Consolidated Water (CWCO) Q4 2021 Earnings Call Transcript

Consolidated Water (CWCO 0.56%)
Q4 2021 Earnings Call
Mar 30, 2022, 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 full year 2021 results. Hosting the call 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.

[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 on 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, Anthony. Good morning, everyone. Thanks for joining us on today's call. As you saw from our earnings release yesterday, 2021 was a challenging year for the company due to the impact of the pandemic on certain areas of our business.

While our retail and manufacturing segments perform below historical levels, we made progress in growing our business in other areas. On the call today, I'd like to talk about what produced these results and the foundations we continue to lay to support our future growth and expansion. Last year, our big -- our bulk segment was our biggest revenue contributor and biggest incremental revenue contributor increasing by $2.5 million compared to 2020. And our services segment was our second biggest incremental revenue contributor up by $947,000.

While our manufacturing revenue declined during the year due to adverse economic conditions and retail revenue declined due to the cessation of tourism in Grand Cayman during the pandemic. The challenges and opportunities presented to us during this period further validated the importance of diversifying our manufacturing segment revenue by expanding our geographic presence and customer base. In 2021, we successfully integrated our sales team across four business segments, led by our recently promoted executive vice president of business development, Mr. Brent Brodie.

We expect our manufacturing segment to strengthen this year supported by our integrated sales team, which is leveraging the relationships and excellent reputation that PERC has developed over many years with potential customers and engineering advisors in the Southwest United States. This integrated sales approach is providing opportunities for Aerex to pursue projects in this water-short area of the country, in addition to its primary sales market in Florida. And on the desalination side of the business, our manufacturing segment is fully integrated into three projects that we are pursuing in Hawaii, California, and Grand Cayman. We believe that having Aerex's design and manufacturing capabilities in-house makes us more competitive on these three important projects.

Each of which includes the design, construction, and long-term operation of seawater desalination plants for municipal customers. Our retail segment with operations in Grand Cayman continued to be adversely impacted by the pandemic during 2021. We operate four seawater desalination plants that produce piped drinking water for retail utility business and another three seawater desalination plants for our bulk water customer in Grand Cayman. In total, we produce all of the piped drinking water on Grand Cayman, which is home to about 95% of the country's population.

We are extremely encouraged by the recent easing of COVID-19 restrictions. And the return of tourism to the Cayman Islands as the country's Phase five reopening plan continues. In fact, we've already seen a 7% increase in water sales in our retail service area during the first two months of 2022 as compared to the same period last year. And with just about a day left in March, we've already produced almost 15% more water than in March 2021.

Just last week, the Cayman Islands welcomed back its first cruise ship in two years, The Disney Magic. It is the first of a series of ships scheduled to visit Grand Cayman over the next month. Naturally, we expect the resurgence of tourism to help our retail water sales return to normal levels over the coming months as hotels and businesses begin to serve the thousands of tourists and vacationers coming back to the islands. Now, before I talk a little more about the year and the outlook for 2022, I'd like to turn the call over to David, who will take us through the financial results for the year.

David Sasnett -- Chief Financial Officer

Thanks, Rick, and good morning, everyone. Thanks for joining us today. As Rick mentioned, we are encouraged by the easing of travel restrictions, but we continue to face significant challenges as a result of the current economic environment. Despite these challenges, we've maintained our strong financial foundation as we pursue new opportunities and we have continued to pay dividends.

Yesterday we issued our earnings release for 2021, which is available in the investor section of our website. We reported that revenue totaled $66.9 million for our 2021 fiscal year, which is a decrease of 7.9% in 2020. This decline reflects decreases of $847,000 in retail segment revenue and $8.4 million in manufacturing segment revenue. This decline was partially offset by an increase of $2.5 million in our bulk segment revenue and $947,000 in our service segment revenue.

