Consolidated Water (CWCO) Q3 2021 Earnings Call Transcript

Consolidated Water (CWCO 1.57%)
Q3 2021 Earnings Call
Nov 16, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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, Dave Sasnett. Following their remarks, we'll open the call to your questions.

[Operator instructions] 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 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's CEO, Rick McTaggart. Sir, please go ahead.

Rick McTaggart -- Chief Executive Officer

Thank you, Kate. Good morning, everyone. Thanks for joining us on today's call. I hope everybody is well.

During the third quarter, the continued cessation of tourism on Grand Cayman due to 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 Aerex 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 Aerex 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 and/or products. And in the first nine months of the year, we generated manufacturing revenue of $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.

David Sasnett -- Chief Financial Officer

Thanks, Rick. Good morning, everyone. Thanks for joining us today. As Rick mentioned, we continue to face significant challenges as a result of the current environment, as do many companies.

But despite these challenges, we've 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 that revenue totaled $16.4 million in the third quarter, a decrease of 7% from the same quarter of last year. The decline reflects decreases of $141,000 in services segment revenue and $2.2 million in manufacturing segment revenue.

These decreases were partially offset by revenue increases of $254,000 in our retail segment and $807,000 in our bulk segment. Our retail revenue decreased -- increased due to a 1% increase in the volume of water sold by Cayman Water. The 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. The increase in bulk segment revenue was attributable to an increase in energy costs for Consolidated Water Bahamas, which increased the energy pass-through component, of CW Bahamas' rates.

The decrease in services revenue was due to a decline in plant construction revenue of $525,000, which was partially offset by an increase of $385,000 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 orders from Aerex's former largest customer. We have not yet been successful in replacing this lost revenue. In late July, this customer communicated to Aerex that it is expected to recommence its purchases of its specialized product for Mirex in 2022 and in subsequent years but communicated that such purchases would be at substantially reduced annual amounts as compared to both the amounted that he has purchased from Aerex in 2020 and prior years, and it's below what we had inspected -- anticipated they would purchase.

Our efforts to replace this revenue previously generated from this customer with revenue from existing and new customers has been adversely impacted by the current economic environment, which has increased raw material costs, resulted in raw material shortages, and extended the delivery times for such materials to Aerex. We have also been adversely affected -- excuse me, we believe these shortages and delivery days have also adversely affected the financial condition of Aerex's 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. The third quarter of 2021 net income attributable to Consolidated Water shareholders, which includes the results of discontinued operations, was $286,000 or $0.02 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 $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's revenue sources. Based upon our discussions and collection history with the Bahamas government, we believe our accounts receivables from the WSC are fully collectible. In fact, the Bahamas government and the WSC continue 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 reduced 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 30, 2021, our cash and cash equivalents totaled $40.4 million. Our working capital was $69.3 million.

We had only $200,000 in debt, and our stockholders' equity totaled $157.4 million. So, this completes my financial summary. I'd now like to turn the call back over to Rick.

Rick McTaggart -- Chief Executive Officer

Thank you, David. Like many companies, our manufacturing segment has been adversely affected by supply chain challenges, including material shortages, 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 has pushed out to next year 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's 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 reduced customer dependence and concentration. It's important to recognize that municipal jobs have a longer lead time and delivery time, which are usually -- and they're 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 compared 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 guarantees required by this potential client. Our extensive experience in designing, building, and operating these seawater desalination plants allowed us to be shortlisted to bid for this major project.

If we're successful in obtaining a contract and winning the bid, that 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 that range from one to five years. At this time, approximately 44% of PERC's 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 for a wastewater plant of the gaming and entertainment business in Southern California. We expect this O&M contract to generate revenue of about $400,000 per year.

New project opportunities for PERC, both sole-sourced and competitively bid, continue 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 design-build contract for a large wastewater treatment facility in California. We're leading a very strong engineering and construction team for this important project, and we're one of the three teams that had submitted bids for this. We were also recently selected as the preferred bidder for another prospective project, the wastewater recycling plant in Southern California, and we're currently in contractual negotiations with the client.

We expect to hear whether PERC is selected finally for each of these projects by early next year. And based on this overall increased bidding activity that reflects strengthening market demand, we believe PERC's performance in 2022 will exceed this year as new water treatment projects come to market after the lull due to the pandemic. Now, 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 20.

We see the reopening as a major step toward reopening of hotels and resorts in Grand Cayman and expect a gradual return to normalcy for our retail water segment. As 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 in 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. And now, with that, Kate, I'd like to open up the call for questions.

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] The first question is from Gerry Sweeney of ROTH Capital. Please go ahead.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Good morning, Rick and David, thanks for taking my call. I wanted to start with the retail segment, obviously, it's great news that the Caymans is opening up. Do you have any sense of how well prepared the tourism industry is for this opening up? I mean, hotel staff is ready to go, or will that be a little bit of a headwind for a period of time?

Rick McTaggart -- Chief Executive Officer

Well, I mean, I don't have any sort of detailed information, Gerry, but I mean, I think it's going to take at least a few months to ramp up the business again there. I mean, my understanding is that some of the airlines are not resuming regular service until February. They were set to resume in October and the government canceled the reopening previously, but this one seems to be on schedule. So, you're not going to have full airlift capacity probably until February next year.

