Consolidated Water (CWCO) Q2 2021 Earnings Call Transcript

Consolidated Water (CWCO 1.57%)
Q2 2021 Earnings Call
Aug 17, 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 second-quarter 2021 results. Hosting the call today is the chief executive officer of Consolidated Water Company, Mr. Rick McTaggart; and the company's chief financial officer, Mr.

David Sasnett. Following their remarks, we will 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, Rashnari. Good morning, everyone. Thanks for joining us on the call today. I hope everyone is well.

Our second-quarter 2021 results reflect the continuing adverse impacts of the pandemic on certain segments of our business as well as an adjustment to the carrying value of our manufacturing segment necessitated by new order projections for Aerex's historically largest manufacturing customer, improved performance of our bulk water segment, as well as growth of our services segment that partially offset these impacts. Our services segment revenue increased 8% to 3.8 million, which accounted for 23% of our consolidated revenues. This was up from 18% in the second quarter of last year. Our PERC Water subsidiary was responsible for this growth in our services segment.

Based in Southern California, PERC operates and maintains water treatment and reuse facilities under contracted engagements which have renewable terms that range from one to five years, with the majority having renewal dates beyond this year. During the second quarter, PERC generated about 90% of its revenue from such contracts with various entities in California and Arizona. Revenue from our bulk water segment increased 14% to 6.7 million in the second quarter due to higher volume sales and electricity pass-through charges. Bulk water gross profit increased 21% to 2.3 million compared to the second quarter of last year.

However, our retail water segment continued to be adversely affected by the pandemic due to a moratorium on tourism and border restrictions at the Cayman Islands government enacted in March of last year to safeguard their population from COVID-19. According to the most recent statistics, only 651 reported infections and two coronavirus-related deaths have occurred in the Cayman Islands since the pandemic began. The Cayman Islands government strategy to protect its citizens from the pandemic has been similar to that of other commonwealth countries like Canada, New Zealand, and Australia, which have enacted strict lockdowns, extended quarantines, and criminal penalties for breaches of pandemic protocol and regulations. Recently, however, government officials announced a five-phase border reopening plan through November of this year, which is available on the official Cayman Islands government website.

The final phases of the plan, which include the reopening of the islands to a limited number of vaccinated tourists, are contingent on achieving at least an 80% vaccination rate of the local population. The vaccination rate is currently at 68% and has not moved much in the past several weeks. Consequently, we would not expect to see any change in the performance of our retail water segment due to the resumption of tourism in Grand Cayman until the first half of next year at least. Our manufacturing segment revenue declined due to the loss of orders from Aerex's largest customer, as we have also discussed last quarter.

However, while this customer informed us in July 2021 that they expect to recommence their orders in 2022 and subsequent years, we expect that these new orders will be at much lower volumes than in the past and less than what we anticipated previously. It was this change in projected future revenue, along with the continuing weakness in the economy arising from COVID-19, that required us to record an impairment loss in the second quarter for our manufacturing segment. Meanwhile, we continue to focus on other sectors, and we are building a good manufacturing revenue backlog from new projects and new customers, which we expect to offset some of the revenue loss from our largest customer. We expect to book revenue from these new projects in the latter half of this year and extending into 2022 as we begin production on these orders.

At the end of the quarter, our cash levels totaled 41.2 million, and working capital was 69 million, with only about 200,000 in debt. So we believe our strong balance sheet and liquidity position us to ride out the current adverse economic impacts of the pandemic while enabling us to fund our growth initiatives. Bidding activity for new projects in our services and manufacturing segments has increased significantly over the last few months, and so we're looking forward to future months and years with great anticipation. But before I talk further about this, I would like to turn the call over to our CFO, David Sasnett, who will take us through the financial details for the quarter.

Dave?

David Sasnett -- Chief Financial Officer

Thanks, Rick, and good morning, everyone. As Rick mentioned, the pandemic has continued to create some significant challenges for us as it has for many companies. But despite these challenges, we have maintained a strong financial foundation as we pursue new opportunities to grow organically and acquisitively, and we have continued to pay dividends. Revenue totaled 16.7 million in the second quarter, which decreased 13% from the same quarter of the prior year.

This decline included decreases of 292,000 in our retail segment revenue and 3.2 million in manufacturing segment revenue. The decreases in these two segments were partially offset by revenue increases of 846,000 in our bulk segment and 287,000 in our services segment. Retail revenue declined due to a 2% decrease in the volume of water sold by Cayman Water. The sales volumes for both 2021 and 2020 have been significantly below the historical volumes for the retail segment prior to 2020 due to the continued moratorium on tourism in Grand Cayman.

