Consolidated Water (CWCO) Q3 2020 Earnings Call Transcript

Consolidated Water (CWCO 1.49%)
Q3 2020 Earnings Call
Nov 17, 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 third quarter of 2020 Results. Joining us today is the chief executive officer of Consolidated Water Company, Rick McTaggart; and the company's chief financial officer, David Sasnett. Following the 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 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 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 -- Chief Executive Officer

Thank you, Gary, and good morning, everyone. Thanks for joining us on today's call. I hope everyone is well. Fortunately, Consolidated Water has not been impacted by the adverse conditions created by the pandemic as much as others.

Our team has worked diligently throughout the pandemic to ensure that we are able to continue our operations and pursue additional projects that can strengthen our business. During the third quarter of 2020, we managed to generate substantial revenue growth and returned to profitability from Q2. Over the first nine months of the year, we were also profitable generating nearly $11 million in cash from operations. Our Q3 top-line growth is largely due to the $3.2 million in revenue contributed by our new PERC Water subsidiary.

PERC's core business which provides engineering, construction, and management services for water treatment infrastructure in the United States has met our expectations so far this year in spite of the pandemic. And so far, we've seen no material impact from the COVID-19 pandemic on its day-to-day operations. The Management team at PERC has been focused on increasing its recurring revenue through multi-year operating contracts and consequently, PERC was awarded four operating contract renewals and two new operating contracts during the first nine months of this year. I'll provide more details about the growth opportunities we see with PERC later in the call.

Our retail segment experienced a decline in revenue in Q3, compared to last year, mainly due to the continuing closure of the borders in the Cayman Islands to tourist travel, and this is in response to the pandemic, it was also lower because of much wetter weather conditions in the Cayman Islands during the third quarter. The seaport and airport in the Cayman Islands have been closed to tourists since March, which has reduced visitors and tourism to nil. However, as of October 1, residents and property owners have been allowed to return to the Cayman Islands subject to quarantine for 14 days after arrival. This has allowed flights from the United Kingdom and the U.S.

to resume on a reduced schedule. To encourage more long-term visitors, the Cayman Islands government recently implemented a Global Citizen Concierge program, whereby tourist visas are granted to individuals and families who wish to reside and work remotely in the islands for up to two years. These developments are very encouraging and can help bring much needed economic activity back to these islands. The Cayman Islands have actually been very successful in keeping the country COVID-free for many months and mitigating pandemic-related damage to its economy, and this is one of the strong selling points they present for their Global Citizen Concierge program.

We are also encouraged by recent positive announcements regarding COVID-19 vaccines and believe that the Cayman Islands are well-positioned to quickly rebound from the economic downturn created by the pandemic once a vaccine is available and regular tourism resumes. While these are all positive developments, we expect that our retail segment will continue to be negatively affected until the United States, which is the principal source of tourists for the Cayman Islands has recovered from the pandemic. Our bulk water operations in the Cayman Islands and the Bahamas have continued to operate without incident and have been much less affected by the pandemic than our retail business. However, our bulk segment revenue that is generated in the Bahamas and the Cayman Islands declined slightly period-over-period due to factors unrelated to COVID-19.

Bulk water revenue decreased last quarter, compared to the prior year, due to lower energy costs, which reduced the energy pass-through charges to our Bahamian customer. Bulk water's gross profit margin was lower, due to higher scheduled maintenance costs for our Bahamas operations. The COVID-19 pandemic has caused unprecedented complications for the majority of industries and companies, but we believe, nevertheless that we are well-positioned to execute our growth strategies with a very strong balance sheet with over $38 million in cash to support our ongoing key business development initiatives. Our core operations and mission of providing affordable, quality drinking water through our highly energy-efficient desalination plants, as well as wastewater treatment services through advanced water treatment and recycling facilities, continues to be a public health and economic necessity for our customers in the Caribbean and the United States.

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 of the quarter. I'll then return to provide more detail on our operational activity and our outlook for the remainder of the year. David?

