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Consolidated Water Co. Ltd. (NASDAQ:CWCO)
Q4 2019 Earnings Call
Mar 16, 2020, 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 Results for the Year Ended December 31st 2019.

Joining us today is the Chief Executive Officer of Consolidated Water Company, Rick McTaggart; and the company's Chief Financial Officer, David Sasnett. Following their remarks, we'll 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 this 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 the company's press release, issued this morning 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.

Frederick W. McTaggart -- President, Director and Chief Executive Officer

Thanks Craig. Good morning, everyone. Thank you for joining us today. I know most of you are following the impact that the COVID-19 virus is having on the world, and while we are concerned about the impact on our business, we remain optimistic about our long-term prospects. We believe that the travel interruptions and a decline in tourism in the Caribbean will likely adversely impact our desalination business in the short-term, and we continue to closely monitor this very fluid situation.

Now turning to our 2019 results, as you saw from the earnings release we issued this morning, 2019 was another great year for Consolidated Water. We made strong progress in growing our overall business and expanding our platform to support future growth and market reach. Overall, we reported record revenue with improved profitability. Our retail and manufacturing segments drove this revenue increase, with manufacturing segment revenue nearly doubling to $13.6 million. We expect our manufacturing segment to continue to strengthen this year, supported by purchase orders received to-date that are already comparable to all of last year's.

The events and opportunities presented to us in 2019 underscored the importance of further diversifying our revenue by adding complementary service and product offerings, as well as expanding our geographic presence and customer base. This process actually began in 2016, with the acquisition of a controlling interest in Aerex Industries which comprises our manufacturing segment, and then in January of this year we acquired the remaining 49% of Aerex. Over time, we have strengthened Aerex's capabilities and resources and expanded its product offerings, resulting in improving results. We expect Aerex to contribute to increased shareholder value in the coming years.

To further expand our product offerings and presence in the United States, in October of last year we acquired a controlling interest in PERC Water Corporation, a leading water treatment and reuse infrastructure provider and manager that operates primarily in the Western U.S. In addition to its existing business offerings, PERC provides us with a platform in the U.S. for expanding our core business of designing, constructing and operating desalination plants, to water short regions of the U.S. Our strategy is to expand such service revenues is supported by a strong balance sheet and growing pipeline of projects, which I'll get into more a little later in the call.

Now I'd like to turn over the call to David, who will take us through the financial details for 2019, after which I will return to discuss some more recent developments in our outlook for 2020. David?

David W. Sasnett -- Executive Vice President and Chief Financial Officer

Thanks Rick, Good morning everyone. In 2019, our revenue increased 5% to a record $68.8 million. This was driven by revenue increases of $6.3 million in our manufacturing segment and $835,000 in our retail segment. The increase in manufacturing revenue was due to a larger number of orders that resulted in expanded project production activity.

Our retail segment revenue was higher due to a slight increase in the volume of water sold by Cayman Water and higher energy prices. This increase was partially offset by the lack of revenue in 2019 from Consolidated Water Bali, due to the cessation of this business in 2018 and its sale in 2019. If you look at our income statement, we generated a gain on sale of asset dispositions in 2019 of $445,000, and this number was primarily from the sale of CW-Bali's assets and its stock, which happened in June of 2019.

The decrease in our bulk water revenue was due to the lower rates that came into effect in February for water supplied by the Red Gate and North Sound plants, and the new contract that came into effect in July for the North Side Water Works plant. Our previous contracts had expired and we were fortunate enough to win the tender process and get new contracts for these plants for the Water Authority in Cayman.

The slight decrease in services revenue for 2019 reflects non-recurring activity, that generated more than $1.2 million in revenue in 2018, as well as lower fees generated in 2019 and our management services agreement with our British Virgin Islands affiliate, OC-BVI. We were able to add a new revenue source for our services segment to our acquisition of 51% of PERC Water Corporation in October. PERC contributed $1.4 million to our services segment revenue for 2019.

Our gross profit in 2019 increased 6% to $28.3 million, as compared to $26.7 million in 2018, with the gross margin as a percentage of revenue improving slightly from 40.7% in 2018 to 41.1% in 2019. Our net income attributable to stockholders totaled $12.2 million or $0.80 per diluted share. This number compares to a $11.3 million or $0.75 per diluted share for 2018.

If you look at our balance sheet, cash and cash equivalents totaled $42.9 million as of December 31, 2019 as compared to $31.3 million as of December 31, 2018. The increase in our cash and cash equivalents was primarily due to negative income generated by continuing operations, and the sale of our CW-Belize business for $7 million, which occurred in February of 2019.

