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View Transcript - Global Water Resources

FINAL TRANSCRIPT March 28, 2013 — 4:00 p.m. E.T.
GWR Global Water Resources, Inc. Fourth Quarter Results CORPORATE PARTICIPANTS Brett Higginbotham GWR Global Water Resources, Inc. — Vice President, Accounting Trevor Hill GWR Global Water Resources Corp. — President and Chief Executive Officer Cindy Liles GWR Global Water Resources Corp. — Chief Financial Officer CONFERENCE CALL PARTICIPANTS Lukasz Michalowski CIBC World Markets — Analyst Khurram Malik Jacob Securities — Analyst Jeremy Hellman Divine Capital — Analyst Jon Jung Trailhead Asset Management — Analyst Andy Krystal Global Capital Management — Analyst Jim Belin Aldebaran Asset Management — Analyst "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results PRESENTATION Operator Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the GWR Global Water Resources Corp. 2012 Fourth Quarter and Year‐End Results Conference Call. At this time, all participants are in a 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 your questions. If anyone has any difficulties hearing the conference, please press *, 0 for Operator assistance at any time. I would like to remind everyone that this call is being recorded on Thursday, March 28, 2013, at 4:00 p.m. Eastern Time. I would now like to turn the conference over to Brett Higginbotham, Vice President of Accounting for Global Water Resources, Inc. Please go ahead, sir. Brett Higginbotham — Vice President, Accounting, GWR Global Water Resources, Inc. Thank you. Good afternoon, everyone, and thank you for joining us on today's call. This afternoon we issued our 2012 fourth quarter and year‐end financial results by press release, and a copy of those results is available on our website at www.gwresources.com. Speaking today are Trevor Hill, President and Chief Executive Officer; and Cindy Liles, Chief Financial Officer. Mr. Hill will summarize the key events of the fourth quarter and provide his insight "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results for 2013, followed by Miss Liles, who will review our financial results for 2012 fourth quarter and year‐end. Then both Mr. Hill and Miss Liles will be available for questions. 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. These forward‐looking statements are not guarantees of our future performance, and they are subject to certain risks which could cause actual performance and financial results to vary materially from those contemplated in the forward‐looking statements. For additional information on these risks, please read the March 28, 2013 GWR Annual Information Form under the heading Risk Factors. Unless otherwise stated, all amounts discussed today are in US dollars. GWR Global Water Resources Corp. was formed in 2010 as a Canadian company to hold an equity investment interest in the US‐based company Global Water Resources Inc. We will refer to the US company today as Global Water or the Company. I will now turn the call over to Mr. Trevor Hill. Trevor Hill — President and Chief Executive Officer, GWR Global Water Resources Corp. Thank you, Brett. Good afternoon, everyone, and thank you for joining us today. Today I'll start my comments with the regulated utilities. We are pleased at the rate of return of organic growth to Arizona and particularly in our service areas. For the last several years, new land development has been slowed and there's been "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results minimal new housing starts, but of late this has changed dramatically. In 2012, we saw a marked increase in permit activity in these areas, nearly doubling in our service areas from 2011. This trend has accelerated in 2013. Permitting is an early indicator of new home growth, and as historically foreclosed inventories continue to rapidly decrease and market demand for product continues to increase, we see the potential for significant organic growth occurring in all our regions. Remember, new home growth is a function of affordability. Arizona is at the top of the affordability index nationally, and is now near the top of the nation's list for new job creation. Historically, Arizona is first into recessionary periods, but also first out. We believe these indicators suggest market stabilization and an improving economic environment. Our utilities have seen steady organic growth now for some time. In fact, continuously since January of 2009, and it is picking up as a function of the generally improving housing market. During 2012, we grew our active service connections to 41,008, a 3.2 percent annual increase. 626 of the 1,277 service connections added in 2012, or about half, were from previously inactive or foreclosed homes now reconnected. Interestingly, for the first two months of 2013, our active service connections have grown at an annualized rate of 5.7 percent or nearly twice the rate of 2012. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results The utility rate increase application process is also progressing smoothly. The rate applications filed last July request an adjustment to revenue requirement for all seven utilities, representing a collective rate increase of approximately 28 percent or 8.4 million of annualized revenues over 2012. As you know, we reached sufficiency on the filing in November of 2012, and expect the process to complete in late Q3 or early Q4 of this year. We also expect that the increase in revenue we do achieve will be phased in over a two or three‐year period. We've made good progress in a variety of other fronts as well during 2012. As discussed previously, we landed a new public/private partnership, which will lead the formation of a new utility area in the new growth corridor in the area of Glendale, Arizona. We have progressed on the path to receiving the $6 million plus arbitration award we announced earlier in 2012. Having collected 2 million during the third quarter, we expect to receive the remaining 4.5 million in 2013. Our growth strategy for the regulated business is driven by increasing service connections, continued operational efficiencies, as well as utility rate increases approved by the economic regulator. The combined effect of all of these factors contributes to a steadily improving outlook through 2013 and into 2014. And now to FATHOM. As we reflect on the fourth quarter and the entire 2012 year, we increased our FATHOM recurring revenue on a run rate basis by 26.6 percent. Even though our implementation revenue was lower than previous years, and although FATHOM sales cycle remains "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results challenging, the primary driver of FATHOM's value is recurring revenue. The achievements of the past year are significant to our market position, and enhance Global Water's growth potential going forward. FATHOM continues to build momentum within the United States and abroad. Of note, in 2012 we went live with FATHOM CIS with two California cities, the city of El Cajone and the Goleta Water District. We also contracted with our first FATHOM client in the State of Texas, the City of Kennedale for CIS and the implementation of automatic meter infrastructure. And we were selected by the City of Adelanto, California to provide all three FATHOM services. We continue to advance our relationship with Thames Water in the UK. In December 2012, we entered into an agreement to research how Thames Water can leverage the power of GWRI’s FATHOM platform. The FATHOM product continues to develop interest in the marketplace, and as we continue to invest in IT and the richness of the product, it continues to increase in value. Sales have been slower than hoped, but steady, and our pipeline of opportunities remains robust and growing. You may also be interested in the publication of our new book, The Smart Grid for Water, which was officially published this week and is now available on amazon.com. This book further solidifies our market and thought leadership position in the smart grid for water space. And now I’ll ask Cindy to review our fourth quarter and 2012 year‐end results. Cindy? Cindy Liles — Chief Financial Officer, GWR Global Water Resources Corp. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Thank you, Trevor. Since the financial information of the US company is not consolidated with the public Canadian company, our discussion today refers to the consolidated financial information of the US company Global Water. As a reminder, unless otherwise stated, all amounts discussed are in US dollars. Consolidated revenues for the fourth quarter of 2012 increased 8.9 percent to 8.4 million compared to the same quarter of 2011. Consolidated revenues for the year 2012 decreased 2.9 million to 33.5 million. Regulated utility revenue, which is subject to regulation from the Arizona Corporation Commission, increased 11.4 percent to approximately 7.5 million for the fourth quarter 2012, compared to the same quarter of 2011, and regulated utility revenue also increased 7.4 percent to 30.7 million in 2012 compared to 2011. The increase in regulated utility revenue was due primarily to the last phase‐in of our rate increase effective January 1, 2012, pursuant to the 2010 regulatory rate decision, as well as to growth in the number of active service connections. Consolidated revenues also include revenues not subject to the regulation of the Arizona Corporation Commission. Such unregulated revenues primarily relate to our FATHOM business, which is comprised of recurring operations and non‐recurring activities associated with FATHOM implementations. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Recurring FATHOM revenues increased 7.7 percent to approximately $569,000 for the fourth quarter of 2012, and increased $464,000 or 26.6 percent to approximately 2.2 million for the year 2012. The increase is attributed to the increased number of FATHOM clients. While recurring revenue increased substantially, non‐recurring revenue or implementation revenue, which is generally lumpy in nature, decreased for the fourth quarter and for the year of 2012 compared to 2011. We use a non‐GAAP measure, EBITDA, to analyze operating performance, which is based on net income or loss, excluding depreciation, interest expense, and income taxes. A reconciliation of net income or loss to EBITDA is included in today's press release. EBITDA increased 16.7 percent to 3.2 million for the fourth quarter of 2012 compared to 2011. EBITDA for the year of 2012 totalled 12.6 million compared to 14.1 million in 2011. The change in EBITDA is primarily due to the decrease in FATHOM implementation revenue, and revenue from the sale of contractual rights. Consolidated net loss was 1.8 million for the three months ended December 31, 2012, compared to 1.4 million for the same period last year. Consolidated net loss was 38.5 million for the year ended December 31, 2012, compared to 3.3 million in 2011. The change was predominantly due to a $33.7 million noncash charge attributed to valuation allowance recorded against the Company's net deferred tax assets during 2012. The actual deferred tax asset of the Company is still preserved. Excluding this valuation allowance, consolidated net loss totalled 4.8 million for the year ended December 31, 2012, compared with 3.3 million for 2011. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results I'll now pass the call back to Trevor. Trevor Hill Thank you, Cindy. That concludes our prepared remarks. Cindy and I are now available for any questions that anyone might have. I'll turn the call over now back to the Operator. Q&A Operator And at this time if you would like to ask a question, please press *, then the number 1 on your telephone keypad. And I’ll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Lukasz Michalowski with CIBC. Your line is now open. Lukasz Michalowski — CIBC World Markets Hello, all. Just calling in for Ian today. Congratulations on a good quarter. Just had a few questions. I guess start it off with in terms of the arbitration award. I guess during Q3 there was commentary that kind of indicated that you expected to receive the remaining amount this quarter. But I didn’t see—I guess I didn’t see it reflected in the financials. Could you maybe talk about it? Trevor Hill Sure. That award, as you know, arose from an arbitration that concluded in 2013, near the beginning of 2013. And the arbitration award was perfected through a judgment in the Superior "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Court. Because the contracts were registered on real property we then, in order to collect on our judgment, took the matter all the way through to the sale of the real property under which it was registered. At that point, and in the certainty of a sheriff's sale, one of the two developers paid us in full. The other developer put itself into bankruptcy. That bankruptcy occurred in September of last year, and we have been now going through the bankruptcy process in Q3 and Q4 of last year and into Q1 of this year. Remember that these contracts are still registered in real property. The property has a value that is a multiple of the value of our contracts. And the bankruptcy proceeding we expect to be completed in Q2, and the bankruptcy order to be promulgated sometime in the next 60 days or so. So the procedure is still going. It's been a little bit onerous, but nothing has changed from our perspective in our ability to collect on those judgments, and the interest clock is still ticking. Lukasz Michalowski Okay. And so I guess at the end of Q3 you were expecting kind of the credit amount to be kind of 4.5 million with about a third of it being treated as other income; just wondering whether that treatment is still going to remain the same? Trevor Hill Yeah. That's correct. Lukasz Michalowski "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Okay. And I guess moving on in terms of refinancing. In the first half of 2012, you refinanced some of the outstanding debt, not all of it. I'm just wondering whether you're still in discussions to pursue additional refinancing of some of those liabilities, and is there maybe a possibility of the recurring revenue on FATHOM starting to reach higher levels? Is there a possibility of maybe putting on some leverage on the FATHOM business to help it grow? Trevor Hill So let me answer the first question first, and then Cindy may chime in. Last year we completed, in the second quarter, a transaction with Regions Bank that consolidated a number of smaller debt instruments that were in place and allowed us to capitalize on a historic acquisition progress payment. Once that was completed, that really finished the debt financings that were planned for 2012. We don't have any further financings ongoing at the moment. On the FATHOM side, I think it's a great question, and we've put on a fair amount of recurring revenue in FATHOM through 2012, and we have significant projects in‐house at the moment. I think it's always consideration to think about levering that business as the margins begin to materialize and we continue to increase the recurring revenue, but at the moment we are not looking to expand the leverage on FATHOM at this time. Lukasz Michalowski Okay. And maybe to continue a bit on the kind of the last point you mentioned, that the recurring revenue is starting to reach attractive levels under the FATHOM side; the utility business "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results organic growth is continuing to proceed. Internally what—it's kind of—you’re kind of reaching a level where the possibility of a dividend is definitely in the picture. I'm just wondering what else would you want to see from your operations to potentially seriously consider instituting a dividend. Trevor Hill I certainly agree with you. I think that there is nice potential arising in Global to consider a dividend. You know that I've spoken about this potential in several quarters now. What I would like to see primarily, to answer your question specifically, is absolute clarity on where this current rate proceeding ends up. It's a fairly material request for incremental revenue we've asked for. Whether we get it all, I don't know for sure, but I would like to have the clarity of that outcome in my back pocket before formalizing our dividend policy. But I can tell you that we have discussed the potential of a dividend in Global with the Board. We see organic growth ticking up materially now. Our cost structures are stable on the regulated side, and certainly you're right to say this opportunity remains a priority for our dialogue in the next couple of quarters. Lukasz Michalowski Great. That's it for me for now, and I'll get back into queue. Thank you. Trevor Hill Thank you. Operator "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results And your next question comes from Khurram Malik with Jacob Securities. Your line is now open. Khurram Malik — Jacob Securities Afternoon; just a few questions here. If we could start on the FATHOM side, Trevor, you were talking about in Arizona and sort of the market conditions there with permits increasing and you continuing to add on previously foreclosed homes into your network of active