David Sasnett -- Chief Financial Officer

Thanks, Rick. And good morning, everyone. Despite the challenges presented by the current economic environment and the COVID-19 pandemic, our revenue in the third quarter increased 11.2% to $17.7 million, compared to $15.9 million in the same period of last year. This increase is largely due to the addition of $3.2 million in revenue from PERC Water, which we acquired in October 2019.

We also saw a slight increase in our manufacturing segment revenue of approximately $187,000. The incremental PERC and manufacturing revenue were partially offset by revenue decreases in our retail and bulk segments of $1.3 million and $400,000, respectively. Our retail revenue was lower, due to an 18% decrease in the volume of water sold as a result of the temporary cessation of tourism on Grand Cayman in response to the COVID-19 pandemic. As Rick mentioned earlier, the decrease in bulk segment revenue was due to CW-Bahamas, lower energy costs that correspondingly decreased the energy pass-through component of CW-Bahamas rates.

Our manufacturing revenue increase is a result of a shift in our product mix to higher revenue projects. Gross profit for Q3 totaled $6.2 million or 35% of total revenue, [Inaudible] decline of 7.4% from the $6.7 million in the same quarter of last year, and represented 42.2% of total revenue. In the third quarter of 2020, net income from continuing operations attributable to Consolidated Water shareholders was $1.8 million or $0.12 per basic and fully diluted share. This compares to $2.3 million or $0.15 per basic and fully diluted share in the same period of last year.

With respect to our balance sheet and financial condition, our accounts receivable balances related to our Bahamas business amounted to $18.4 million as of September 30, 2020, which was essentially the same balance that we had as of December 31, 2019. However, due to payments we received from the Bahamian government in October, as of October 31, 2020, our Bahamas receivables from the Water & Sewage Corporation of the Bahamas had been reduced to approximately $15.1 million. Historically, CW-Bahamas has experienced delays in collecting its accounts receivable from the WSC. When these delays have occurred, we held discussions and meetings with representatives of the Water & Sewage Corporation and the Bahamas government.

As a result, payment schedules are developed for WSCs delinquent accounts receivable. All previous delinquent accounts receivable from the WSC were eventually paid in full. And as a result, we have never been required to provide an allowance for doubtful accounts for our Bahamas receivables. We believe the delays we have experienced in collecting CW-Bahamas' receivables were extended due to the impact of Hurricane Dorian, which devastated the Northern Bahamas in September 2019.

We also believe the delays are creditable to the economic impact of the COVID-19 pandemic on the Bahamas government's revenue sources. As of September 30, 2020, our cash and cash equivalents totaled $38.2 million. Our projected liquidity requirements for the balance of 2020 include capital expenditures for existing operations of about $150,000, and about $1.3 million for dividends payable. Of course, our liquidity requirements may also include future quarterly dividends, if such dividends are declared by our Board.

Our dividend payments amounted to approximately $3.9 million for the nine months ended September 30, 2020, and approximately $5.1 million for the year ended December 31, 2019. Now, I would like to turn the call back over to Rick.

Rick McTaggart -- Chief Executive Officer

Thank you, David. I'd like to share a little more about our manufacturing business. This segment is entirely comprised of Aerex, our manufacturing subsidiary based in Fort Pierce, Florida. Aerex is primarily a custom manufacturing shop.

So its contracts are typically shorter term than those in our other businesses. As David mentioned, our manufacturing segment results for the quarter benefited from a favorable product mix that resulted in an increase in its revenue and gross profits for the third quarter. In October, Aerex's largest customer informed us that it expects to suspend its purchases until the first quarter of 2022, due to inventory management reasons. We've been focused for some time now on diversifying Aerex's customers and products, and believe that we have a good opportunity to replace some or all of this anticipated lost revenue by increasing sales of other products Aerex's manufacturers for existing and potentially new customers.