Looking forward, our projected liquidity requirements for 2020 include capital expenditures for existing operations of approximately $4.7 million. $3.9 million for non-cancellable raw materials purchase orders, $3 million to be extended for our development activities in Mexico, related to the Rosarito project; and we have presently $1.3 million in dividends payable. Our liquidity requirements for 2020 may also include future quarterly dividends, as such dividends are declared by our Board. Our dividend payments amounted to $5.1 million for the year ended December 31, 2019.

That's a summary of our financial results. I would like to turn the call back over to Rick now. Rick?

Frederick W. McTaggart -- President, Director and Chief Executive Officer

Thanks David. Our overall growth in 2019 demonstrates how we've remained focused on our mission of providing Water Services to areas of the world, where the supply of naturally occurring potable water is scarce, and particularly where reverse osmosis technology is economically and environmentally feasible. Our push into new markets and product offerings have helped us further carve out a niche as a company capable of solving some of the most daunting and challenging water problems in the world.

We are seeing an increased number of new opportunities for desalination in the U.S., as well as for other types of water projects, using this or similar project delivery models to what we have used in the Caribbean traditionally, and this is especially true for the southwestern U.S. We believe California in particular, with its 840 miles of Pacific Coastline, will be a source of extensive desalination project opportunities for us. In fact, 11 desalination plants are already in operation in California, with 10 more being proposed.

To be sure, our desalination opportunities aren't limited to ocean coastlines, Arizona, which is perpetually been short on water and facing a Colorado River supply shortage, has been looking at ways to treat its estimated 600 million acre feet of brackish water deposits using desalination; because the dissolved solid content of brackish groundwater is considerably lower than seawater, brackish water is actually considered to be more economical and to desalinate than seawater.

In addition to producing potable water, water management challenges are also creating a growing demand and opportunity for waste water treatment in reuse projects. For California, Arizona, Texas and Florida, states actively pursuing such projects, the anticipated demand for new waste water treatment facilities and operations, is actually several times higher than the corresponding category for potable water. The addition of PERC Water supports our efforts to address these and many other emerging opportunities. PERC develops, designs and builds state-of-the-art facilities that recycle waste water for industrial use and groundwater replenishment, and they can provide the ongoing operational and management services to keep these facilities operating at peak performance.

PERC has completed and continues to support several water infrastructure projects, including new facilities, facility upgrades, short and long-term operation services, and have asset management engagements. They won numerous industry awards for their innovative designs and highly efficient project delivery model.

Since we acquired them in October, PERC has proven to be highly complementary and synergistic to our existing business, and overall mission, allowing us to offer our customers a comprehensive solution, for deploying or upgrading their water infrastructure. PERC also provides a solid platform, upon which we can expand our core business of designing, constructing and operating desalination plants for water-short regions.

It's also important to note that PERC Water is highly complementary to Aerex, which fabricates water treatment equipment for a diverse number of industries involved in waste water treatment infrastructure. We have introduced PERC to our specialized capabilities in greater access to capital and other important resources, allowing them to take greater advantage of these fast-growing markets. PERC is presently pursuing several new water and wastewater recycling projects being developed under various project delivery models, including design, build, operate, and is also pursuing opportunities to obtain management contracts with large utilities that could generate for us substantial management and consulting fees.

Turning to our international activity; our Mexico desalination project recently received congressional extension of key financing, through the passing of the legislative bill Decreto 37. The extension allows the State of Baja, California, additional time to establish the financing and securitization structure required for payments to us, under the water projects, water supply contract. We believe this extension demonstrates the state's continued commitment to the completion of this important project.

The Rosarito project involves constructing a desalination plant designed to produce a 100 million gallons per day of portable water in two phases of 50 million gallons per day, and will provide a major, much needed new source of drinking water for the coastal region of Baja California, Mexico for at least 37 years.

In addition to Mexico, many other water scarce areas of the world need solutions, especially as water demand continues to increase. with the growth in populations, urban expansion and food production. However, desalination doesn't fit every need, especially for landlocked areas and community water planters typically strive to obtain a portfolio of water sources. Bearing this in mind, with PERC Water, we may now have an additional new leg to support our growth objectives. Their advanced wastewater treatment and reuse expertise gives us another offering to support the growth and quality of life of communities, where desalination is not the best option.

PERC Water exemplifies the high quality opportunities we are pursuing, to drive future growth and enhance shareholder value over the coming years. Our Caribbean operations, while in a mature market and likely to suffer short-term impacts from the COVID-19 virus pandemic, will continue to provide us a predictable source of cash flow. These operations, along with our ample liquidity and strong balance sheet, will help us to weather the impacts of the COVID-19 pandemic, and provide a solid foundation, upon which we can advance our projects and plans for expansions.

