Global Water Resources, Inc. (GWRS) Q4 2019 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, thank you for standing by. Welcome to the Global Water Resources Inc. 2019 Year-End Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. [Operator instructions] I would like to remind everyone that this call is being recorded on March 5, 2020 at 1:00 PM. Eastern Time. I would now like to turn the conference over to Heather Krupa, Vice President and Controller. Please, go ahead.

Welcome everyone, and thank you for joining us on today's call. Yesterday, we issued our 2019 year-end 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 quarter, following which Mr. Liebman will review the financial results for the year ended December 31, 2019. Mr. Fleming and Mr. Liebman will be available for questions at the end of the call. Before we begin, I would 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 factors and management's discussion and analysis of financial condition and results of operations, included within our latest Form 10-K filed with the SEC. Such filings are available at www.sec.gov Certain non-GAAP measures may be included within today's call. For a reconciliation of these measures to the comparable GAAP financial measures, please see the table's included in yesterday's earnings release, which is available on our website unless otherwise stated all amounts discussed are in U.S. dollars. I will now turn the call over to Mr. Ron Fleming.

Thank you, Heather. Good morning everyone, and thank you for joining us today. We are very pleased to report the results for the year-end 2019. 2019 was another wonderful year for our company and there are many highlights worth mentioning. The first I want to thank all of our employees, partners and shareholders for their efforts and support that together produced these results. Foremost the health and safety of our employees and our customers is our top priority. Throughout 2019 and even through today, we extended our employee safety and regulatory compliance, non-recordable incident streaks, as our staff has achieved over 950 consecutive days without a recordable, safety accident. Also, it has been 1,437 days since our last significant compliance violation for nearly four years. These streaks continue while we also manage rapid expansion and customer growth. Total active connections increased 4.9% to 45,823 at December 31, 2019. Regulated revenue increased 7.3% to $35.5 million and adjusted EBITDA increased approximately 700,000 or nearly 5%. We increased our dividend in the year to $0.2892 per share on an annualized basis. We received an extension from the internal revenue service to defer the remaining gain realized from the condemnation of our operations and assets of Valencia Water Company in 2015, and extension goes through the end of 2020. We are partnered with the City of Coolidge and Saint Holdings to bring an integrated utility solution to Southern Coolidge and Inland Port Arizona. We appointed David Rousseau to the company's Board of Directors, adding an exceptional senior level experience in water and utility policy. At the end of the year, we've brought customer service and billing operations in-house, including all related technologies allowing the company to provide a greater focus and control over our utility back office and our customer's experience, as well as support its plans for growth and expansion. We extended the availability of the company $8 million revolving line of credit by an additional two years, which now goes through April 30, 2022. And the full amount remains available to date on that line. And subsequent to year-end in January 2020, we raised net proceeds of approximately $11.6 million and an equity offering to fund our growth and acquisitions and provide funds for working capital in general corporate purposes. These achievements show the dedication and care of our employees as we deliver exceptional performance both financially and operationally. I wanted to now highlight permit growth. For 2018 single-family dwelling permits in Maricopa and Pinal counties were up to 22,437 units, or 13% over the prior year. In 2019, we realized another 14% increase as permit grew to 25,127 is projected at 2020 we'll see an increase to 26,000 permit. Specifically, the city of Maricopa submarket continues to be strong, as a reminder in 2018 permit growth was up 18% over the prior year with 1,022 permits issued. 2019 finished with 989 permits, resulting in a two year average of over 1,000 permits per year. This multi-year trend supports our long stated position that has sustained growth continues in and around Metro-Phoenix, we will get a larger and larger market share of new homes based on the amount of lot and infrastructure capacity that exists. Before turning the call over to Mike to review the year-end financial performance in greater detail, I want to again lay out our primary objective. Global Water will continue to meet our primary mandates to provide safe, reliable, and sustainable service to our customers and partners, while taking a disciplined approach to growth and long-term value creation. We'll do it through the following means. We will work to grow earnings by driving top line revenue growth and creating operational efficiencies and managing controllable expenses. We'll make prudent capital improvements as necessary, ensuring we have appropriate capacity and redundancy to be reliable utility partners. We will expand our utility platform via new greenfield opportunities, and finally we will pursue accretive acquisitions with consolidation benefits. Accretive tuck-in such as this will compliment the strong position and growth of our core regional assets and we are committed to continue to pursue similar opportunities both big and small. Additionally, as proven by our recent acquisitions, the consolidation can help to improve our industry as a whole and provide many benefits to the customers and communities we have the privilege to serve. I will now turn the call over to Mike.

