Global Water Resources, Inc. (GWRS) Q1 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Global Water Resources’ 2018 First Quarter Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a 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 May 10, 2018 at 1:00 P.M. 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. Yesterday we issued our 2018 first 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 year and Mr. Liebman will review the financial results for the quarter ended March 31, 2018. 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. 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 measures, please see the tables included in today’s earnings release, which is available on our website. Unless otherwise stated, all amounts discussed are in U.S. dollars. I’ll now turn the call over to Mr. Ron Fleming.

Thank you, Joanne. Good morning, everyone and thank you for joining us today. We are very pleased to report our first quarter 2018 results. Highlights include, revenues increased 9.3% to $7.4 million driven by growth in active connections, increased consumption and approved rate increases. Adjusted EBITDA and non-GAAP metric increased 14.1% to $3.7 million. As a percentage of revenues adjusted EBITDA was 49.7%. Total active connections increased 4.9% over the trailing 12-month and increased 5.6% on an annualized basis during the first quarter. Debra G. Coy and Brett Huckelbridge were nominated to the Board of Directors and will bring tremendous experience in policy, investments, capital market, transactions, and strategic planning. Senior water industry expert, Jake Lenderking, was appointed as a Director of Water Resources, bringing to Global Water more than 10 years of senior leadership experience in Water Resource Management. And the Company joined WaterStart, a consortium of global leaders in water technologies dedicated to accelerating the adoption of innovative water technologies. And subsequent to the first quarter events in April 2018 and could signing a definitive agreement to acquire Turner Ranches Water and Sanitation Company, a non-potable irrigation water utility in Mesa, Arizona and securing a two-year revolving line of credit of up to $8 million to support the Company's growth strategy. Moving on I wanted to highlight progress on our accelerated capital improvement plan. In 2017 Global Water invested in additional $20.9 million of cash flow into the capital improvement program. These expenditures represent investments that we expect to increased revenue, reduce the variable cost on a pure unit basis and build our rate base. And importantly, these prudent capital improvements in our existing utilities enhanced the level of service we provide to our customers and support the growth of the communities we have the privilege to serve. The facility improvements included in the accelerated CapEx plan will be placed in the service in the second quarter of 2018. From here and with these completions, we expect to return to a lower pace of capital investments into our existing utilities, which will greatly benefit cash flow, allowing our substantial free cash flow to be utilized for other growth initiatives. Highlighting organic growth further, as noted earlier on a trailing 12-month basis, we realized an increase in connections of 4.9%. Again year-to-date in 2018, we've achieved an annualized growth rate of 5.6% confirming the new house growth continues to accelerate in our service areas. Metro Phoenix single-family permit data remains 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 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 in 2017, and year-to-date we are currently at 90% over 2017. Before turning the call over to Mike to review the first quarter 2018 financial performance in greater detail, I want to again layout our primary objective. Moving forward Global Water will continue to meet our primary mandates 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 topline revenue growth and creating operational efficiencies that manage controllable expenses. With the completion of the accelerated capital improvement plan in 2018, we will make only targeted capital improvement as necessary. And we will routinely analyze our dividend policy. Finally, we will pursue accretive acquisitions with consolidation benefits. This was recently demonstrated by our acquisition of Turner Ranches which will add more than 950 connections and nearly 1 million of annual revenue to Global Water when it closes, which we expect to occur in the second quarter. Accretive tuck-in such as this will complement the strong position and growth of our core regional assets. And we are committed to continue to pursue similar opportunities both big and small. I will now turn the call over to Mike.