Bidding activity for the new water treatment projects in our current market area remains robust, and PERC through its strong presence in the Southwestern United States is helping Aerex to expand its market into that area. The addition of PERC has been highly complementary to our existing business, and overall mission supporting our pursuit of water reuse projects and other emerging opportunities with a comprehensive suite of solutions for improving water infrastructure. PERC also provides us a solid platform on which to expand to North America, our core business of designing, constructing, and operating seawater desalination plants. In the third quarter, we acquired an additional 10% of PERC from another shareholder for $900,000, raising our ownership to 61% and underscoring our confidence in the PERC business model and its markets.

PERC represents the principal component of our services segment and has maintained its positive performance since we acquired a controlling interest in October of last year. We are especially encouraged by the prospects in this area of our business as PERC continues to actively pursue various potential new projects and contracts. Several of these could have a substantial positive impact on PERC's results of operations should ultimately be successful in capitalizing on these opportunities. While the COVID-19 pandemic does not appear to be getting any closer to ending, we think our business is stable in the current environment.

We have gone through two-full quarters of lockdowns with the various companies that we operate and while sales and our retail businesses remain lower than normal, our other businesses are operating status quo is improving. Looking ahead, our healthy financial condition and ample liquidity provide us with a solid foundation necessary for dealing with the challenges of the current economic environment. And we are well-positioned to take advantage of opportunities that may arise to expand or enhance our operations, especially as conditions eventually improve. Strong growth drivers inherent to our markets will continue to persist over the long-term regardless of the pandemic, and this bodes well for Consolidated Water as we work to enhance shareholder value over the months and years to come.

Now with that, I'd like to open the call for questions, Gary.

Questions & Answers:

Operator

We will now begin the Q&A session. [Operator instructions]. Our first question is from Gerry Sweeney with ROTH Capital. Please go ahead.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

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

Rick McTaggart -- Chief Executive Officer

Good morning, Gerry.

David Sasnett -- Chief Financial Officer

Good morning, Gerry. How you're doing?

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Doing well. I was wondering if you could provide a little bit more information on PERC, specifically maybe how large their pipeline is or backlog? How large the backlog is versus a couple of quarters ago? And how much visibility you have into sales for the next couple of quarters? And then part two on PERC would be, how much is recurring revenue versus during construction.

David Sasnett -- Chief Financial Officer

Gerry, we've added a risk factor in our 10-Q that talks about the amount of revenue that potentially could not be renewed from these operations in management contracts. Assuming that those contracts are renewed, I think what you're seeing with PERC right now is substantially all of their revenue is of a recurring nature because they're for operations and maintenance contracts. PERC also has an element of their business, which is a design-build. But at the moment that particular revenue does it cost to very much of their total revenue.

I think what excites us about the business is, they are pursuing a number of design-build contracts, which are very significant, as we said earlier, in terms of size and revenue. We can't provide any assurances that when these contracts, but they certainly have a number of interesting targets. And then they continue to pursue the operations and maintenance business as well. But with the exception of the fact that perhaps these contracts ultimately may not be renewed.

And as Rick mentioned earlier, we just reduced for -- we just gained new contracts and new -- I think there's a total of four for this year. So we'd like to think of that business is recurring that we'll get renewals from all of those contracts. So hope that helps.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Could you – how many total contracts those PERC have today?

David Sasnett -- Chief Financial Officer

I don't have that number on the top of my head, because it's changed. Somewhere around 20.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Ok. But -- ok, that's helpful. I just was wanting magnitude versus for being renewed and these design-build opportunities, is there an opportunity that they themselves lead to an O&M opportunity?

David Sasnett -- Chief Financial Officer

Yes. Some of these contracts, I mean, their business is very similar to our desalination business. Often, we'll build a plant for a third-party and then run it for them or operate the plant and sell the water that's what we do in Cayman. A similar possibility exists for PERC's business.

They could build a plant and make money off selling the plant. Then at the same time, they could enter into an O&M contract to run the plant.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Got it. Switching gears to the retail side. Obviously, it's going to be a -- that's going to face headwinds until a vaccine comes out. And as you said, the United States starts to rebound, but specifically about the quarter, would you know how much impact was rain versus tourism? And it just even broad brush is fine.

I'm out of curiosity there.