But it's a good start for sure.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Yeah. Without a doubt, right, it's at least open. We'll get to hit the ball wrong. And then the Hawaiian seawater desalination -- desal project.

Just curious, is that a private project? Or is that a municipal-funded opportunity?

Rick McTaggart -- Chief Executive Officer

No, that's going to be municipal project, Gerry. That used to 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's not being bid until next year, early next year.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

OK. And then on the Georgetown Cayman Islands one, I don't know if you would want to answer this or can't answer it. But is there a -- 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 stationed on the islands, access to equipment, etc., 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 bid?

Rick McTaggart -- Chief Executive Officer

Yeah. I mean, as I mentioned in the script there, our local presence gives us a number of advantages, and I guess, bundling if that's what you want to call it, is really one of them. We share resources across the six plants now that we have there. So, seventh 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.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Got it. And then switching gears to Aerex, it sounds like the refocusing on sales and marketing and shifting to the municipal side, it's starting to bear, I think, some fruit. But I'm just curious as to, I mean, the margin profile on that municipal work. It sounds like it is different.

It's probably even 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?

Rick McTaggart -- Chief Executive Officer

Well, I mean, it's a different margin for sure. The municipal work is much more competitive. And initially, the work that we did for this other customer was very competitive, and 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 flow through the shop, then I think you get a better sense of that because it's almost all 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 delays with material deliveries and that sort of thing. So, because we -- David could -- he explains the accounting better than me, but once we start manufacturing this, we'll start booking the revenues, and you'll see certain milestones around the same period.

David Sasnett -- Chief Financial Officer

So, Gerry, the margins on this municipal stuff, we were making very high margins on the other stuff. And as a result, I think going forward, you'll see some margin adjustment. But, as Rick mentioned earlier, our margins have been adversely impacted because utilization of the plant overhead has been very low. We continue to absorb those costs because it's very hard to replace your workforce.

You can't terminate people, then all of a sudden when production increases, you go back and hire them up. It just doesn't work that way. But as we continue to grow the business, and you see a greater percentage of Aerex's manufacturing capacity utilized, the impact of that fixed operating cost, fixed 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.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

No, I can recommend that with $1.1 million of revenue manufacturing versus like $3.8 million last June. I completely understand that overhead is fixed, and there's the incremental margins. I was just curious as maybe even the delta between municipal margins and your other customers, just so we would have an idea of --

David Sasnett -- Chief Financial Officer

No, I don't think we can give you that number, Gerry, because some of the municipal work, it varies in margins. Some of it has very good margin on it. So, it's just a matter of the product mix. We're happy to be in this market.

We think it's going to be a very good market for us. I expect good margins in it. So --

Gerry Sweeney -- ROTH Capital Partners -- Analyst

And I completely understand that. And one more question on Aerex's manufacturing. And what is your maybe theoretical capacity with that facility? And have you ever sort of maxed it out? And I know -- I can't necessarily ask what kind of revenue could a facility do at capacity because there's going to be different pricing, especially in today's environment. But I'm just trying to figure out potentially how much revenue that facility could do if you look at the sales channel --

David Sasnett -- Chief Financial Officer

I could say, Gerry, that prior to purchasing Aerex, they had years where they did $19 million in revenue, I believe, somewhere around that $17 million, $18 million, $19 million. That plan has that potential. And we also have ability to expand the plant. And for some reason, we got major orders that would push us beyond the existing capacity.

I mean, 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 placed -- Aerex has the potential to do with his existing capacity. Given the product mix, I mean, that's always a big determinant, I mean, $20 million in revenue is not beyond their reach with the right mix of orders given the existing capacity.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

OK. That's helpful. I'll jump back in. Thank you.

Appreciate it.

David Sasnett -- Chief Financial Officer

Thanks, Gerry.

Operator

[Operator instructions] There are no other questions at this time. This concludes our question-and-answer session. I'd like to turn the call back over to Mr. McTaggart.

Please go ahead, sir.

Rick McTaggart -- Chief Executive Officer

I'd just like to thank everybody again for joining today, and I hope everybody has a very nice holiday season, and we look forward to talking to you again in March, when we release our year-end report. Thank you.

Operator

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 1995, including, but not limited to, statements regarding the company's future revenue, 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 its business and the industry and markets related to its business. Any forward-looking statement made during this conference call are not guarantees of future performance and involve certain risks, uncertainties, and assumptions, which are difficult to predict. Actual outcomes and results may differ materially from what is expressed in such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued 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; the collection 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 the 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 reports for Form 10-Q. Any forward-looking statements made during the conference call speak as of today's date. The company expressly disclaims any obligations or undertaking to update or revise any forward-looking statements made during the conference call to reflect any changes in its expectations with regard thereto, or any changes in its events, conditions, or circumstances of which any forward-looking statement is based, except as required by law. Before we end today's conference call, I would like to remind everyone that this call will be available for replay starting later this evening.

Please refer to yesterday's earnings release for dial-in replay instructions available via the company's website at www.cwco.com. Thank you for attending today's presentation. [Operator signoff]

Duration: 29 minutes

Call participants:

Rick McTaggart -- Chief Executive Officer

David Sasnett -- Chief Financial Officer

Gerry Sweeney -- ROTH Capital Partners -- Analyst

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