The reduction in our retail revenue represents a 4% decrease in the volume of water sold by Cayman water. This is due to the closing of Grand Cayman Islands to all tourism back in March 2020 in response to the COVID-19 pandemic. The decrease in manufacturing segment revenue was due to the loss of orders from Aerex's former largest customers, and we discussed this in previous calls and in our public filings. Aerex has made efforts to replace this revenue generated from this customer with new revenue from existing and new customers.

However, this effort has been adversely affected by continuing negative economic conditions. For example, we are experiencing increasing raw material costs, raw material shortages, and extended delivery times for our raw materials. We believe the same factors have also adversely affected the overall financial condition of Aerex's current and prospective customers. Rick will go into detail about Aerex key strategic initiatives later on in this call.

The increase in our service segment revenue was due to an increase of approximately 3.2 million from operating and maintenance contracts attributable to new customers, which helped to offset a plant -- excuse me, which helped offset the plant construction revenue which declined during the year. The increase in our bulk segment revenue is attributable to an increase in energy costs for CW-Bahamas, which increased the energy pass-through component of CW-Bahamas rates. The increase was also due to a lesser extent by a 5% increase in the volume of water sold by CW-Bahamas. Our gross profit for 2021 was $23.5 million or 35.2% of revenue as compared to $26.8 million or 36.9% of revenue in 2020.

Our net income from continuing operations attributable to Consolidated Water stockholders for the full year of 2021 was $3.4 million or $0.43 per basic and diluted share, that's compared to a net income of $8.6 million or $0.56 per basic and diluted share for 2020. Total net income attributable to consolidated stockholders for the full year 2021, which includes the results of discontinued operations was $876,000, or $0.06 per basic and fully diluted share. This was down from a net income of $3.7 million or $0.24 per basic and fully diluted share for the previous year. I'd like to speak briefly about our balance sheet now.

Our accounts receivable balances related to our CW-Bahamas business, a total of $21.5 million at the end of 2021, which was up from the $16.8 million at the end of the previous year. These receivables are due from the Water and Sewerage Corporation of the Bahamas. Last month, we received correspondence from the Ministry of Finance of the Government of the Bahamas that set forth a payment schedule providing for the gradual reduction over the course of 2022 of CW-Bahamas delinquent accounts receivables due from the Water and Sewage Corporation. Such correspondence also indicated that the government intends to return all of CW-Bahamas accounts receivables from the Water and Sewage Corporation's current status.

We appreciate the Government's renewed focus on paying CW-Bahamas receivables, given the economic impact the pandemic has had on the Bahamas. It's important to remember that the Bahamas government has always eventually paid 100% of CW-Bahama's receivables and that we have never been required to record an allowance for doubtful accounts for our CW-Bahamas receivables. As of December 31, 2021, our cash and cash equivalents totaled a healthy $40.4 million. Our working capital exceeded $69 million.

Our debt was only $200,000. And the stockholders' equity attributable to the CWC-Bahamas -- excuse me, shareholders totaled $157.6 million. So this completes my financial summary, I'd like to turn the call back over to Rick now.

Rick McTaggart -- Chief Executive Officer

Thank you, David. One of our key strategic initiatives has been to build out a more diversified book of business for Aerex. For those unfamiliar, Aerex is a custom and specialty manufacturer of water treatment-related systems and projects. It also provides design, engineering, management, operating, and other services applicable to commercial, municipal, and industrial water production.

As I mentioned earlier in the call, we fully integrated our sales team across our business segments in 2021. This is particularly benefited Aerex by further diversifying its client base and geographical market. As we reported last year, our Aerex sales team has been focused on developing and redeveloping relationships with large engineering consultants and general contractors who provide design and construction services to the municipal water market. In 2021, about 77% of our manufacturing revenues came from various municipal water projects.

