctaggart, and the company's Chief Financial Officer, David Sasnett.
Well open the call for your questions any.
Any time during the call you made go into Q&A queue.
I present this car one on your keypad.
Before the call concludes today I'll provide some important cautions regarding the forward looking statements made by management during the call.
I'd like to remind everyone today's call's being recorded.
The basketball for Telecom replay Permian instructions in yesterday's press release.
Which is available in the Investor Relations section of the company's website.
Now I would like to turn the call over to consolidated water company CEO Rick Mctaggart. Please go ahead.
Thank you Nick and good morning, everyone. Thanks for joining us today.
As noted in our earnings release issued yesterday afternoon, we reported dramatically improved results for the second quarter of 2022 compared to last year.
Our total revenue for the quarter increased by 26% to $21 1 million.
This contributed to the increase in our net income from continuing operations.
$2 7 million or <unk> 18 per share.
Our retail segment revenue grew by 15% to $6 5 million and this increase resulted from.
The significant easing of travel restrictions to the Cayman Islands for tourists and the reopening of large hotels another vacation properties on the island earlier this year and this drove increased water consumption by tourism industry related businesses.
Our bulk segment revenue increased by $1 7 million to $8 4 million and contributed operating income of $2 4 million.
Our services segment revenue increased by $1 3 million.
To $5 1 million with this contributing operating income of 356000.
We are very encouraged by the trends that drove these results.
Our manufacturing segment, however continues to struggle with supply chain issues and the currently weak economic environment.
But we are optimistic that this segment will report improved results in the latter half of this year based on our current contracted backlog.
So also during the quarter, we announced two major contract wins.
And may pursuant to a competitive bid process, we were awarded a contract by the water Authority Cayman Islands to design and build a new $2 six 4 million gallon per day seawater desalination plant on Grand Cayman.
Following the construction and sale of this plant to water authority, we will operate the plant and deliver the water produced to the water authority for 10 years.
This contract is expected to generate more than $20 million in revenue over the life of the contract.
With the majority of the revenue being recognized on the construction and sale of the plant.
Which is the plant is scheduled to be completed in the fourth quarter of 2023.
We commenced the permitting and design phase for this project during this past quarter. So things are moving along.
In May also in May our majority owned subsidiary PERC Water Corporation signed a contract with Liberty utilities.
Construct and commission of 4 million gallon per day wastewater treatment facility in Goodyear, Arizona.
The construction and commissioning revenue under this contract is expected to total approximately $82 million with the facility expected to be operational by December 2023, and fully completed by the end of the second quarter of 2024.
Construction of this important project is already underway and we will begin to generate significant revenue beginning next quarter.
Now before I talk about our progress.
Further in our outlook for the rest of the year I'd like to turn the call over to David SaaS net our CFO , who will take us through the financial details for the quarter.
Thanks, Rick and good morning, everyone. Thanks for joining us today.
Yesterday, we issued our earnings release for the second quarter of 2022, which is available in the investors section of our website.
Reported net revenue.
$21 1 million in the second quarter, which is an increase of 26% from the second quarter of 2021.
The growth reflects this growth reflects increases of 852000 in our retail segment revenue of $1 7 million and our bulk segment revenue $1 3 million for our services segment.
$510000 in additional manufacturing segment revenue.
As Rick mentioned the increase in our retail revenue was due to the improved improvement in tourist activity in the Cayman analysts last quarter.
This generated an 8% increase in the volume of water sold by our Cayman water subsidiary.
Our retail revenue also increased as a result of higher energy costs that increased the energy pass through component of our water rates as well as a more favorable rate mix much of the increase in volume.
Sales.
What was to tourist related properties and they pay a higher per gallon rate our residential customers.
The increase in bulk segment revenue was primarily attributable to an increase in energy costs for CW Bahamas.
And these energy cost increased.
Energy pass through component of CW Bahamas rates.
The increase in our services segment revenue was attributable to increases in both plant design and construction revenue as well as operating and maintenance revenue increase.
I want to make it clearer and point out to investors that our services segment revenue does not reflect any revenue.
But the two contracts we recently won.
Both on Grand Cayman and in Arizona, and that investors should expect to see revenue from those two contracts begin to increase our services segment revenue next quarter.