Rick McTaggart -- Chief Executive Officer

The best thing I could say is looking at what the volume drop was in the second quarter, which I think was a couple of percentage points less than what it was in the third quarter. So I mean, it went from I think 15% to 18% down, and maybe that other 3% is related to the rain. Maybe it's not. I mean, it's really hard to determine, but it did go up in the third quarter.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Got it. And then the final question in the -- I was waiting for the queue, and you have a note in there about the Rosarito project. I think you submitted if I read it right non-recoverable assets of $51.1 million. One, is that correct? And two, any type of timeline or thoughts on how that moves along as it develops?

Rick McTaggart -- Chief Executive Officer

Well, I'd like to hope that it develops quickly, but it's a legal issue now, Gerry. So, it's very difficult to say how long that's going to take. And if the total is closer to $56 million, so there's a certain amount in pesos, and then there's a certain amount in U.S. dollars that we've...

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Got you. Sorry, I apologize, this is -- and an additional on the peso line, it's all that.

Rick McTaggart -- Chief Executive Officer

So we are -- I can assure shareholders, we are working very hard and looking at every way possible to recover that money. So, I'm spending a lot of my time on that right now. So, I can't tell you when it could get worked out, but...

David Sasnett -- Chief Financial Officer

They really haven't given us a response to that yet, Gerry.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Ok. So they're -- that they've been a little bit quiet. What about other potential assets. I think you own the land.

I think that's on the balance sheet is around $21 million. If I read it a little while ago, but is there an opportunity to monetize any of the assets other than some of that non-recoverable amount that you submitted?

David Sasnett -- Chief Financial Officer

No, there's nothing. We have some receivables that are due from the government that we're collecting and the ordinary course of business, value-added receivables of that. And then we had the land. That's it.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Yes, I mean, the land is separate from that $56 million, I should say. Correct?

David Sasnett -- Chief Financial Officer

No, no.

Rick McTaggart -- Chief Executive Officer

No, no. That's included, Gerry. It's just -- we follow a parallel path by listing land for sale. So if we can get that sold earlier then that comes out of the claim.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Got it, perfect. Ok, great. That's it for me. That's very helpful.

[Indiscernible] Thank you.

Operator

[Operator Instructions] The next question is from John Bair with Ascend Wealth Advisors. Please, go ahead.

John Bair -- Ascend Wealth Advisors -- Analyst

Thank you. Good morning. Thanks for taking the call here. Could you shed some more information on the geographical footprint of PERC? And are there markets -- is it expanding any, in other words, the geographical reach of them and see more opportunities outside of their current primary markets?

Rick McTaggart -- Chief Executive Officer

Yes. So, their primary contracts are in California. They have other contracts in Arizona. We're working on projects with them in Oregon, additional projects in California.

We're trying to get them into the Florida market. We're working with them here out of the Coral Springs office and out of our Aerex facility in Fort Pierce to pursue some opportunities that we see here in Florida that would fit well with them. So that's what we're looking at at the moment. I mean, we see some additional opportunities in Arizona.

We're working on some projects there. I think that pretty much covers it. California is the primary market.

John Bair -- Ascend Wealth Advisors -- Analyst

Right.

David Sasnett -- Chief Financial Officer

John, there -- it's a pretty active market in both California and Arizona. We're also looking at the project too in Utah. So, we're very encouraged by the prospects. There's a lot going on in that area of our business.

John Bair -- Ascend Wealth Advisors -- Analyst

With the municipalities being impacted by COVID and so forth, are you seeing any -- you're saying it's active, but are you seeing any hesitation or push out on proposed projects or whatnot. And you have any sense as to I mean, everybody's talking about an infrastructure bill it's going to be coming out and so on and so forth, and imagine that there could be some benefits there for you.

Rick McTaggart -- Chief Executive Officer

Yes. So because PERC does operations, contracts, and design-build. And as David mentioned earlier, I mean at the moment, most of the revenues are from the operating contracts. So the troubles with the municipalities are actually in my view, help PERC to get some of these extensions on the operating contracts and to -- we have opportunities to get new operating contracts with municipalities that may be cash strapped and are trying to optimize limited resources.