I'd like to now open the call up for questions. Grant?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Gerry Sweeney with ROTH Capital. Please go ahead.

Frederick W. McTaggart -- President, Director and Chief Executive Officer

Hey Gerry, can you hear us?

Gerard Sweeney -- ROTH Capital Partners -- Analyst

I can. Yes. I apologize. I was sort of jumping on and off the call, as you know, we are working on our conference on the other end. Obviously, there is a core base of business. I think the bulk water is probably a lot -- a good portion of it is driven to sort of municipal use on the Bahamas and, I guess, Grand Cayman. But there is also a portion that is retail, that maybe -- retail and/or maybe tourist-driven. Have you been able to -- looking at your numbers and see what percentage of your revenue is sort of base core business that what I would assume to like general population use, versus maybe some other business that is used to more on the tourist side, that may have some fluctuations?

David W. Sasnett -- Executive Vice President and Chief Financial Officer

Gerry, this is David. Good morning, by the way.

Gerard Sweeney -- ROTH Capital Partners -- Analyst

Yes.

David W. Sasnett -- Executive Vice President and Chief Financial Officer

We've looked at these numbers. If you look at Grand Cayman, there is about 65,000 people that live on the island. And I would say that more than half of those people live in our service area, West Bay and Camana Bay and Seven Mile Beach. I don't know if its possible to quantify the exact impact of tourists on the amount of water that we sell. It's fair to say, I mean if you think about it, more than 30,000 people are in our service area. I don't know if the fact that you have 1,000 or 2,000 tourists there, have a huge impact. As we said earlier, the biggest impact on our business is rainfall patterns.

Without question though, if there were a decline in tourism in the Cayman Islands, that's going to affect the overall activity on the island in general and the economy. So it's not just the lack of water sales, I think, due to the tourists, I think the whole activity on the island goes down. So it could have a pretty stiff impact on us. I don't know if its possible to really quantify it, because we've never been able to figure out exactly -- the tourist levels, they've always been pretty steady in Grand Cayman and cases where they've gone up a little bit, was the additional development [Phonetic] we have down there. But still the majority of the water we sell is to residents and businesses.

Gerard Sweeney -- ROTH Capital Partners -- Analyst

Okay. That's helpful.

Frederick W. McTaggart -- President, Director and Chief Executive Officer

The retail business...

Gerard Sweeney -- ROTH Capital Partners -- Analyst

Yes, sorry go ahead.

Frederick W. McTaggart -- President, Director and Chief Executive Officer

Yeah. Our retail business which is really the most sensitive part right now, I think it's about 30% or 32% of our revenue, something like that. I don't have the number right in front of me. But it's in the K.

Gerard Sweeney -- ROTH Capital Partners -- Analyst

Okay.

Frederick W. McTaggart -- President, Director and Chief Executive Officer

Let me see. 38%, sorry.

Gerard Sweeney -- ROTH Capital Partners -- Analyst

That is helpful.

Frederick W. McTaggart -- President, Director and Chief Executive Officer

Go ahead, sorry.

David W. Sasnett -- Executive Vice President and Chief Financial Officer

It's going to have a big impact on the island in general, not only in our numbers, but the entire economy of the island, if tourism shuts down there.

Gerard Sweeney -- ROTH Capital Partners -- Analyst

Yes, I think in today's environment, people are looking for stability and I think the key takeaway is, there is some leverage to some tourism, but there is a core base of business here that will continue, and I think that's -- I mean, that's exactly what I am looking for, in terms of just trying to figure out how much stability there is in the general revenue side. So that's helpful. That's it from my end. I got a bunch of little fires to put out, so I appreciate your time and I'll follow-up with you, if that's an option?

Frederick W. McTaggart -- President, Director and Chief Executive Officer

Thanks for calling in Gerry. Appreciate it.

Operator

[Operator Instructions] Our next question comes from John Bair with Ascend. Please go ahead.

John Bair -- Ascend Wealth Advisors -- Analyst

Thank you. And good morning. Glad you are out of...

Frederick W. McTaggart -- President, Director and Chief Executive Officer

Hey John.

John Bair -- Ascend Wealth Advisors -- Analyst

Also, I know, that you -- with energy prices coming down, should that help offset some of the potential operating costs or whatnot for and perhaps loss of some revenue in the Caymans and other areas, where that's a factor?

David W. Sasnett -- Executive Vice President and Chief Financial Officer

John, not really. Most of the energy -- almost all the energy cost in our bulk and retail operations are passed through to consumers. So an increase in energy prices or decrease in energy prices will not have a big impact on our profitability.