The municipal water market is cyclical, and while bidding activity for municipal equipment supply has slowed in recent months after a strong post-COVID burst of activity, Aerex is maintaining a much stronger contracted orders backlog than this time last year. Unfortunately, like many companies over the last several months, Aerex has been adversely affected by supply chain challenges, including material shortages, price increases, and logistical delays that have impacted its manufacturing processes. Certain municipal orders that we had expected to be completed in the last half of 2021 were pushed into this year. And we are now seeing about 2.6 million orders pushed into next year, 2023.

In response to these challenges, Aerex engineers are working with suppliers and customers to find solutions to avoid these delays by implementing design changes and/or substituting equipment and materials. While all the time ensuring that our products meet or exceed customer requirements. We've also been working on other areas to expand our product offerings and presence in the US and in October 2019, we acquired a controlling interest in PERC Water Corporation, award-winning water treatment and reuse infrastructure provider and manager. It currently operates primarily in the Western United States.

PERC expands our service offerings as well as provides us with a new platform in the Western United States for expanding our core business of designing, constructing, and operating water desalination plants. And as I mentioned earlier, we're currently pursuing three projects, two of which are in the Western United States. PERC has seen increased bidding activity in primary markets for new plants and asset management contracts and they are currently pursuing more than a dozen potential design-build and asset management projects. PERC has developed an excellent reputation with municipalities and developers in the Southwest as a company that delivers design-build water treatment projects on time and at the most competitive cost.

PERC's unique custom design report, or CDR offering, provides potential clients with a 20% design plus a not-to-exceed construction cost estimate, which the client can use for planning in comparison with other project delivery models. Perc provides clients with a single point of responsibility for the design, construction, and commissioning of municipal water treatment projects. By comparison, other project delivery models typically used in municipal projects such as design, bid, build consist of multiple points of responsibility for design, construction, commissioning, etc., which ultimately increases the cost of the project to the client. PERC's innovative wastewater treatment plant design features, minimal land use, neighbor-friendly facilities, maximum noise and odor control, and maximum cost efficiency.

Once a plant is commissioned, PERC is also able to operate the plant using its highly skilled workforce of licensed operators. PERC currently operates two of the most advanced water reuse plants in California for the Water Replenishment District in Los Angeles. The combination of PERC and Consolidated's unique experience operating complex, membrane-based water treatment plants permits us to pre-qualify to bid for similar new projects and operating contracts. Our plan to expand service revenues in the wastewater reuse market is supported by our strong balance sheet and growing pipeline of potential projects.

Now looking at our international operations outside of the United States. As I mentioned earlier, the easing of the COVID-19 restrictions and the return of tourism to the Cayman Islands has been very encouraging to see after many months of lockdowns and travel bans. On February 18th, the Cayman Islands government dropped all on island COVID testing for vaccinated travelers, and they no longer require post-arrival COVID-19 tests for fully vaccinated travelers. A quarantine period for partially vaccinated and unvaccinated individuals was also reduced from ten days to seven days.

The Government significantly increased the occupancy limits on gatherings, which facilitates the return of conferences and conventions to the islands. In fact, I know one of my friends is actually attending a conference in May there. So, in addition to the return of cruise ships to the island, major airlines, including American, Delta, Southwest, and United have resumed their flight routes to Cayman earlier this month. As a result of these positive indicators, we see our retail water sales returning to normal levels over the coming months as hotels, restaurants and other tourism-related businesses return to service the island's visitors once again.

In fact, as I mentioned earlier in the call, we have seen our retail water sales increase by 7% in January and February compared to last year. And production is actually up by 15% so far in March. We are also seeing the potential for expansion of our business on the island. And in January, we submitted a multimillion-dollar bid to design, build, and operate a new 2.6 million gallons per day desalination plant in Grand Cayman for the government-owned water utility.

We anticipate hearing the results of that bidding process by the middle of next month. Our Bahamas operations through our Bahamas government customer supply all of the piped water on the island of New Providence, Bahamas. And New Providence is the most populous island in the Bahamas, with about 275,000 residents, or 70% of the country's population. And this includes Nassau and Cable Beach, which Nassau is the political capital and commercial hub of the Bahamas.

