Global Water Resources, Inc. (GWRS) Q2 2017 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Global Water Resources 2017 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this call is being recorded on August 8, 2017 at 1 PM Eastern time. I would now like to turn the conference over to Jeff Risenmay, Controller. Please go ahead.

Good morning everyone, and thank you for joining us on today's call. Today, we issued our 2017 second quarter financial results by press release, a copy of which is available on our website at www.gwresources.com. Speaking today is Ron Fleming, President and Chief Executive Officer and Mike Liebman, Chief Financial Officer. Mr. Fleming will summarize the key events of the second quarter following which Mr. Liebman will review the financial results for the three and six months ended June 30, 2017. Mr. Fleming and Mr. Liebman will be available for questions at the end of the call. Before we begin, I'd like to remind you that certain information presented today may include forward-looking statements. Such statements reflect the Company's current expectations, estimates, projections and assumptions regarding future events. These forward-looking statements involve a number of assumptions, risks, uncertainty, estimate and other factors that could cause actual results to differ materially from those contained in the forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on any forward-looking statements, which reflect management's view as of to-date hereof and are not guarantees of future performance. For additional information regarding factors that may affect future results, please read the sections Risk Factor and Management's Discussion and Analysis of financial conditions and results of operation included within our last Form 10-K filed with the SEC. Such filings are available at www.sec.gov. Certain non-GAAP measures maybe included within today's call. For a reconciliation of these measures to the comparable GAAP financial measure, please see the tables included in today's earnings release, which is available on the website. Unless otherwise stated, all amounts discussed are in US dollars. I’ll now turn the call over to Mr. Ron Fleming.

Thank you, Jeff. Good morning everyone and thank you for joining us today. We are very pleased to report the results of our second quarter 2017. Highlights include increased total revenue of 7.3% to 8.1 million, increased total active connections to 38,135; year to date this represents a 4% annualized growth rate, grew adjusted EBITDA by 1.1 or 40.1% to 4 million, invested an additional 6.3 million of cash flow into the capital improvement program in the second quarter of 2017 bringing the annual total capital improvement investments to 12.8 million. Retained a cash and cash equivalents balance of 9.1 million at the end of the quarter and acquired Eagletail Water Company, a small water utility located west of metropolitan Phoenix. In addition to the annual phasing of new rates, our utilities have seen steady consistent organic growth since January of 2009. As noted, year-to-date we have realized an annualized increase of 4% and the vacancy rate now stands at 1.56%. Metro Phoenix single-family permit data remained very strong after coming in at 18,015 for 2016. The Blue Chip economic forecast experts project 21,396 permits for 2017 and 24,088 for 2018 representing additional 19% and 13% of permit growth respectively over the next two years. The Q2 data for the City of Maricopa sub market continues to be strong as well. As a reminder, 2016 saw 56% year over year increase in permanent. Year-to-date in 2017, we've realized a 31% increase in permits over 2016. Before turning the call over to Mike to review our Q2 2017 financial performance, I want to again lay out our primary objectives. Moving forward, Global Water will meet our primary mandate to provide safe, reliable and sustainable service to our customers and partners while taking a disciplined approach to growth and value creation through the following mean. We will work to grow reoccurring EBITDA by driving top line revenue growth, while creating operational efficiencies and managing controllable expenses. We intend to use cash on hand to make targeted capital improvements that improve the level of service we provide our customers and allow for growth of the communities in which we have the privilege to serve. These investments have the added benefit of increasing revenue, reducing expense and building rate base, while also having the added benefit of deferring the Valencia condemnation tax liability by approximately 37% for each dollar invested in qualifying capital project. We will further look to defer the Valencia condemnation tax liability by replacing assets through accretive acquisitions with consolidation benefit. And finally, we will routinely analyze our dividend policy with the commitment to grow our reoccurring dividend as we execute the plan. I will now turn the call over to Mike.