Thank you, Ron. Hello everyone. Total revenues for the quarter were $7.4 million which was up $634,000 or 9.3% compared to Q1 2017. This increase is due to a 4.9% organic connection growth, increased rates and increased consumption. Operating expenses in Q1 2018 were $6.1 million compared to $5.7 million in Q1 of 2017. This is an increase of $371,000 or 6.5% compared to Q1 of 2017. Notable changes in operating expenses include an increased depreciation expense by $153,000 primarily due to increased capital investments made over the past couple years. As well as an increased general administrative expense by approximately $187,000 which was primarily attributed to increase in professional fees associated with growth effort. Turning to net income. Global Water had net income in Q1 of 2018 of $320,000 or $0.02 per share compared to $189,000 or $0.01 per share in Q1 of 2017. Adjusted EBITDA which adjusts for non-recurring events, option expense and our equity investment in FATHOM was $3.7 million in Q1 of 2018 which is up $457,000 or 14.1% compared to Q1 of 2017. This increase was primarily driven by the topline growth partially offset by increased G&A expense previously mentioned. Before turning the call back to Ron, I just wanted to provide an update on tax reform with respect to the current rates we charge customers. The Arizona Corporation Commission or ACC is considering the impact for regulated utilities as it is expected that certain effects of the Tax Cut and Jobs Act, TCJA add to rate base and others reduced rate base. On May 1, 2018, the ACC Chairman bought a letter to the ACC’s docket concerning the TCJA, stating that it appears that there may be some unintended consequences related to the tax treatment of contributions and aid of construction and advances in aid of construction and that is my intent that the commission wait to move forward on adversely affected water and waste water companies, until we find a balanced approach. At this point, it is not clear what action that ACC will take regarding the TCJA issues. As a result, the Company cannot determine the effect of the TCJA on current enacted rate. That concludes our update on Q1 of 2018 result. I will now pass the call back to Ron.

Thank you, Mike. It is clear Global Water has returned to being a high growth utility company. This fact led us to the board nomination and expanded management team we announced during the quarter, which will help us remain at the forefront of the water management industry and advance our mission of achieving efficient growth and consolidation. We truly believe that expanding our platform and applying our expertise, there are regional service areas and to new utilities will be beneficial to all stakeholders involved. We appreciate your investment in and support of us as we grow Global Water to address important utility water resource and economic development issues in Arizona and potentially beyond. That highlight concludes our prepared remarks. Thank you, and Mike and I are now available to answer your questions.

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

Good morning, Mike and Ron. How are you?

Doing good, Gerry.

Doing good. Thank you.

Couple questions on the acquisition front, maybe could you go over – there's a specific tax benefit I think from the sale of Valencia that you could buy lifetime assets and there was a set period of time that you could make those acquisitions and then you recently bought the Turner Ranches property. Just curious as to how much benefit is still remains and how much longer you have for that benefit?

Yes, so that’s a great question, Gerry. This is Mike. Right now after the Turner Ranches acquisition goes into effect, there will still be an additional $15 million of additional investment will need to make in acquisition, to qualify for the deferrals of that tax liability. So right now the tax liability sits in about $6 million, whereas prior to our capital investment and acquisition effort that was $20 million. So we've done – we’ve granted about $14 million off of that. So we now have until the end of 2018 to make acquisitions and then we can file for one-year extension thereafter. And in the past we've actually gotten two one-year extensions that we believe will have at least until the end of 2020 to defer the remaining $6 million of tax liability.

Got it. And then just looking at the acquisition strategy and I know Turner is over in Maricopa County and maybe a unique property [indiscernible], if you’re looking – when you're looking at other opportunities, are you looking at areas that you want to grow into or in the path of population expansion or is it existing properties that are little bit more dense or does it wide open then we’ll look at everything?

Yes, so I'll take this one. This is Ron. So I mean generally speaking, we of course will prioritize acquisition targets that have some key attributes that basically Global Water was created to focus on and that’s potential areas of high growth and we've proven that we can manage that well. And obviously our interested and trying to continue to acquire utilities and expand service areas with that potential for long-term growth. However, because of the tax deferral opportunity that exists. If we can find a few mature assets don’t really have the same growth potential long-term, but otherwise are good operating utilities that we can get any good value and help us to further tax liability. .:

Got it. That's helpful. And then just speak a properties being and then line of growth, I mean obviously Maricopa is – the City of Maricopa is the biggest asset, but I think you also had some property in West Phoenix is going to back along [indiscernible] there, but – and I think Cascade investment had purchased some land around there or is it planning to make larger investments just with the high – statistics that you are putting out there for permits. Any activity out in that property range to get a little bit more excited about or is that a little bit further out on the horizon?