We are seeing a rapid return of tourists to the Bahamas. And although higher tourism numbers don't necessarily translate to higher water sales for us, it does bode well for the overall financial health of the Bahamas, since a significant part of the Bahamian economy and tax base is directly dependent on tourism. As David mentioned, our receivable balance in the Bahamas is still high. But we recently received assurances from the highest levels of government that the balances will be brought current by early 2023.

So in closing, we believe that our management team and board have charted the best course for the company to recover in 2022 from the impacts of the pandemic and to grow our business by focusing on water-short regions of the Western United States. We believe that our extensive experience, excellent track record, and novel approach to designing, building, and operating both seawater desalination facilities and wastewater treatment and recycling plants, as well as our strong cash position, and relatively low overhead burden, continue to give us a competitive advantage over other companies, some of which are much larger than us. Looking ahead to 2022, we remain very optimistic about our growth prospects. Our optimism is buoyed by the ongoing return of tourism to Grand Cayman and our increased project bidding activity in the US and internationally.

We see these as strong catalysts for growth in 2022 and beyond. So with that, I'd like to open up the call, Anthony, for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Steve -- pardon me, our first question will come from John Bair with Ascend Wealth Advisors. You may now go ahead.

John Bair -- Ascend Wealth Advisors -- Analyst

Good morning.

Rick McTaggart -- Chief Executive Officer

Hey, John.

David Sasnett -- Chief Financial Officer

Good morning, John.

John Bair -- Ascend Wealth Advisors -- Analyst

[Inaudible] Was on speaker. A couple of quick questions. Since Aerex has, you said if I caught this right, about 77% of their business is coming from the muni market. And I'm assuming that most of that is our funds that had already been targeted for that work, is that right from the municipals?

Rick McTaggart -- Chief Executive Officer

Yeah. I mean, there are municipal water projects for Port Saint Lucie and Palm City, various municipal water plants. I don't know where they're getting the funding for these. I mean, we're working through contractors and engineering groups on these projects as equipment supply.

John Bair -- Ascend Wealth Advisors -- Analyst

OK. Where I was going with this is whether or not you're starting to see or have any indication that money is starting to come in from the infrastructure bill that might help either open up new projects or fund ones that have been kind of on the table and kind of just pending that kind of stuff. Or are you seeing or able to tell if you're seeing any impact from that positive impact?

Rick McTaggart -- Chief Executive Officer

Honestly, I'm not aware of any specific projects that are tied to that infrastructure bill. A lot of this work was -- I mean, being planned and designed. I mean, even before that bill was passed. So these are things that, they're multi-year contracts that we are involved in.

So I really can't say with any certainty whether that's helped.

David Sasnett -- Chief Financial Officer

John, we've had general discussions with people relative to our PERC business that seem to lead us to believe that the infrastructure bill will impact the amount of construction that's done certainly in California, in Arizona, and it could be already having an indirect impact. We haven't had anybody come to us and say that this project was the direct result of funding received from the infrastructure bill. I don't know if it had enough time to make that kind of impact yet.

John Bair -- Ascend Wealth Advisors -- Analyst

Yeah. Yeah. And a lot of talk about, getting replacing lead pipes, and all that kind of stuff. And I don't know if that falls into your, into your repertoire or not or Aerex's, for example.

Rick McTaggart -- Chief Executive Officer

No. That wouldn't impact us, John.

John Bair -- Ascend Wealth Advisors -- Analyst

OK. And then the other, another question is your statement about Aerex having become fully integrated with the project. So to my understanding is right that your sales force is now working kind of hand-in-hand with the PERC folks so that PERC wins a contract or whatever that they will be utilizing Aerex's products within the design and construction, is that?