Gross profit for the second quarter of 2022 was $7 5 million or approximately 36% of revenues. This compares to $6 1 million and gross profit.
In the same quarter of last year, which was also about 36% of revenues.
Our net income from continuing operations attributable to consolidated water stockholders for the second quarter was $2 7 million or <unk> 18 per basic and diluted share and this compares to a net loss of $1 5 million or <unk> 10 per share for the second quarter of last year.
Net income attributable consolidated water stockholders for the period, which includes the results of our discontinued operations was $2. One excuse me $2 3 million or <unk> 15 per share in comparison, we reported a net loss of $1 7 million or 11 cents per share in the second quarter of last year.
Now turning to our balance sheet as we have previously disclosed liquidity of our Bahamas subsidiary has been adversely affected.
Prior months.
Really for an extended period of time by delinquent accounts receivables due from its sole customer the water and sewage corporation of the Bahamas.
In February of this year, we received a payment schedule from the Bahamas government.
According to which the government plans to reduce our CDP Bahamas delinquent accounts receivables over the course of 2022.
With the intention of eventually we're bringing all of CW Bahamas receivables from the water and sewage corporation the current status.
Under this plan during the second quarter of this year. She debit Bahamas received approximately $16 4 million in payments towards as accounts receivable from the water and sewage corporation of the Bahamas.
These payments reduced CW Bahamas accounts receivables.
$13 5 million as of June 30th.
This year.
We are pleased to report this dramatic improvement in our liquidity and we greatly appreciate the Bahamas government commitment to paying down. These receivables well ahead of the dates they provided in the February payment scheduled this comes especially in <unk>.
Especially.
We especially appreciate with their ability to do this given the adverse economic impact the pandemic has had on the Bahamas economy.
As of June 30th this year, our cash and cash equivalents.
Totaled $49 1 million, our working capital was $71 6 million, our debt was less than $300000 in our stockholders equity totaled $159 4 million.
Our projected liquidity requirements as of June 30th for the balance of this year.
Include capital expenditures for existing operations and plant construction of approximately $10 one.
$1 billion is $10 1 million includes $3 3 million to be incurred for the replacement of our West Bay seawater desalination plant on Grand Cayman and approximately $3 5 million for the construction of the water authorities news desalination plant under our recently awarded contracts.
In addition, about $1 3 million in dividends were paid in July 2022, and based upon our dividend history, we anticipate similar dividend payments in the fourth quarter of this year.
This completes our financial summary for the quarter and I'd like to turn the call back over to Rick.
Thanks, David.
Before I get into our outlook for the remainder of the year I'd like to talk a little bit more about the progress we made across our business segments during the quarter.
Our retail segment, which operates the water utility for the seven mile Beach, and West Bay areas of Grand Cayman.
Under an exclusive license granted by the Cayman Islands government.
While the license was not expressly extended after January 2018, we continue to supply water under the terms of this license.
We have continued our discussions with the regulator this year regarding the license and these negotiations are ongoing.
We're very encouraged by the return of tourism to the Cayman Islands as the countries reopening plan continues.
Air travel to the islands has been steadily increasing since late last year when the government began well welcoming back major U S Airlines.
Cruise arrivals have also reportedly reached just over 60000 passenger arrivals in may we're at about 60% of pre pandemic numbers.
A recent news article reported that the six months since the reopening of the country to tour during the six months.
Since the reopening of the country to tourists the Cayman Islands attracted about 50% of the number of stay over tourist revisiting prior to the pandemic.
And this aligns with the Cayman island's tourism associations recent report that most big hotels are currently running around half capacity.
This is of course, a vast improvement over last year when the island had no business at all from tourists due to travel restrictions.
And despite tourist arrivals to the islands being about half of half that of the pre pandemic levels. We still saw our retail revenue increased 15% in the quarter and as David mentioned this was primarily due to an 8% increase in the volume of water sold.
We believe we still have a long way to go before tourism returns fully to pre pandemic levels in the Cayman Islands.
But we have every reason to believe that this will just be a matter of time.
Now looking at the Bahamas.
Obviously, we're very pleased to receive the $16 4 million in payments.
On our accounts receivable from the water and Sewerage Corporation.
And we remain very encouraged that the country will continue to return to pre pandemic levels of economic activity.