I think that it's fair to say that still a little bit further on the horizon. However to that specific to the Belmont Property that Cascade Investment the Bill and Melinda Gates Foundation arm acquired. However, because of the growth that is occurring around all of Metro Phoenix and the both the residential and commercial growth that’s occurring in our areas. We are getting a lot contracted quite a bit more from developer interest who want us to service new property around our regional service areas. So that growth is pushing out and we think that that all indications are that's going to continue. When it pushes out as far as the property you referenced we're not sure I do think that's a little bit of a unique project it's probably not driven as much as a kind of the normal kind of growth pattern that otherwise exists around Metro Phoenix. I think that obviously that investment group bought that property for a very specific reason and probably they're on their own schedule or respective of kind of bigger economic trends. It just is based on what they've released so far on that property they need to go back to the drawing board and really recreate or redo the master planning of what exactly that project will look like before they didn’t go back and redo permitting entitlement process and then start to get the infrastructure. So even though I do believe that they're probably making continuous progress in around their own schedule, it's just a fairly lengthy process probably two to three years before – even if they are moving for full steam before they need service from us.

But I guess in general, it’s systemic to say that, lots of growth in Phoenix and you have properties that are in that line of growth and maybe an activity is starting to pick a little bit more?

Exactly right. And I'll go to the number. I know we mentioned them a couple times, but I think it's very important to highlight again. We're doing north of 5% organic growth this year so far and that is based off of last year 2017 seen about 50% permit growth because from permits being pulled for new single-family dwelling units, it's typically six to 12 months before – meter turned on in an account. So that permits being up 90%, I mean you can see growth rate far in excess of 5% coming our way. And the reality is that that is going to require quite a bit more development property to get in the normal development pipelines and that activity is going on, I mean we're spending a lot of our time dealing with that type of activity, which is great. They're just getting the next round of [indiscernible] property is ready to go, so that doesn't slow down that growth rate as we push out to these new areas. So that type of growth is occurring and it's all positive, good sign.

And when you said that 90% increase in permits, is that on a 1Q 2018 over 1Q 2017 or was that annualized?

That’s correct. Q1 2018 over Q1 2017.

Got it. Big jump. Okay. And then just final question, in Valencia, how is that growth in there because you had that connection benefit you get?

Yes. That actually pulled back a little bit in Q1, Gerry, that was a little under 5% growth, it was over 6% last year, it's closer to 7%, so in Q1 they were at just under 5%, like 4.6% I think was the growth rate there. But all in all it continues to grow and we're not expecting a significant shift from that, but there maybe some inflows.

Perfect. Thanks guys. Great quarter and thank you very much.

Thanks Gerry.

[Operator Instructions] Our next question is from Jon Jung with Trailhead Asset Management. Please go ahead sir.

Hi, Mike and Ron. Good quarter.

Thanks Jon.

I wonder if you could tell us a little bit more about the – when you do the Turner Ranches acquisition, what kind of accretion or what kind of results might you see? You've said there is $1 million in revenues?

That's correct. Yes, so obviously we didn't disclosed any of the deal terms at this point. But 950 customers and about $1 million in revenue is what it brings to the Company. We always – we still very confident that we can ultimately operate it similar metrics to our other utilities, maybe not as high when EBITDA margin, because we didn't build it from the ground up per se, but generally speaking, we think we can push their margin and get it closer to how we operate our utilities and so I think you can do your own math on what that probably means.

Okay, and when you’ve added some significant heft of the Board, in terms of experience and acquisitions M&A types of experience. Are you considering or looking at acquisitions beyond what I would call these small tuck-ins and stuff like that?

Yes. I mean the answer is, yes. We are open to it. We've discussed this on prior calls. The way I'm describing it is a little bit of a funneled approach. It just makes sense to really try to identify tuck-ins that are around metro Phoenix and around our large regional service areas. Those we can quickly consolidate. They've got a lot of integration benefits and things like that. And so that's we’re working on in that surface Turner Ranches and are hopeful to get a few more like that or maybe even bigger. So we're working on those things. However, as we get those things done, which continue to help with the tax [default things might walk through earlier]. We're willing to continue to fan out from there, and if there are bigger opportunities and potentially even opportunities that take us further outside of Metro Phoenix and potentially even outside of Arizona. We are open to them and so we are structuring our business that way including at the board level.

Terrific, well, I think that answers my questions. I think good quarter and keep on adding those deals.

Thanks.

Thanks, Jon. End of Q&A

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

Great. Thank you, operator. I would like to thank everyone participating in this call and for your ongoing interest in GWRS and Global Water. Thank you and we look forward to speaking with you again.

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