Thank you, Ron. Hello everyone. Total revenue for the year was $35.5 million, which is flat compared to 2018. This seem year-over-year revenue is primarily driven by the ICFA revenue recognized in Q2 of 2018 that was non-recurring in 2019. Excluding this ICFA revenue, 2019 revenue was actually up $2.4 million or 7.3% and this increase is primarily driven by the 4.9% organic connection growth, acquisition connection growth from both Turner Ranches and Red Rock as well as approved rate increases. Operating expenses in 2019 were $28.5 million compared to $26.2 million in 2018. This is an increase of $2.3 million or 8.6%. Notable changes in operating expenses include, increased depreciation and amortization expense of $884,000 primarily due to the acquisition of Turner Ranches and Red Rock, as well as increases in our fixed assets associated with our capital expenditures plan. Additionally, we have increased operating and maintenance costs by $686,000. This increase was primarily driven by the additional costs associated with the Turner Ranches and Red Rock acquisitions of $476,000, as well as an increase in contract services from related parties of $78,000 and an increase in maintenance expense of 69,000. Lastly, we had an increase in G&A expense by $694,000, which can be attributed to the increase in personnel expense of $433,000 and an increase in deferred compensation of $219,000. Now to discuss other expense. Other expense for 2019 was $3.6 million compared to $4.4 million in 2018. The $809,000 improvement was primarily due to the $1 million of other income received in Q1 of 2019 from the Loop 303 contract offset by a decrease in the Valencia earnout of $240,000. Turning to net income. Global Water had net income of $2.2 million or $0.10 per share. Adjusted EBITDA which adjust non-recurring events such as ICFA revenue, Loop 303 proceeds and also adjust for options expense and our equity investment in FATHOM was $16.4 million in 2019, which is up $700,000 or 4.5% compared to 2018. Adjusted EBITDA was up primarily due to the increases in organic growth as well as the acquisition growth from Turner Ranches and Red Rock. This concludes our update on 2019 results. I'll now pass the call back to Ron.

Thank you, Mike. It is clear excluding one-time revenue recognition events from ICFA, Global Waters topline and connection growth rates continued to be very strong. As we handled this high-growth, we intend to remain at the forefront of the water management industry and advance our mission of achieving efficiency and consolidation. We truly believe that expanding our platform and applying our expertise throughout our regional service areas and to new utilities will be beneficial to all stakeholders involved. We appreciate your investment and support of us as we grow Global Water to address important utility, water resource and economic development issues in Arizona and potentially beyond. These highlights conclude our prepared remarks. Thank you. And Mike and I are now available to answer your questions.

We will now begin the Question-and-Answer Session. [Operator Instructions] The next question comes from Gerry Sweeney from Roth Capital.

Just a couple quick questions. I just want to start on the growth side. Obviously, Maricopa going very well connections growing, want to see if you could give a little update just on Coolidge Saint Holdings. How do we look at that? How does that sort of developed an emerge of the next couple of years?

Yes. We always like to talk about growth, Gerry. Thank you. Yes look before I switch just to the Coolidge and Nikola project you're talking about, I mean, look, Arizona has the most inbound transports right now than any other state. Maricopa County has added more jobs than any other county -- in the country. And so -- and this is absolute values not percentages. So Arizona's doing very well. And, and really for the first time, this long sustained recovery and the way our governor's got about it and our communities here, we've really seen industrial and manufacturing and healthcare and lots of other sectors really come in strong and be thriving. And it's not as much just construction based is what it's been historically. And so we feel really good about where the states at. And that leads us to the Nikola project because, and these larger kind of industrial parts that are starting to pop up around Metro-Phoenix is because of that greater jobs climate and the cost to develop these types of projects and the cost of labor and all those things. So we think this is just the beginning of these types of projects. So specifically, just -- I think it was just yesterday or the day before, and you can look it up, Nikola had a press release and announced a merger with a company that's publicly traded on NASDAQ. And what they basically said was -- it was there's lots of strategic benefits to the partnership of the merger, but basically this capital partner is going to finance the rest of their plans to really get Nikola going on the -- not just on the innovative design and really to create a whole new industry. But the actual, now let's get to manufacturing our first product. So based on the information in that article they want to start be rolling some things off out of their new plant in the next 24 months to 36 months or less. So they've gotten to the point they're now ready to go fast. So Nikola will be the -- as we say, the seed for that new area in Coolidge, because it's about a five minute or sorry -- five mile separation from the industrial park from the existing City of Coolidge. But we expect -- not a lot we can share it today, but we expect that with that type of project going into an industrial park with a lot of other capacity, it will bring all of the other kind of industrial and commercial projects that locate next to a facility like that. So, for us it's the normal utility regulated process. We'll put a CCN in place get all the construction permitting done, we'll build it and then we'll turn it on and provide service that's 24 months to 36 months from today. But after that, we do think that area to grow quite nicely.

Got it, it's very helpful. And then Valencia that had a great growth trajectory for a little bit and it slowdown, I think some of the housing stock that consumed. Any thoughts on how that development -- how that is developing on a go forward basis? Specifically, as you talked about just being [indiscernible] in Arizona.