Looking at our U S businesses.
We've discussed for some time.
We believe immediate action is needed to secure new drought crude sources of fresh water and the water stressed areas of the United States in particular, the southwest U S and desalination and water recycling are increasingly being recognized as the best solutions to meet this need.
We're currently pursuing.
Some major wastewater recycling projects.
And in June .
Bid for a multi decade design build operate seawater desalination project in Hawaii was submitted and we're currently awaiting the resolution.
The Hawaii bidding process.
Yeah.
This project in Hawaii is very comparable to the types of projects that we've been successfully completing in the Caribbean for many years.
We believe our extensive experience in designing building and operating these seawater desalination plants.
Allowed us to be Shortlisted to bid for this major project.
Yeah.
With the record high temperatures and record drought levels in the Western U S.
We anticipate a growing number of opportunities here.
Here in the United States.
Just last week it was reported that the United United Nations warned that millions or a risk of major power and water shortages in the U S. As two of our nation's largest reservoirs Lake Mead and Lake Powell in the Colorado River or on the brink of Deadpool status.
Lake Mead, which stretches across Nevada and Arizona.
<unk> has been known as the country's largest artificial body of water.
<unk> levels have gotten so low that NASA, which has been monitoring the lake from space said this could be a sign of the worst drought in the region and more than 12 centuries.
We believe desalination is key to alleviating global water scarcity, and particularly in the area southwest United States.
These regions need to take immediate steps to diversify their shrinking water supplies by implementing drought proof resources like desalination and not just seawater desalination.
Brackish groundwater desalination.
Plenty of opportunities in Arizona.
Those types of projects.
They also need to do more to recycle existing water supplies, which aligns perfectly with the capabilities and experience of our PERC water subsidiary.
Based in Southern California, Percy builds operates and maintains advanced water treatment and reuse facilities across the southwest.
Facilities, which have received awards for their innovative designs.
As mentioned earlier in May Perk was contracted to design construct and commission of 4 million gallon per day wastewater treatment facility with Liberty utilities.
We believe that we were able to obtain this project from Liberty because of our unique project delivery model, which enables us to design construct and commission. This type of project on an accelerated schedule and at a lower overall cost and traditional project delivery models.
Additionally, Additionally, our clients only have to deal with one responsible party for all aspects of the project, including cost schedule and plant performance.
Based on perks overall increased activity.
That reflect strengthening market demand, we believe PERC is well positioned for further growth in the coming months and years.
As we mentioned in our manufacturing segment continue to deal with the challenges of current economic conditions.
And several projects originally.
Scheduled for completion by the end of the second quarter.
Been further delayed.
Either at the customer's request or because of difficulties obtaining materials and equipment.
However, based on current contracted backlog, we expect to complete several projects in the second half of this year.
And expect our manufacturing results to improve over the course of the.
The rest of 2022 and into 2023.
Additionally, our integrated sales team is generating leads and potential sales orders for our manufacturing segment with new clients and new markets, such as industrial and mining projects.
Now I'd like to update you briefly on developments rigs.
Regarding the canceled pliers, the Rosarito desalination plant in Mexico.
So further to recent public statements by Representatives of the Baja California government.
I can confirm that we are in discussions with the state to potentially resolve the issues related to their cancellation of the Rosarito plant contract in June of 2020.
As well as potentially addressing the state's acute water shortage issues.
I would also like to clarify that we have agreed to delay the appointment of arbitrators. While these discussions are in process, but the arbitration has not been suspended.
Consolidated water's been designing building and operating seawater desalination plants.
For over 50 years.
We believe our commitment to delivering safe reliable and affordable desalinated water to cities and countries.
In need is unmatched in the industry.
Hope that our ongoing discussions with Mexico will result in a positive solution for both parties.
Yeah.
So looking ahead, we see many positive factors driving continued growth in 2022 and.
In addition to the anticipated diminishing impact of the pandemic and the increased return of tourism in Grand Cayman. We are also seeing increased project bidding activity in the United States and in the Caribbean.
We see these trends representing potential major catalysts for growth in the remainder of this year and beyond.
So Nick I'd like to open the call up for questions now.
Thank you well now begin the question and answer session.
That's the question you May Press Star then one on your Touchtone phone using.
We are using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two.