Rick McTaggart -- Chief Executive Officer

That's exactly it. Yeah. And they're also marketing Aerex's products to potential customers that don't necessarily involve PERC. So we were able to bid on a project in Arizona that we became aware of through our PERC sales team.

So we had individual sales guys for Aerex, for PERC, and for our legacy businesses, and that's all sort of been united under Brent is running that now. So they have the -- well, I mean, I think it's been very effective, so.

John Bair -- Ascend Wealth Advisors -- Analyst

Yeah.

David Sasnett -- Chief Financial Officer

Were it makes sense we employ Aerex to make equipment for any plants that we will be building. But the exciting part of this is that we now have an Aerex sales team through PERC on the western coast of the United States and in Arizona. And Aerex never had the opportunity previously to reach out to those areas of the country. And we think Aerex will be very competitive bidding on projects there, as Rick said earlier, doesn't really directly involve PERC.

But PERC has relationships with the customer and the contacts to lead the opportunities to Aerex give them a chance for them, so.

John Bair -- Ascend Wealth Advisors -- Analyst

Yeah. That sounds very encouraging and you've mentioned about the raw material demand and so forth, pressures there. Are you seeing anything in the way of personnel issues, turnover, that kind of thing that's affecting you at all?

Rick McTaggart -- Chief Executive Officer

No. I mean, we're aware of the demand for operators. For example, in our PERC business though, the management team has been very attentive to that to make sure that we don't have that sort of turnover. I think we offer very competitive employment terms and, we want to make sure we stay that way.

On the customer side, I mean, they seem to be there's a willingness to absorb these extra costs. I mean, certainly on projects that we're looking at something that might have been 20% cheaper two years ago. The customers are still moving on those projects. Most of them are.

David Sasnett -- Chief Financial Officer

But let me point out, John, that our customers are having issues relative to a number of things. So that's why those orders were pushed, that Rick mentioned, it was pushed from 2022 to '23. Eventually, that'll settle out and we won't have those issues going forward. But for the short term, that's why had we had a small deferral of revenue from this year to next year.

John Bair -- Ascend Wealth Advisors -- Analyst

Yeah. Very good. Thanks for taking my questions. I'll let somebody else go forward.

Thanks.

Rick McTaggart -- Chief Executive Officer

Thanks, John.

Operator

[Operator instructions] Our next question will come from Ada Casso with PSP Capital Management. You may now go ahead.

Unknown speaker

Hi. I just wanted to follow up on the Aerex topic since they are located in Florida and you're trying to be, a manufacturer for California and Arizona, would you be looking to open a manufacturing facility in the Southwest?

Rick McTaggart -- Chief Executive Officer

No, we don't have any plans for that, Ada. I think the facility we have in Florida is completely capable of servicing those regions, just as some of our competitors are actually located in California and they regularly participate in the Florida market here. So we're trying to make it a little bit more uncomfortable for them in their home market.

Unknown speaker

OK. Another question that I had was what in your press release, I believe you talked a little bit about your potential acquisitions, that your balance sheet is strong to accommodate that. And what would you be looking for in a potential acquisition?

Rick McTaggart -- Chief Executive Officer

We are looking for main companies now that would give us an expanded geographical presence for our PERC business. So they would be located in the United States, maybe operating companies that service wastewater clients that would be additive to PERC. We're not looking to expand our manufacturing business from that standpoint, which is also in the United States, but we are certainly looking at potential opportunities to expand PERC's footprint.

David Sasnett -- Chief Financial Officer

And we're also looking at companies involved in membrane technology who we're very familiar with that. So it would perhaps give us access to do markets. There are a number of technologies we've looked at over the years. We continue to look at companies that may give us a competitive edge from a technology standpoint.

We've looked at a couple of those recently, and we're always interested in enhancing the scope of products that we can offer to our existing customers and even getting into perhaps a new market that's potentially highly profitable because it's a niche market that involves the use of membrane technology, so.

Unknown speaker

Thank you.