John Bair -- Ascend Wealth Advisors -- Analyst

Okay. And then as...

David W. Sasnett -- Executive Vice President and Chief Financial Officer

It will affect our -- obviously, it will affect our sales, but the gross profit margin won't be impacted that much.

John Bair -- Ascend Wealth Advisors -- Analyst

Yes, OK. Right. Okay. And the interesting comments on the brackish water opportunities there. Does this have potential to be more broad based than just in say the southwestern region that you mentioned in the call? I mean, is this something that could be applied in other parts of the country, up here in the Northeast, or whatever, that are being evaluated at or...?

Frederick W. McTaggart -- President, Director and Chief Executive Officer

Well, I can tell you there is -- John, that I am familiar with -- I mean Florida, for example, they have already started tapping a brackish aquifer, which is deeper than the main aquifer here in South Florida. So they have water treatment plants, that utilize brackish water RO. In Texas, same thing, I mean there is tremendous brackish aquifers in Texas and I think even into the Midwest, and then Arizona, because of PERC, I mean, they have excellent relationships in Arizona and California. I mean, we are more focused on those areas right now. But there are broader opportunities, I mean, In Florida, Aerex has built equipment -- brackish water RO equipment for municipalities that use these deeper aquifers, and there is a broader opportunity there.

John Bair -- Ascend Wealth Advisors -- Analyst

I mean, is this applicable in conjunction with oil and gas related projects, or is it totally separate?

Frederick W. McTaggart -- President, Director and Chief Executive Officer

Its more specialized, John. I mean, they are taking out a lot more than just dissolved solids there.

John Bair -- Ascend Wealth Advisors -- Analyst

Right. Okay.

Frederick W. McTaggart -- President, Director and Chief Executive Officer

That's probably not a market want to be in right now.

John Bair -- Ascend Wealth Advisors -- Analyst

Yeah, well. Yeah, other than a lot of these companies are trying to utilize looking at ways to cut costs. Obviously if they could reuse and -- I mean, I know they are doing this, but reuse, find better ways to reuse their...

Frederick W. McTaggart -- President, Director and Chief Executive Officer

Produced water.

John Bair -- Ascend Wealth Advisors -- Analyst

Yes, Right, produced water, whether it's from frac operations or just water drive related production. So, OK. Very good. Thanks. Thank you very much for taking the call.

Frederick W. McTaggart -- President, Director and Chief Executive Officer

Sure John. Take care.

John Bair -- Ascend Wealth Advisors -- Analyst

Yes, you too.

Operator

[Operator Instructions]. All right. At this time, this concludes our question and answer session. I would like to turn the call back over to Mr. Taggart. Sir, please go ahead.

Frederick W. McTaggart -- President, Director and Chief Executive Officer

Thanks Grant. Just like to thank everybody for joining us today. I am sure that we've got lots of things to do, and hopefully when we speak to you again in May with our first quarter results, a lot of this stuff will be past. Take care and all the best. Bye-bye.

Operator

Thank you ladies and gentlemen. Now before we conclude today's call, I would like to provide the company's Safe Harbor statements, that include important cautions regarding forward-looking statements made during today's call. The information that we've 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 revenues, future plans, objectives, expectations, and events, assumptions and estimates. Forward-looking statements can be identified by the use of word or phrases, usually containing the words, believes, 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 end-markets related to its business.

Any forward-looking statements 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. Important factors which may affect these actual outcomes and results include, without limitation, continuing acceptance of the company's products and services in the marketplace, changes in its relationship 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, its ability to complete the project underdevelopment in Baja California, Mexico, the future financial performance of its subsidiary that manufactures water treatment-related systems, and products and provides design, engineering, management, operating and other services applicable to commercial, municipal and industrial water production. The collection of its delinquent accounts receivable in the Bahamas, its ability to integrate and profitably operate recently acquired subsidiary, PERC Water Corporation, the possible adverse impact of the COVID-19 virus on the company's business, and various other risks, including those risk factors set forth under Part-1, Item 1A risk factors in the company's annual report on Form 10-K.

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 this conference call to reflect any change in its expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based except as it may be 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 and running through March 23. Please refer to today's earnings release for dial-in replay instructions available via the company's website at www.cwco.com.

[Operator Closing Remarks].

Duration: 27 minutes

Call participants:

Frederick W. McTaggart -- President, Director and Chief Executive Officer

David W. Sasnett -- Executive Vice President and Chief Financial Officer

Gerard Sweeney -- ROTH Capital Partners -- Analyst

John Bair -- Ascend Wealth Advisors -- Analyst

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