Global Water Resources, Inc. (GWRS) Q4 2017 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Global Water Resources, Inc. 2017 Year End Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] I would like to remind everyone that this call is being recorded on March 8, 2018 at 1:00 PM Eastern time. I would now like to turn the conference over to Joanne Ellsworth, Vice President of Corporate and Regulatory Affairs. Please go ahead.

Good morning, everyone and thank you for joining us on today's call. Today we issued our 2017 year-end financial results by press release, a copy of which is available on our Web site 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 year and Mr. Liebman will review the financial results for the year ended December 31, 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, uncertainties, estimates 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 views as of the 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 latest Form 10-K filed with the SEC. These 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 measures, please see the tables included in today’s earnings release, which is available on our Web site. Unless otherwise stated, all amounts discussed are in U.S. dollars. I’ll now turn the call over to Mr. Fleming.

Thank you, Joanne. Good morning, everyone and thank you for joining us today. We are very pleased to report our fourth quarter and year-end 2017 results. Full year highlights include, revenues increased 4.7% to $31.2 million from $29.8 million. The increase was driven by growth in active connections, increased consumption and approved rate increases. Excluding Willow, revenues increased $1.7 million or 5.8%. Total active connections increased 4.3% to 38,997 as of the end of the year. Net income totaled $4.6 million or $0.23 per share. Adjusting net income for the impact of onetime events, net income totaled $2.3 million or $0.12 per share. Adjusted EBITDA, a non-GAAP metric, increased 18.2% to $16.4 million with a 52.3% margin. And we also increased our dividend by 5% over the course of the year. Moving on, I wanted to highlight our progress on our accelerated capital improvement plan. In 2017, Global Water invested an additional $20.9 million of cash flow into the capital improvement program. All primary capital investments related to facility improvements will be completed in early 2018. These expenditures represent investment that we expect to increase revenue, reduce expenses and build our rate base, and importantly, these prudent capital improvements in our existing utilities enhance the level of service we provide to our customers and supports the growth of the communities we have the privilege to serve. Now I wanted to highlighted organic growth further. As noted earlier, we just realized an increase of 4.3% in calendar year 2017. Metro Phoenix single family permit data remained very strong. For Maricopa County and Pinal County combined, the Homebuilders Association of Central Arizona reported that single family housing permits grew 12% to 19,863 units in 2017. Permits are forecasted by the Greater Phoenix Blue Chip panel to increase to nearly 24,000 permits in 2018 and to 27,000 permits in 2019. In the City of Maricopa, where Global Water has its largest water and wastewater permitted utility service area, the Home Builders Association of Central Arizona reports that permits are up 59% year-over-year, and this was after we realized a 56% year-over-year increase in 2016. Before turning the call over to Mike to review our 2017 financial performance in greater detail, I want to again layout our primary objective. Moving forward Global Water will continue to meet our primary mandate to provide safe, reliable and sustainable service to customers and partners while taking a disciplined approach to growth and value creation through the following means. We will work to grow recurring EBITDA by driving top line revenue growth, while creating operational efficiencies and managing controllable expenses. With the completion of the accelerated capital improvement plan in 2018, we will make only targeted capital improvement as necessary. We will look primarily to pursue accretive acquisitions with consolidation benefits. And finally, we will routinely analyze our dividend policy. This was demonstrated again in 2017. I will now turn the call over to Mike.