The increase in bulk segment revenue was due to an increase in CW-Bahamas revenue of 844,000 due to higher energy costs, which correspondingly increased the energy pass-through component of CW-Bahamas rates. The increase in bulk segment revenue is also due to a 9% increase in the volume of water sold by CW-Bahamas. The decrease in manufacturing revenue in the second quarter of 2021 was due to the decrease in orders from Aerex's former largest customer, as discussed previously by Rick. Which -- this customer informed Aerex in 2020 that it was suspending its purchases of the specialized product until 2022.

In late July 2021, this customer again communicated to Aerex that it expected to recommence its purchases of the specialized product for Aerex in 2022 and subsequent years, but it also said such purchases would be at substantially reduced annual amounts in terms of both the amount they purchased from Aerex in 2020 in prior years and from the amounts we previously believed they would purchase from us. We continue to expect, although cannot guarantee, that the orders from this customer will resume as they have indicated. However, as Rick will cover later, they are also discussing with us other products that Aerex could potentially manufacture for them. Gross profit for the second quarter of 2021 was 6.1 million or 36% of revenues, as compared to 7.3 million or 38% of revenues in the second quarter of last year.

This decline was largely due to lower revenue generated by our retail water operations and manufacturing segments. Even though total revenue decreased, our bulk segment gross profit increased 21% to 2.3 million. For the second quarter of 2021, the net loss attributable to Consolidated Water shareholders, which includes the results of discontinued operations, was 1.7 million or a loss of $0.11 per basic and fully diluted share. But if you exclude the manufacturing segment impairment loss of 2.9 million, net income attributable to Consolidated Water was 1.2 million or $0.08 per basic and fully share -- fully diluted share.

Turning to our balance sheet. Our accounts receivable balances related to our Bahamas business amounted to 21.3 million at the end of the second quarter, which was up from 16.8 million at the end of last year. We believe the increase in accounts receivable, this increase resulted from the adverse impact of the pandemic on the revenue sources for the Bahamas and its government. Such delinquent accounts receivables we have experienced in the past were eventually paid in full.

Also, given our recent contact with the government of the Bahamas Ministry of Finance, we believe that reducing this balance is a priority for them. So based upon their payment history, our majority-owned subsidiary, CW-Bahamas, has never been required to provide an allowance for doubtful accounts for any of its accounts receivables despite the periodic accumulation of significant delinquent balances. And as of June 30th, 2021, we had not provided an allowance for doubtful accounts for CW-Bahamas' accounts receivables. It is important to note that so far in 2021, we have received 14.4 million on our Bahamian accounts receivable, including two payments in the last two weeks, totaling 5.7 million.

We believe that our recent payment history is a clear indication that the Bahamas government is moving toward reducing the balance of these delinquent accounts receivables. As of June 30th, 2021, our cash and cash equivalents totaled 41.2 million and our working capital totaled 69 million. We believe this position affords us more than sufficient financial resources to maintain our normal operations while still pursuing our strategic initiatives. And this completes my financial report.

I'd like to turn the call back over to Rick.

Rick McTaggart -- Chief Executive Officer

Thanks, David. In our manufacturing segment, one of our key strategic initiatives has been to build a diversified book of business for Aerex. It is not concentrated on one specialized product or a large customer. With this in mind, we have continued to develop our sales channels in order to create a more diversified customer base and product line.

Since we acquired Aerex, its revenue has been predominantly from the sales of a specialized water treatment product to one customer. In the first quarter of 2020 last year, we increased resources in our sales team and began to focus on other sectors and customers to diversify our revenue base. As a result, in the first half of this year, we generated manufacturing revenue of 2.2 million from new customers and/or products, which was equal to all of the revenue generated last year from customers and -- other than Aerex's major customer. We presently have contracted project backlog of approximately 9 million from new customers and/or products, which have begun to impact revenues in the second half of this year and will carry into 2022.

In addition, we have recently bid for 4.8 million of additional work, which we hope to receive news on in the near future. Our manufacturing sales team is doing a great job of diversifying Aerex's revenue stream, but it will still take more time to hopefully replace the significantly reduced revenue stream from Aerex's historically largest customer. It is important to note that Aerex maintains an excellent relationship with its largest customer, and has recently sent us requests -- they have recently sent us requests for proposals and quotes for other products. Earlier this year, Aerex passed a highly technical and demanding quality assurance examination performed by another major customer for the purpose of qualifying Aerex for various highly technical manufacturing projects.

And thus, we now have that customer's clearance to perform this work. As a result, we expect to continue to receive orders for products other than the specialized product we've historically made for this customer over the last few years. Given our success in diversifying our product and client base, increased product bidding activity, and the magnitude of our current contracted project backlog, we expect a significant increase in manufacturing revenue in the second half of this year as compared to the first. We are able to sustain and build on these successes over the next couple of years.