Well, Paul shortly to assemble the roster.
Yeah.
First question come from John Bair ascend wealth.
Please go ahead.
Good morning, gentlemen.
Gratulation is on the wins this quarter.
Thanks, John .
David mentioned about maintaining the dividend rate.
But given that you had a significant drop in accounts receivable from the Bahamas and.
Balance sheets really in great shape, just wondering what if.
Thought process in that.
Capital.
Perhaps being.
Applied towards M&A.
Just curious about that.
Well, John let me.
Let me caution you I didnt guarantee that we're going to pay a dividend going forward, but our board is always always a proved the dividends. So right I'm not aware of any reason why they went in my playbook going forward, but always it's there their decision not.
It's not management's.
Look when you look at our balance sheet, we have 49 million in cash at the moment.
But if you look at our dividend payout ratio relative to earnings I think it is relatively high we have what we believe to be an increasing demand for our capital.
Some of these larger projects did.
And on which we are bidding you know they require a certain amount of bonding capacity for us which goes back to our borrowing capacity. So I don't think are given that our businesses I think poised for a lot of growth we're not in a position to have excess cash to pay dividends meet personally I don't believe that any time soon.
However, if you know we will receive a substantial.
Windfall lets say if something happened positively for Mexico, we'd certainly look at and maybe paying a special dividend or increasing the dividend, but I think right now we have enough.
And potential new business and enough capital required for that new business that we really need to focus on allocating capital to that purpose to not increasing our dividend.
That's just my personal opinion sure fair enough just.
Just curious what the thought process was there.
Thanks, very much and gratz again and look forward to the next quarter.
Thanks, Sean.
Do you have a question. Please press Star then one.
The question will be from.
The borough coal Lark research. Please go ahead.
Thank you.
First of all on the on the two projects.
The came in slaughter plant and the Liberty utilities see Arizona wastewater project I presume, you're going to account for those as a.
On a percentage of completion basis, so you'll be accruing.
The cost of that over time until completion.
Correct.
Well, it's actually.
It's actually not called percentage of completion it anymore, but you are right under the under the inputs method as we incur cost on the project will be recognizing revenue.
Based upon estimated profit for the.
For the project will be recognizing a portion of that profit as we incur the costs on both of these projects.
Yes, and you should see.
Go ahead.
And will you be receiving progress payments.
From the entities are you well.
Do you do you as payments delayed until the project is complete.
So with respect to the Arizona project, we do receive project progress payments and we build as we as the work proceeds.
10% of our of the actual billing us retain the contract has a 10% retaining factors. So at the end if all goes.
According to schedule at the end of the project, we would have billed all but about $8 million, we would've been at all a project and collected all but about $8 million and I think the pertaining stays in place for six months just to ensure proper operation of the plant with respect to the Cayman Islands project.
We will not be paid until the project is complete.
So we will end up carrying a pretty large asset on our books as construction complete.
Proceeds and then I think breakeven.
And if I'm wrong, but I think what they've payment within a few months out and get 90% completion and then we get another 10%.
It's after six months of the year.
Check back yet, but you will see a significant you'll see significant assets contract assets and contract liabilities on our balance sheet for both of these projects as we proceed but the billings for the Arizona project are pretty much consistent with the incurrence of cost so that shouldn't be a huge drain on our <unk>.
Working capital.
Okay.
And then.
On the Mexico project.
I you know I've.
Been reading I'm sure with other people about the drought conditions in Mexico that have gotten really die are and so when you say are.
You're you're talking to them about.
Resolving their water problems and it sounds like.
They they've decided that they've they've got to move forward with.
Some kind of desalination solution I guess the question is and I know you cant give away your negotiation and negotiating position or or whatever but what if they could.
Could they conceivably resurrect the project in a way that brings you back in there is that if you can say it is that something that you would entertain at this point and maybe you should remind us why they canceled the project.
Originally and in 'twenty 'twenty.
Yes, I mean, it's very early in the negotiations to make any sort of statements along those lines I think.
The key points are that they do need water desperately there and we'd like to get our money back.
From this cancelled projects so.
We're we're in the process of talking.
Talking to the state.
That's pretty much all I can say at this point I mean theres no.
Particular direction that this is going.