Rick McTaggart -- Chief Executive Officer

You're welcome.

Operator

[Operator instructions] Our next question will come from Steve Percoco with Lark Research. You may now go ahead.

Steve Percoco -- Lark Research -- Analyst

OK. Thank you. I have a question. If you answered it, I apologize, but can you give us a better perspective on the new plant that is you're bidding on in Cayman? Is that going to be additive to the market? Is it going to replace capacity in the market? I presume that the water authority is going to operate the plant.

But, maybe I'm wrong about that. And, if I'm wrong, would you have an opportunity to bid on the operations of that? And then also, where is the plant located? I mean, does it affect your existing owned plants?

Rick McTaggart -- Chief Executive Officer

So Steve, the project that we bid on was for -- it was a design, build, and operate agreement for the water authority. So it's a 10-year operating tail, which is included in the contract. There's no financing component. So, if we were successful, we would get paid for the plant when it's completed.

The plant is located in Georgetown, which is the government utilities service area. So it would not impact our service area, our retail business. And I'm not sure what their plans are on whether this is additive or whether it would -- there is an older plant in the area that there's been some talk of them retiring that but we're not sure what they're doing.

Steve Percoco -- Lark Research -- Analyst

I mean, given that, with the opening back up, there's still some uncertainty about how strong tourism is going to come back, I would imagine, right? I mean, and so I would think that they would gauge this plant too, or at least wait to see how, how to think strong the tourism comes back. Is that reasonably right? Or, is it, are they just planning to go ahead with it no matter what, at this point?

Rick McTaggart -- Chief Executive Officer

So the government utilities service area did not experience the declines in demand that we did in our retail area. The government services the population, local population centers, we service the tourism business on Seven Mile Beach, where all the big hotels are located within our service area. So I presume they need the capacity just based on their normal growth projections, which have not been skewed by the pandemic. Compared -- comparative to our demand.

Steve Percoco -- Lark Research -- Analyst

OK.

Rick McTaggart -- Chief Executive Officer

That makes sense.

Steve Percoco -- Lark Research -- Analyst

All right. Well, great. That's all I had. Good luck with your bid.

Rick McTaggart -- Chief Executive Officer

OK. Thank you very much, Steve.

Operator

[Operator instructions] It appears there are no further questions. This concludes our question-and-answer session. I'd like to turn the call back over to Mr. McTaggart.

Sir, please go ahead.

Rick McTaggart -- Chief Executive Officer

Yeah. Thanks, Anthony. I appreciate everybody joining the call today. And I look forward to speaking with you hopefully again in May when we release our first quarter 2022 results.

Thank you.

Operator

Thank you, ladies and gentlemen. Before we conclude today's call, I would like to provide a copy of the 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.

Things that are not historical facts are based on the company's current expectations, beliefs, assumptions, estimates, forecasts, and projections for businesses and industry 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. 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 government of the jurisdiction in which it operates, the outcome of its negotiations with Cayman government regarding a new retail license agreement, the collection of its delinquent accounts receivable in the Bahamas, the possible adverse impact of COVID-19 virus on the company's business, and various other risks are detailed in the company's periodic report filings with the Securities and Exchange Commissions.

For more information about risks and uncertainties associated with the company's business, please refer to the management's discussion and analysis of financial condition and results of operations in Risk Factors of the company's SEC filings, including but not limited to its annual report on 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 obligation or undertaking to update or revise any forward-looking statements made during the conference call to reflect any changes in its expectations with regard to or any changes in events, conditions or circumstances in 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 the cwco.com. Thank you for your participation. This concludes the conference call. You may now disconnect.

Duration: 38 minutes

Call participants:

Rick McTaggart -- Chief Executive Officer

David Sasnett -- Chief Financial Officer

John Bair -- Ascend Wealth Advisors -- Analyst

Unknown speaker

Steve Percoco -- Lark Research -- Analyst

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