We would further expect our manufacturing revenue to be back to historical levels with less customer and product risk concentration. We are also seeing an increase in bidding activity for new design/build projects and operating contracts in our services segment through PERC Water. In fact, PERC is now at its busiest level since we acquired the majority ownership interest in this subsidiary in late 2019. Prospective customers in California and Arizona are seeking cost-effective solutions to their wastewater treatment and potable water challenges, particularly those being caused by the unprecedented drought in the region.

PERC is currently awaiting decisions by clients on design/build projects and operating contracts, which were recently bid, which are valued at more than 55 million and could result in recurring revenues of more than 2 million per year over the life of these operating and maintenance agreements. And after a long dry spell, we are currently pursuing two significant seawater desalination projects in the United States. One is a 30-year design/build operate project, and the other is a manufacturing project. Our more than 45 years of experience in designing, building, and operating these seawater desalination plants allowed us to prequalify for both of these very important projects.

And if we are successful in obtaining these contracts, these will be our first seawater desalination plants in the United States. As David mentioned, our strong balance sheet and greater liquidity supports our efforts to expand our business organically and through acquisitions and new projects. This includes further broadening of our water solutions offering and target markets as well as pursuing acquisitions and strategic partnerships in seawater desalination and for our services business. So while we've had many challenges over the past year due to the pandemic, all our opportunities and growth prospects are very encouraging.

We expect improved financial results in the second half of this year as compared to the first six months due to our successful efforts to diversify Aerex's revenue and customer base as well as PERC's strengthening business activity. Given the strong industry tailwinds, potentially enhanced by the major increase in federal infrastructure spending recently passed in the U.S., we will continue to focus on those opportunities and will provide increasing value for our shareholders. And we remain confident that we will emerge from this long pandemic better and stronger than ever. With that, I'd like to open the call for questions.

Rashnari?

Questions & Answers:

Operator

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

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Hey, Rick and David. Thanks for taking my call.

Rick McTaggart -- Chief Executive Officer

Thank you.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

I want start on the services side. Rick, I believe you said, I think that 3.8 million -- let me make sure I had the right number for services. Did you say the majority of that is from contract for sort of O&M type structures today and not from project work?

Rick McTaggart -- Chief Executive Officer

I didn't --

David Sasnett -- Chief Financial Officer

Yeah.

Rick McTaggart -- Chief Executive Officer

Yes. I said that for services, we had about 55 million in outstanding bids. It's a mix of design/build work and operating contracts.

David Sasnett -- Chief Financial Officer

You're talking about the existing revenue, right, Gerry?

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Yes. Yes. Yes. Sorry.

David Sasnett -- Chief Financial Officer

Yeah, about 90% of that is O&M work,

Gerry Sweeney -- ROTH Capital Partners -- Analyst

OK.

David Sasnett -- Chief Financial Officer

Operations and maintenance contracts. PERC's been very successful in growing that part of the business. We're now seeing an increase in bid activity for design/build projects. So we hope to increase that percentage of revenue generated by PERC, but --

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Gotcha. And that 55 million that, Rick, you were just mentioning about, do you know when some of those award timelines are scheduled to be released or updated?

Rick McTaggart -- Chief Executive Officer

Yeah, I wish I did. I mean, a lot of this stuff is moving around because of budgeting things on the client side, it's difficult to project.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Got it. OK. But -- and then -- I mean, in that 55 million, is the potential for upwards of 2 million more of additional O&M work. Is that --

Rick McTaggart -- Chief Executive Officer

And recurring work, yup.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Yeah. Got it. OK. That's great.

On the manufacturing side, I appreciate the -- there's actually a little bit more detail on the backlog. It's helpful. You discussed some of the technical aspects of what Aerex does and being qualified. If we look at the backlog we see building today and the projects we're going after, is there a material difference in margins of this work versus the work that the Aerex used to do for the former customer?

David Sasnett -- Chief Financial Officer

Well, Gerry, the former customer is still going to buy from us and is still going to buy that product from us.

Rick McTaggart -- Chief Executive Officer

Former largest customer.

David Sasnett -- Chief Financial Officer

Former largest customer, yes. But the thing is there are --

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Sorry.

David Sasnett -- Chief Financial Officer

It's always tough to get information from them. There's -- they're guarded on that, but that business was very hard margin work. We think there are a couple of projects out there, both with this former customer and with other customers, that we'll be able to utilize Aerex's unique manufacturing capabilities and generate very healthy margins in excess of, let's say, 30% on those manufacturing contracts. That's really the focus of the business, is to grow in areas where margin grew -- Aerex differentiates itself and can utilize its capabilities to generally higher margin.