The design-build stuff for sure has slowed down a little bit, and that's reflected in the fact that we don't have any major design-build projects going right now this year. So, we're trying to make up for certain lacks -- lacking in the markets, and with other areas such as the operations contracts, which we see as a positive growth area right now.

John Bair -- Ascend Wealth Advisors -- Analyst

Ok. And with those tight budgets, are they trying to chip away on the terms of -- contract renewals and so forth to where you're being pressured at all in that regard?

Rick McTaggart -- Chief Executive Officer

Well, there is always some pressure. I mean, municipalities they'll talk about going to rebid and that sort of thing. So we've had to negotiate on some of them, but nothing, I would say significant. I mean, I think we're already pretty cost-effective to these places versus operating the facilities themselves.

So, I haven't seen a real tightening in the margin on these renewals this year. Nothing material.

John Bair -- Ascend Wealth Advisors -- Analyst

Ok. And the last question. Any -- it sounds like you're pretty much focusing on the Southwest part of the U.S. What about any potential internationally, pretty much focusing on U.S.

business at this point?

Rick McTaggart -- Chief Executive Officer

Nothing international at the moment. We look at the Caribbean, but the pandemic has really made it challenging to even move around to some of these places. So, we're just focusing on the U.S. right now, primarily.

John Bair -- Ascend Wealth Advisors -- Analyst

Good. Very good. Good luck with trying to get Rosarito behind us.

Rick McTaggart -- Chief Executive Officer

Thank you very much, John.

John Bair -- Ascend Wealth Advisors -- Analyst

Have a good holiday. Take care.

Rick McTaggart -- Chief Executive Officer

You too.

Operator

[Operator Instructions]. The next question is a follow-up from Gerry Sweeney with ROTH Capital. Please, go ahead.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Hey, just wanted to follow-up, since -- we'll put a space there. Are you looking at any acquisitions still? Any comments on that front?

Rick McTaggart -- Chief Executive Officer

We're always looking at acquisitions, Gerry. We got a couple of things that we're looking at now. And we'll keep everybody posted if that develops, but some pretty exciting stuff in my view.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Ok. I didn't mean to think that you weren't looking, so I apologize. But, are they more U.S. based, just out of curiosity, if you can give a little bit of.

Rick McTaggart -- Chief Executive Officer

Yes.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Got it. I won't put it around too much, but I appreciate it. Thanks, Rick.

Operator

At this time, this concludes our Q&A session. I'd like to now turn the call back over to Mr. McTaggart. Sir, please go ahead.

Rick McTaggart -- Chief Executive Officer

Just like to, again thank everybody for joining us this morning for being shareholders. And I look forward to speaking with you again toward the end of March next year when we release our 2020 full-year results. Have a nice holiday, and stay safe.

Operator

Thank you, ladies and gentlemen. Now, 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 future performance and involves certain risks, uncertainties, and assumptions that 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 one, continued acceptance of the company's products and services in the marketplace; two, changes in its relationships with the governments of the jurisdictions in which it operates; three, the outcome of its negotiations with the Cayman government regarding a new retail license agreement; four, 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; five, the collection of its delinquent accounts receivable in the Bahamas; six, its ability to integrate and profitably operate its recently acquired subsidiary PERC Water Corporation; seven, the possible adverse impact of the COVID-19 virus on the company's business; and eight, 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's Discussion and Analysis of Financial Conditions and 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 on Form 10-Q. Any forward-looking statements made during the conference call 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 and its expectations with regard thereto, or any changes in its events, conditions or circumstances, of which any forward-looking statement is based, except as where it may be required by law. Before we could 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 November 24.

Please refer to today'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: 32 minutes

Call participants:

Rick McTaggart -- Chief Executive Officer

David Sasnett -- Chief Financial Officer

Gerry Sweeney -- ROTH Capital Partners -- Analyst

John Bair -- Ascend Wealth Advisors -- Analyst

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