Thank you, Ron. Total revenues for the year were $31.2 million which was up $1.4 million or 4.7% compared to 2016. This increase is due to a 4.3% organic connection growth, increased rate and increased consumption. Adjusted revenue which removes Willow Valley were up $1.7 million, or 5.8%, compared to 2016. Operating expenses in 2017 were $23.9 million compared to $24 million in 2016. This is a decrease of $123,000 or 0.5% compared to 2016. Notable changes in operating expenses included increased depreciation expense by $629,000, primarily due to increased capital investments made over the past couple of years. Decreased O&M expense by $492,000, primarily due to a reduction in related party contract fees, and decreased general and administrative expenses by $260,000 which was primarily attributed to reductions in deferred and board comp, offset by increases in public company and personnel expenses. Turning to net income. Global Water had net income in 2017 of $4.6 million or $0.23 per share compared to a loss of $2.5 million in 2016. This $7.1 million improvement is primarily due to the following. A $6.2 million reduction in other expenses tied to the onetime expenses associated with our capital raising efforts completed in 2016. $1.5 million improvement in operating income primarily tied to our revenue increases previously mentioned, and this is offset by a $690,000 reduction in income tax benefits. Adjusted EBITDA which adjusts for non-recurring events, option expense and our equity investment in FATHOM, was $16.4 million in 2017, which is up $2.5 million or 18.2% compared to 2016. Now a few highlights from Q4 2017 compared to Q4 2016. Increased revenue to $7.8 million from $7.2 million reflecting a $586,000 increase or 8.1% increase. Reduced operating expenses to $6.1 million from $6.3 million which reflects a decline of $197,000 or 3.1%. Increased adjusted EBITDA to $4.0 million from $2.8 million which is a 42.4% increase. Before turning the call back to Ron, I just wanted to provide an update on tax reforms. On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act otherwise known as TCJA. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes significant changes to the internal revenue code of 1986 which significantly changed the taxation of individuals and business entities and includes specific provisions related to regulated public utility. Amongst the significant provisions, the TCJA reduces the federal corporate income tax rate from 35% to 21%. It eliminates bonus depreciation for regulated utility, it eliminates the provisions that treated advances in aid of construction and contributions in aid of construction, provided to regulated water utilities as non-taxable, and it limits the amount of net interest that can be deducted. However, this limitation is not applicable to regulated utilities and therefore is not anticipated to have a material impact to the company's ability to deduct interest. The staff of the U.S. Securities and Exchange Commission has recognized the complexity of reflecting the impact of the TCJA and on December 22, 2017 issued guidance in staff accounting bulletin 118 which clarifies accounting for income taxes under Accounting Standards Codification 740, if information is not yet available or complete and provides for up to a one year period in which to complete the required analysis and accounting. The company has made a reasonable estimate for the measurement and accounting of certain effects of the TCJA, which have been reflected in these financial statements. The re-measurement of deferred income taxes at the new federal tax rate decreased to 2017 income tax by $1.3 million for the year ending December 31, 2017. Additionally, the company recorded an estimated $1 million tax benefit related to the recording of a regulatory asset of $1.3 million with a partially offsetting deferred income tax liability of $0.3 million. The company has not yet recorded the impact for certain items under the TCJA for which it has not yet been able to gather, prepare and analyze the necessary information in reasonable detail to complete the accounting treatment. The determination of the impact of the income tax effects of these items and the items reflected as provisional amounts will require additional analysis of historical records, further interpretation of the TCJA from yet to be issued U.S. Treasury Regulations and an evaluation of future administrative interpretation, court decisions, accounting interpretation, or other developments relating to the TCJA. This concludes our update on 2017 results. I will now pass the call back to Ron.

Thank you, Mike. I wanted to conclude today’s call by making a few brief comments on acquisition and other business development opportunity, as I know the questions will come in Q&A anyway. Frankly, beyond organic growth in our existing footprint, with Metro Phoenix expanding rapidly, there is an increasing opportunity to service new residential commercial and industrial properties in and around our large service areas. Additionally, our growth strategy goes beyond organic growth and Greenfield opportunity. As we have communicated to the market for some time now, we have refocused resources on consolidation, which is both a priority for Global Water and a primary regulatory policy for our Arizona Corporation Commission. While we cannot disclose such deals early, we are currently and actively in detailed diligence with multiple prospects. Beyond these specific targets, we are committed to consolidation and believe there are other opportunities, both large and small that will develop this year and beyond. We truly believe that expanding our platform and applying our expertise to new utilities can be beneficial to all stakeholders involved. As evidence to this commitment towards efficient and strong growth, this week we announced the hiring of Jake Lenderking as Director of Water Resources, a recognized water resource and industry expert here in Arizona. We also announced that the board of directors has nominated new potential board members. Debra Coy, a water industry expert; and Brett Huckelbridge, a capital markets expert, who will stand for shareholder vote at our upcoming shareholder meeting. The combined skills sets of these individuals is intended to further enhance Global Waters expertise and capability to aggressively pursue our growth and public market strategy. That highlight concludes our prepared remarks. Thank you. Mike and I are now available to answer your questions.