But there's a substantial amount of work out there that's more basic that Aerex is also pursuing. And that does not generate the kind of margin that this former business did. So if you're looking at historical margins for 2020 and 2019, it's going to be hard to get back to that quickly. But we still think the business out there that Aerex is pursuing will be healthy margins.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

OK. Got it. So maybe to summarize, targeting higher-end margin work. However, that's a little bit longer to lead time, and you're going to backfill potentially with some lower-margin growth until --

David Sasnett -- Chief Financial Officer

Yes, bread-and-butter kind of stuff that Aerex's been doing [Inaudible] we're bidding on a lot of stuff, and it's more commodity-type products, so the margins are lower. We want to keep the operation fully utilized to the extent we can. Part of the issue in the first quarter or the first six months for Aerex is that its margins are down because we kept all the manufacturing people on staff. We made a commitment to keep them even though the production activity was low for the first six months.

So you'll see margin improvement in the second half for the year as production activity increases.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Got it.

David Sasnett -- Chief Financial Officer

It's not easy to -- yes, it's not easy to build a workforce, and we didn't want to lay off a bunch of people just because there was a delay in the work that we were getting until the second half.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

No. I completely understand. I completely agree. I mean if they're talented, you got to keep them and you got to manage it.

So I wouldn't have any issues with that. And you did say we're looking for a substantial increase second half versus first half. And I don't know if those are substantial, but I want to be -- we're looking for an increase.

Rick McTaggart -- Chief Executive Officer

Significant.

David Sasnett -- Chief Financial Officer

Significant.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Significant. OK. Got it. I want to make sure.

Finally, maybe just -- yes?

Rick McTaggart -- Chief Executive Officer

We'll have a better second half than the first half, Gerry, especially in manufacturing.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

OK. Got it. And then just turning to the deal side. Obviously, it looks like the Bahamas looks reasonably well.

And it looks like the retail side and the Caymans were just looking at -- obviously, there's some bulk there, but retail operations in the Caymans are going to be slow to rebound with this 5-phase opening and that 80% sort of vaccine rate. Back of the envelope, it looks like retail is probably about $1 million of gross profit drag due to this pandemic. Is that sort of a fair assessment?

David Sasnett -- Chief Financial Officer

Well, you can look at the results for the second -- two quarters of last year. And unless there's a huge difference in rainfall patterns, I mean, you have a core group of people that are using the water of the residents. And you can expect the second half of this year to look a lot like the second half of last year. There's no reason for it to look any different, Gerry, other than rainfall patterns.

We're not increasing rates, so you would think they're using about the same volume of water they did last year.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

I got it. I mean, what I was really driving toward was you have manufacturing rebounding, you have opportunities in PERC. Bulk water seems to be doing fine. At some point, we -- I would expect the Caymans to open up and there's $1 million-plus of gross profit dollars that could potentially flow through.

So there are several levers of profitability that can flow through over the next 12 to 18 months.

Rick McTaggart -- Chief Executive Officer

Correct. Yeah.

David Sasnett -- Chief Financial Officer

That was more interested in the Cayman's opening than us, Gerry. Hopefully, that will be something, hopefully, sooner rather than later.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Got it. OK. That's it for me. I appreciate it.

Thank you.

Rick McTaggart -- Chief Executive Officer

Thank you, Gerry.

David Sasnett -- Chief Financial Officer

Thank you, Gerry.

Operator

[Operator instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. McTaggart for any closing remarks.

Rick McTaggart -- Chief Executive Officer

Yes, thank you. I'd just like to thank everybody who joined this morning and stay safe, and we'll talk to you again in November. Bye-bye. Rashnari?

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 revenues, future plans, objectives, expectations and events, assumptions and estimates. Forward-looking statements can be identified by the use of words or phrases usually containing the words, believe, estimate, project, intend, expect, should, will or similar expressions.

Statements that are not historical facts are based on the company's current expectations, beliefs, assumptions, estimates, forecasts, and projections for its business and the industry and markets related to the business. Any forward-looking statements made during the 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 could 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 government of the jurisdictions in which it operates; the outcome of its negotiations with the same endowment 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, SEC.

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 or results of operations in 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 speaks as of today's date. The company expressly disclaims any obligations or undertaking to update or revise any forward-looking statements made during the conference call to reflect any changes in its expectations with regard thereto or any changes in events, conditions, or circumstances of which any forward-looking statement is based, except as where it may be required by law. Before we could end today's conference call, I would now like to remind everyone that this call will be available for replay starting later this evening.

Please refer to yesterday's earnings release or dial-in replay instructions available via the company's website at www.cwco.com.[Operator signoff]

Duration: 31 minutes

Call participants:

Rick McTaggart -- Chief Executive Officer

David Sasnett -- Chief Financial Officer

Gerry Sweeney -- ROTH Capital Partners -- Analyst

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