Thank you, Ron. Hello everyone. Our discussion today refers to the consolidated financial information of the US company, Global Water Resources Inc and all amounts discussed are in US dollars. Total revenues for Q2 2017 were 8.1 million which was up 556,000 or 7.3% compared to Q2 of 2016. It's also worth noting adjusted revenue which adjusts for the Willow Valley deposition in 2016 increased by 636,000 or 8.5%. This increase is due to an annualized 4% organic connection growth, increased consumption and increased rates pursuant to the 2014 rate order. Year-to-date total revenues through Q2 of 2017 were 14.9 million which was up 531,000 or 3.7% compared to the same period in 2016. Adjusted revenue was up 837,000 or 5.9% compared to the same period in 2016. Operating expenses in Q2 2017 were 6.4 million compared to 6.7 million in Q2 2016. This is an improvement of 231,000 or 3.5% over Q2 of 2016. Notable reduction in operating expenses included reduced deferred compensation by 296,000, reduced contract fees by 108,000, reduced chemical expense by 52,000 and eliminated the Willow Valley operating expenses of 52,000. The improvements were partially offset by an increase in depreciation expense of approximately 200,000 and an increase in public company related expenses of approximately up 100,000. Year-to-date through Q2 of 2017, operating expenses were 12.1 million compared to 12.4 million in the same period last year. This is an improvement of 296,000 or 2.4% over prior year. Notable reductions in operating expenses included reduced deferred compensation by 307,000, reduced contract fees by 217,000, reduced chemical and supply expense by 132,000 and savings of 69,000 in IT expenses. These reductions were offset by increases in depreciation expense of 227,000 and an increase in expenses due to being a public company of approximately 230,000. Turning to net income, Global Water had net income in Q2 of 2017 of 425,000 compared to a net loss of $3.5 million in Q2, 2016. This $4 million improvement is primarily due to the $6.2 million reduction in interest expense, the $787,000 improvement in operating income and the $144,000 increase in earnings from the growth premium related to our Valencia disposition. These improvements were offset by the $954,000 one-time gain in Q2, 2016 related to the early payoff of our Sonoran acquisition liability and the $2.2 million increase in income tax expense. Year to date, through Q2 of 2017, net income was $614,000 compared to a net loss of $3.8 million in the same period prior year. Following along the same lines as Q2, this $4.5 million improvement is primarily due to a $6.7 million in interest expense, $827,000 improvement in operating income and $246,000 increase in earnings from the growth premium related to our Valencia disposition. These improvements were offset by a 954,000 one-time gain from the early payoff of our Sonoran acquisition liability and the $2.6 million increase in income tax expense. Adjusted EBITDA, which adjusts for non-recurring events, option expense related to awards made to the board of directors and our equity investment in FATHOM was $4 million in Q2 of 2017, which is up $1.1 million or 40% compared to Q2 of 2016. This increase was primarily due to the previously mentioned top line revenue growth, net reduction in operating expenses and increase in earnings from the growth premium related to our Valencia disposition. Year to date, through Q2 of 2017, adjusted EBITDA was $7.2 million compared to $5.9 million in the same period of 2016. This $1.3 million improvement is driven by the same factors as the Q2 improvement just mentioned. This concludes our update on Q2 2017 results. I’ll now pass the call back to Ron.

Thank you, Mike. That concludes our prepared remarks. Thank you. And Mike and I are now available to answer your questions.

[Operator Instructions] The first question is from Gerry Sweeney with Roth Capital. Please go ahead.

I want to start off on the O&M side. Mike, I appreciate the detail on the puts and takes on what was driving some of the expenses. Obviously, just on a percentage basis, O&M is down around 22%, I did see some of the chemical costs, some contracts coming down, is that 22% sustainable? I mean, obviously we've talked in the past about getting O&M improving and it has been and I think that's probably near an industry low on the positive side. So I want to see if it was sustainable on a go forward basis, seasonality excluded.

Yeah. Hey, Gerry. This is Mike. Directionally, I would say, the answer to that is yes, specifically related to the contract service expense. On the chemicals and supplies expense, that was a reduction in the current rate that you're experiencing. We expect to be our continued run rate. I'm not sure if that equates to the 22% year-over-year reduction for the entire year, but directionally, the current run rate is where we would expect that to be.

And then part of the thesis going forward is obviously a lot of fixed assets, et cetera and as those connections continue to grow 4% plus, there is potential for that O&M to come down as we leverage some of those assets further. Is that a fair assumption? Again, maybe some of the variable costs, the chemicals, if they don't change.

Absolutely, that's correct, Gerry.

Okay. And then obviously acquisitions, Eagletail, it was probably a little bit on the smaller side, but big important step forward for you guys in terms of getting back into the acquisition game and the Arizona Corporation Committee very committed it appears to allowing some of the purchases of the underperforming assets out there, just as much as you can say, an update in terms of maybe pipeline activity, et cetera on that front.

Yeah. Hey, Gerry. It's Ron. So obviously, it’s a little bit difficult to talk about that too much upfront. I mean we're committed to that part of the plan now, having completed most of the accelerated of our capital plan and just kind of tie this to the last question as well with I think some of the expense gains you’re seeing due to those investments that we're making on the capital improvement side as well. But with that plan coming to an end here in the next few months, we really can turn more of our resources towards the -- to the acquisition strategy and so that's what we're doing and with that, the pipeline of potential opportunities is building and we hope to be able to accelerate some of that now with more of our focus in the coming quarters.

And on the private letter ruling, you have a little bit more time on the acquisition front as opposed to the capital expenditure side, right, in terms of making investments.

Yeah. Gerry, this is Mike. That’s right. We have three years on the acquisition front with the ability to make one year extensions thereafter. In our past experience, five years was what we were able to achieve and so we have no reason to believe we couldn't get less than five years. And then on the investment in existing utilities, you have a two year with the ability to make a one year extension, which we've applied for and once we find out, we'll let the market know if we were able to get that additional one year.

Okay. Great. I appreciate it guys. Congratulations on obviously O&M and growth, everything seems to be going well. Appreciate it.

Thank you.

Thank you.

[Operator Instructions] There are no further questions registered at this time. I would like to turn the conference back over to Ron Fleming for any closing remarks.

All right. Thank you, operator. I'd like to thank everybody who participated in the call and your ongoing interest in Global Water and we look forward to speaking with you again. Take care.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.