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

Congratulations on a nice quarter. Ron, since you brought it up, I will follow up with question on acquisitions. If I heard you correctly, it sounds like you are in active diligence with a couple of potential candidates. Initial questions, are these built out systems with actual connections at homes, or is it more along the lines of like the recent Eagletail acquisition you made where its potential development building out towards it.

Yes. Good question, Gerry. Fair enough. I mean I think I am going to limit what I say on those but I’ll say that’s a fairly vague question so I will answer it as, yes, there is active connections in each of them.

Okay. Arizona based?

Yes.

Got it. Okay. I mean, any of these have substantial size if you could...

I am not going to elaborate on that question.

That’s fair enough. That’s fine. Got it. Okay. And then speaking of which, I mean Eagletail was an acquisition a couple of quarters ago and maybe any significant movements on not that acquisition but on the development in and around the Eagletail I think there was some highway work etcetera, that could be re-routed. Not expecting anything but I figured I would ask since we are on the topic.

Sure. Absolutely. So just to remind everyone, Eagletail Water Company was 50 active connections, water only, but they have 7 square miles of [indiscernible] in far western Maricopa County that abuts immediately up to our water utility of Greater Tonopah. There is no other way for a provider there just at this point in the county and they don’t have a municipal or centralized sanitary sewer system. So it creates the opportunity to roll that area into what we already have plan from a regional perspective out in that area and that’s what we intend to do. So of the road from it, is I think what you are referring to, Gerry, I don’t have a distance off the top of my heard but in the water utility of Greater Tonopah, generally out in the same region last time we announced that the Bill and Melinda Gates Foundation had invested in that area by buying 20,000 acres of a master plan community that we are contracted to serve and already is in our existing service area. Well, we will do our normal utility and business model where we are water, waste water and recycled water provider. So there hasn’t been any progress in the last quarter since we made that announcement. At least not to the extent that that would disclose it at this point. But ultimately Metro Phoenix as a whole continues to expand quite rapidly, we are doing fairly well in this recovery from a jobs perspective and attracting large industrial growth. There has been other announcements, not even in our service area of similar types. So we just feel that the momentum is strong and that will continue to bring new opportunities similar to that to these areas over the coming years.

Okay. Perfect. I appreciate the update. And then, obviously, I think connection growth was, I think 4.3% year-over-year. Permits continue to sort of support continued growth in that area. Is that a fair assumption on my part?

Yes. We think that’s a fair assumption. That’s how we are viewing it, yes.

And then just a couple of little questions. O&M, actually it took a - I mean for a seasonally slower quarter I think it was almost 21%. Just a hair above 21%. Is that a number that -- or a ratio that we should sort of expect to continue and I assume some of that was driven by the recent CapEx that you had done internally.

Yes. I mean the current run rate, I think there is -- and we have discussed this in the past, deferred compensation had a pretty significant impact on that operating expense. So the reduction of operating expenses in the quarter, and so I would say that if the stock price continues to stay at a level where it is, that we would continue to see the benefit associated with that. But if the stock price increases substantially, obviously it would have implications for that deferred comp expense to go up. On the depreciation side, the increases there, depreciation expense are tied to the capital expenses and we expect that to continue on a go forward basis as a result of those investment being placed into service.

I am sorry, I meant the O&M. Operation and maintenance was down almost about 21% for the quarter.

Yes. Okay. Operations and maintenance specifically is tied to the reduction in our related party contract that we had with FATHOM. And we expect that to sustain on a go-forward basis too. Yes. I thought you were talking about O&M in general, Gerry.

No. I am sorry, I am sorry. I should have specified. But I did note the stock units tied to the pricing. I figured that had impact also. All right. That’s it from my end. Great quarter. You guys continue to execute, I really appreciate it. Thank you.