From the standpoint of where we build another plant or are they going to reinstate the contract I mean, we haven't.
Gotten to those points yet in the discussions.
We're just looking at a way to.
We both thing to amicably resolve.
The dispute besides go into a lengthy arbitration process.
That's where we're at.
Okay, and I know Oh.
I mean your disclosure suggests it's a little hard for me to figure out I haven't read the K that.
You you you transferred some of the equity in the project at one point, but then maybe you got it back I'm not sure do you do you own the project.
Or are the entities that that have the rights to the project.
At this point in time.
So very early on and we had a partner 50% partner feedback. This is many years ago. When we first started the project.
Essentially we bought out all but about.
1% of the equity interest in that project.
So we own all rights to the project and all rights to the permits and the land and all the other expenditures that were made for the project.
So no other equity partner and in fact that.
There is an outside interest its just a fraction of a percent.
And one of the companies.
Okay. That's all I have thank you very much.
Sure.
Okay.
And then if you have a question. Please press Star then one.
The next question will be from Felipe Aclara Clara Associates. Please go ahead.
Yeah Hello.
Thanks for taking my call I, just wanted to I didn't hear anybody mentioned it.
It seems to me.
Yesterday, you saw yesterday.
That news release that the Governor of California was proposing a significant initiatives to try to resolve the water problems in that state.
And of course with two X present.
Vince in California.
Hey, thanks.
<unk> desalination mentioned in this press release.
Do you does anybody.
We were there.
Pretty excited about the possibility that there might be some significant opportunities.
On the table.
Table there.
I mean honestly.
There's a lot of mixed signals coming from California on.
On seawater desalination, I mean, I heard the same sort of thing and I heard that they've blocked some funds.
The state budget to to support desalination initiatives.
On the other hand, if you look at the industry.
Reports I mean, there was a big project in California that recently.
Got it can so.
The developer had been beside and had been working on that for 10 plus years. So.
I don't I don't really know what they want to do with desalination there.
However.
We see the potential.
On the waste waste recycling side and Thats why we invested in PERC a couple of years ago.
It's not a very controversial.
Process and a lot of municipalities are now.
Designing and go into bid for.
The advanced wastewater treatment plants that would produce recycled water so.
If you want the easier path for business I mean, you want to follow that one.
The desalination.
And opportunities in California to me are still.
Bit unclear.
Thanks, Thanks, Steven please.
Okay.
Yeah.
Thank you.
This concludes our question and answer session I would like to turn the call back over to Mr. Mctaggart. Sir. Please go ahead.
Thanks, Nick and I appreciate everybody, calling in today, great questions and we look forward to.
Speaking with you again in November I guess for the third quarter results.
Take care.
Bye bye.
Thank you ladies and gentlemen.
Today's call I'd like to provide the company's safe Harbor statement includes cautions regarding forward looking statements made during the call.
This information that we have provided in this conference call includes forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95.
According to 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.
Statements that are not historical facts are based on the company's current expectations beliefs assumptions estimates forecasts and projections for the business in industries and markets related to its business.
Any forward looking statements made during this conference call are not guarantees of future performance involve certain risks uncertainties and assumptions, which are difficult to project.
Actual outcomes and results may differ materially from what is expressed in such forward looking statements.
Actors that would cause or contribute to such differences include but are not limited to.
Tourism and weather conditions in the areas we serve.
Packs of Covid, 19, pandemic, particularly on our retail and manufacturing segments.
Economic political and social conditions in each country in which we conduct or plan to conduct business.
Our relationship with the government entities and other customers in certain regulatory matters, including resolution of negotiations for the renewal of a retail license in Grand Canyon excuse me your antenna our ability to successfully enter new markets and other various risks.
Detailed in the company's periodic report filings with the Securities and exchange system.
For more information about risks and uncertainties associated with the company's business. Please refer to the managements discussions of analyst of financial conditions and 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 on Form 10-Q.
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Speaks 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 events conditions or circumstances of which any forward looking statement is based.
Upon required by law.
Before going to a conference call and now I'd like to remind everyone that this call will be available for replay.
Later this evening, please refer to yesterday's earnings release for dial in replay instructions available via the company's website at Ww Dot CWC O Dot com.
Thank you for attending today's presentation. This concludes the conference call you may now disconnect.