Consolidated Water Co. Ltd. (NASDAQ:CWCO) Q4 2022 Earnings Call Transcript

Consolidated Water Co. Ltd. (NASDAQ:CWCO) Q4 2022 Earnings Call Transcript March 31, 2023

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: 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. So, 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: Thanks, Rick, and good morning, everyone. Yesterday, we issued our full 2022 fiscal year results in a press release, and you can find that press release in the Investors section of our website. As Rick mentioned, revenue for 2022 totaled $94.1 million, which was up 41% compared to the $66.9 million we reported in 2021. This increase was driven by increases of the following amounts in all of our four business segments, $3.8 million in our Retail segment, $6.2 million in our Bulk segment, $15 million in our Services segment, and an additional $2.3 million in Manufacturing segment revenue. As we discussed earlier, our retail revenue increased primarily due to a 12.5% increase in the volume of the water we sold on Grand Cayman.

Our retail revenue also increased due to higher energy costs that increased the energy pass through component of our water rates and it increased slightly as a result of a more favorable rate mix. The increase in our Bulk segment revenue was due to an increase in energy costs for the Bahamas, with this increasing the energy pass through component of CW-Bahamas rates. The increase in our Services segment revenue was due to increases in both plant design and construction revenue, and operating and maintenance revenue, with most of the increase resulted from PERC’s progress on the construction of the water treatment plant in Goodyear, Arizona. The increase in our Manufacturing segment revenue was due to increased production activity. Our gross profit for the full year of 2022 was $30.4 million or 32% of total revenue, which is up 29% from the $23.5 million or 35% of total revenue in 2021.

Net income from continuing operations attributable to CWCO stockholders for 2022 was $8.2 million or $0.54 per basic and diluted share compared to net income of $3.4 million or $0.23 per basic and diluted share in 2021. Net income attributable to consolidated water stockholders, which includes the results of discontinued operations, was $5.9 million or $0.38 per basic and fully diluted share. This is up from net income of $876,000 or $0.06 per share in 2021. Now turning to our balance sheet. Our cash and cash equivalents totaled $50.7 million as of the end of the year. This compares to $51.1 million as of the end of the September 30, 2022 quarter. As of December 31, 2022, our working capital totaled $69.9 million. Our debt was only $300,000 and our stockholder’s equity totaled $159.7 million.

As of December 31, 2022, our projected liquidity requirements for 2023 include capital expenditures for our existing operations of approximately $14.1 million. This includes $2.8 million that is expected to be incurred in 2023 for the replacing of West Bay desalination plant and approximately $7.5 million for construction of the new desalination plant on Grand Cayman. In order to January this year, we exercised — well, actually in October of 2022, we exercised our option to purchase the remaining 39% equity our subsidiary PERC water and we completed this transaction in January of 2023. We paid approximately $7.8 million. This was comprised of $2.44 million in cash and 368,383 shares of common stock valued at about $5.4 million. We paid approximately $1.4 million for dividends in January 2023, and of course, our future liquidity requirements.

They also include any future dividends declared by our Board. In the third quarter of 2022, we obtained a $10 million revolving credit line with Scotiabank in the Cayman Islands to assist us with some of our short-term financing and working capital needs. However, to date, we have not been required to utilize any of the borrowings that are available under this line. So that completes our financial summary for the quarter, and I’ll turn the call back over to Rick.

Rick McTaggart: 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 is — 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 much — 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 in the last 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, so 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 — at the 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.

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Q&A Session

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

Rick McTaggart: Hi, Gerard. How are you doing?

Gerard Sweeney: Doing well. I wanted to add 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, probably this is a short-term probably positive for California. But curious if you’re seeing any projects or project PERC (ph) around slippage or pushing back opportunities or how do we look at that?

Rick McTaggart: The stuff that we’re following, we haven’t seen any indication that they’re delaying it at this point.

Gerard Sweeney: 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, next year, they certainly have a lot on their plate, but I just want to understand that a little bit further.

Rick McTaggart: Well, I mean I think that — we have a great management team there, Jerry, 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 and 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, project managers. And so far, it’s all been working very well. From the standpoint of financial resources, I mean I can let David speak to that.

David Sasnett: Yeah. It’s important to remember, Jerry, 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 PERCs 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: Okay. Perfect. And speaking of Liberty, I think $82 million project, $9.5 million was done in 2022. I know scheduled completion in first half of 2024, I believe. But isn’t there a — you had to have a majority of the project completed by the end of this year. Is that correct? And meaning there would be a big chunk of that remaining revenue coming through on the…

David Sasnett: The majority of the $72 million will be recognized next year. When I say next year in 2023, we’re into next year.

Gerard Sweeney: Okay. Got you. Okay. In 2023, got it. And is that — as much as you can say, is that consistently spread over four quarters or is that a lot of it back and load because…

David Sasnett: It’s ever consistent ever consistent. Yes, it’s ever consistent because based upon the inputs and some months, we’ll have — we’ll put in more expensive equipment than we do the following months of the preceding months. So, it will be somewhat sporadic. It won’t be consistent.

Gerard Sweeney: 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: Yes. I don’t have those numbers in front of me, Jerry. 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: 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: Thank you, Jerry. Take care.