[Operator Instructions] Our next question comes from Jon Jung at Trailhead Asset Management. Please go ahead.

I appreciate your call this morning and the good work that you have done, great quarter. I wonder if you could give me an update on what Trevor is doing over at FATHOM and what impact you see for Global Water.

Yes. Hi, Jon. Well, Trevor Hill is the CEO of FATHOM. As you will recall, we sold that business unit in 2013. He remains on our Board of Directors as well and that’s why anything with FATHOM is a related party transaction and fully disclosed there. But ultimately, we remain one of FATHOM's largest clients in the way that we utilize the platform that we created and sold with that business unit. So I guess those relationships, business relationships are still there. Is there anything further specific that I could answer as it relates to what Trevor is doing...

Yes. My question relates to, is FATHOM growing and becoming more valuable and you own a minority position in that. Global owns a minority position. What kind of value is that generating and is that growing and is it becoming more valuable and if so, what does Global's Board plan to do with that position.

Okay. Got it. Well, it's a great question. So we do still own about 7.4% of that FATHOM investment. They had done a couple of capital rounds that we did not participate in. So our original ownership percentage has been diluted a bit. But they do continue to grow. I mean obviously they are a private company. There is a wall between us. You have don’t have access to everything. But generally what we see in the financial numbers that they have to disclose to us, is that their recurring revenue continues to grow. They have also had quite a bit of lumpy project specific revenue come in. And so that’s an indicator of doing large installation projects which typically lead to the longer term recurring revenue. And so, yes, they are growing. Yes, we believe that means our value of the [percent] [ph] ownership that we have in FATHOM continues to grow. And as they grow, they continue to provide better service [backdrop] [ph] utility. So it's a really win on all fronts. How does our company and Board currently look at that? Look, I mean at the end of the day the reason we sold them is so that we don’t have to continue to finance or cash flow the business. However, we believe in what it is, this is me, I am speaking personally. Having spent 15 years in this industry, we continue to believe that the approach that FATHOM is taking and the need that exists in the industry is real. And so since it kind of sits on our book at an equity value of near zero, I don’t know about that, Mike, but fairly low. And we are not cash flowing it, we are getting the benefit. But I think we are willing to be patient and see ultimately how far they can take it, which we believe is fairly far.

Okay. Could you give us any, just general idea of the value of that based on their most recent financing that FATHOM has done.

Yes. So I think, and I believe it's public, Mike, isn't it?

I have read it an article somewhere.

Yes. It's difficult for me to answer. I don’t recall off the top of that a public number that we can disclose. I just don’t recall.

Our next question comes from Brian Pow of Acumen Capital. Please go ahead.

I just wanted to see if we could tighten up our model. And just as we look at sort of the seasonality trends for 2018, just are you expecting any difference? Was their sort of any acceleration coming out of Q4 that may benefit Q1 or shall we think about sort of the same seasonality and connections in that for the year.

Yes. I mean from a seasonality perspective it's been pretty consistent. So it would be tough for us to tow the [indiscernible] from what you have seen in the last year. Obviously, that’s subject to precipitation in the various quarters. Could have an implication slightly one way or the other but generally speaking the seasonality that you saw in 2017, we would expect would be a fine assumption.

Okay. Great. And then just on the CapEx. You sort of indicated in your opening comments just that you complete the targeted CapEx in 2018. So when do you sort of expect that to be finished up again and as we put in some CapEx numbers, is it more like just first half of the year and then pretty clean after that or how should we look at it?

Yes. That’s absolutely right. I mean from an investment perspective, it's primarily complete as well. I think there is just some things the team wanted to do in the operations side and there is an ideal time to kind of put everything into service and we are expecting that to happen in Q2 of 2018.

This concludes the question-and-answer session. I would like to turn the conference back over to Ron L. Fleming for any closing remarks.

Thank you, operator. I would like to thank all those for participating in this call and for your continued interest in GWRS and Global Water. Thanks, and we look forward to speaking with you again soon. Bye.

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