Yes. Gerry, this is Mike. Good question, and while we did see some accelerated growth in a few years back. This year 2019, we had about 321,000 and we're not expecting any significant increase over that in 2020 just based on what development activities happen specifically in the areas where our former service area was. So that's kind of part for the course. And we'll always do over the long-term because it's a 20 year earnout period expect some things longer term later on down the road in the near term future we're just not expecting that.

Okay, great. That's helpful. And then finally, obviously, you've talked about this in your prepared marks too, lot of the service infrastructure in house that I think it was previously performed by FATHOM. Just update how that integration is going, any issues and just get a quick update. That would be awesome. Thanks.

Yes, absolutely. Frankly it, almost couldn't have gone any better. Now the way it developed is not ideal for any company to have to move that fast on something so significant. We generally say, if you're going to replace some of your back office systems, it's a six month process, a lot alone, replacing all of your back office systems. Our team effectively did it in 60 days. And look, the reason we were able to do that is maybe it's a little bit different than your common municipality or maybe some of the other private utilities. We really understand the technology that they use. Obviously, the history long relations with FATHOM and the people and the technology choices. And so we basically just, because we liked the technology package that had been created, we just went direct to those vendors. And if you think about it, we were really just removing a integrator between us and those technology softwares and the people that sit in the seats that operate that -- those softwares for whatever function is being provided. We hired very capable people that were doing this for FATHOM. Being co-located in Phoenix that was a benefit. We know the people that were here, and they close those doors and we took their best people as a way to kind of look at it. So very happy with the people we got. We're very happy to have the direct relationships with these technology vendors now. And we think it actually provides us more flexibility and more opportunity moving forward. It wasn't planned, but we've definitely turned it into eliminate and we're sitting here today pretty happy with it and no major issues and unexpected covenants.

Okay, great. I appreciate the update. And congratulations on [indiscernible] during the year. I appreciate it.

[Operator Instruction] The next question comes from Jon Jung from Trailhead Asset Management.

Good morning and the congratulations on good year '19. We hope things continue in 2020. okay. We're pretty well covered the questions I had. Are you there?

Yes, Jon.

Yes. I wondering if you could tell me, what does this mean with regard to the value of the original investment still on the books for FATHOM, is that premier gone?

Yes, Jon. This is Mike. Actually we've recorded that written that down on our balance sheet to zero back in April of 2019, but you are correct. The way that we're thinking about that going forward the value is zero.

Okay, alright. So as you said, you're probably doing okay and hope you'll do better. Yes. Do you have anything else in terms of color you can give us on, what's going on with some of the small water utilities around Maricopa in Arizona. And whether you have looked beyond Arizona and any possibilities of doing acquisitions outside of general that you are in?

Yes. So, the way we've talked about in the past is, we're really only just two years into being back in the acquisition game. We wanted to get the company back to a certain point before we did that. And so, our kind of our first initiative to go out and talk to the utilities that made sense to consolidate into Global. We had some success, as you know, we acquired four utilities now approximately over those two years. Turned out to be great acquisitions. So, now we're extending that and we're talking to more, nothing we can really announced today, but we certainly intend to keep that part of our growth portfolio moving forward, even though we have great organic growth and we've got new projects in their entirety like this industrial park with Nikola and Saint Holdings and the City of Coolidge, which there's more of those things even on the radar as well. We will continue to look at acquisitions, but we can be disciplined because we've got good solid organic growth anyway and we've got lots of other good things going for the company and where it makes sense to consolidate them and we will do that. Now, I will also say, two years in and all of that said, because of where the company is now today, we're probably for the first time willing to look at opportunities outside of the State or at least further away from Metro-Phoenix as well. So, yes, to that question, we are open to that at this stage.

That's great. Okay. I'm not familiar what has transpired with the big companies but just outside of your services, has there been any progress with regard to developing plan?

Yes, they made progress on the plan. Now, we sitting here today still don't know when they're going to move to land development, and obviously our infrastructure goes in first and provide service, but just like we talked about earlier on the Coolidge project that's a good 24 to 36 month process from a time they call us and say go for everything that we need to do. So, that's not on our radar yet to be clear. However, what they did say, and if you can go back and appreciate the article that was released at the time that announcement was made. I mean, they're not designing your normal master plan community and there's a lot of things that they want to do on that massive project or property that they bought with just 20,000 acres to remind everybody. So some of that required them to go back and basically reentitle the land, the original plan to no longer apply. And from what we understand, some of that is even requiring them they want to do -- want to look at different regulatory or statute changes here in the state for some of the things they want to do so. So that side of works moving forward, which gives us an -- obviously we don't believe that the group -- the investment group that has built as part of it or at least to build and litigates foundation is part of it bought the property to do nothing with it. So I'm sure there's lots of planning and lots of interesting things that they are looking at and working on, and the day that they're ready to actually engage and move forward with the plan and the utility portion of that we'll be ready to go.

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

Alright, thank you, operator. I just want to thank everybody again for participating on the call and for your ongoing interest in Global Water Resources. Thanks, and we look forward to speaking with you again.

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