connections. Can you give us an idea what's happening in California with your FATHOM utilities and their ultimate customers? When we’re talking recurring revenue, are they adding or shedding connections over the last couple of quarters? Trevor Hill Interesting. So hey, Khurram. So your question is are the utilities that we're serving in the FATHOM operation, are those utilities themselves growing in numbers of customers? Is that... Khurram Malik Right. Exactly. Yeah. As it relates to recurring revenue moving up and down. Trevor Hill I think California is lagging a little bit behind Phoenix in terms of growth. Here in Phoenix, remember that we're seeing some uptick in the market primarily because of affordability. You can still buy a very inexpensive home in our service territories in the range of 100,000 or $150,000. And because there's a significant shortage of finished lots, Global has a disproportionately high "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results percentage of finished lots in its service territories. That's one of the dynamics that's driving our growth. So we're seeing growth in those utilities, but it's more akin to the national growth rate, 1 or 2 percent… Khurram Malik Mm‐hmm. Trevor Hill Whereas here in Phoenix our regulated utilities are approaching 6 percent in organic growth at the moment because of that dynamic. Khurram Malik Right. I definitely wouldn't expect them to keep up with what's happening in Arizona, but they are growing, though, it looks like. Trevor Hill They are growing. Yeah. And they're seeing their foreclosure reversal occur as well. Khurram Malik And how about in Texas in the areas you’re targeting? Trevor Hill So Texas was not as early into the recession. It entered later and it's coming out later. It had the benefit of having the commodity in oil activity ongoing, but now Texas is pretty flat, and the other thing that we're seeing is West Texas still has incredible water scarcity issues. I mean they're "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results in now 24 months of pretty much sustained drought. There's been several cities approach us that are really struggling on the water supply and meeting their demand basis. So we see—Kennedale was a great start—but we see a real growing and near‐term opportunities emerging in Texas because of that driver. Khurram Malik Okay. Great. Speaking to FATHOM and the different sales channels you guys have there in addition to your sales forces, could you give us an update on what's happening with your partners and how that relates to generating future sales and new markets? Trevor Hill Sure. Well, I'm a big believer in the partner channels, and the reason is is because there's 50,000 water utilities in the US. And to just attack that with a direct sales force alone would be difficult, and I think very expensive. Khurram Malik Mm‐hmm. Trevor Hill So our strategy has been to run several channels in parallel. Our direct selling strategy is highly focused in areas where we know there's opportunity; that's been working quite well. On the partner side, we have a formal partnership with the Ontario Clean Water Agency, as you know… Khurram Malik "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Mm‐hmm. Trevor Hill And they are—we've just formalized another layer of agreements with them in the last 30 days or so, and now they are quite aggressively chasing clients in Ontario. There's significant drivers for FATHOM in that area as well, primarily cost related. And our partnership with Aclara here in the US has been quite good. I think Aclara recognizes the value add that FATHOM brings to their platform. Recently they brought us a few quite interesting prospects, and as these relationships mature, and they take some time, but certainly we think that we will see an increase in prospects and deals that come as a function of our partner channel. I think the other thing that's interesting of late is that we've had a significant number of inbound calls from consulting engineers and specialized consultants who deal in this area, or in IT areas with cities, asking to represent FATHOM or be a partner with us in some way. So we have a lot of activity going on the partnership channel. More than a dozen different kinds of partners are in some form of process with us right now. Khurram Malik Mm‐hmm. That's great. Yeah. Especially the consulting side; if that's a new development that could be pretty powerful because they do sort of control the process for quite a few different parts of the market. On the Aclara side, the prospects that they’re bringing to you, as a follow‐up, "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results are they typically for utilities or potential customers where Aclara has hardware already installed? Or are these virgin sort of targets where nothing's been done yet and so they're trying to get in for the first time? Trevor Hill I think it's both. On the one hand where they have product in place like areas like Corpus Christi where we've had a small role in assisting with the existing Aclara implementation there and try to surface some of the value associated with the data side of that implementation and some of the field, our GIS field tool has been very handy for that particular area. So that's an area where there is a fitted base and that's quite a large area. And then we see the other thing as well where there are smaller cities looking for a bundled solution, and Aclara's products are part of it, but not all of it, so we’ve approached a couple deals together in recent months. And they're not the only one. There are other vendors, similar vendors, out there who we are working with as well. Khurram Malik Great. And then just one question on the regulated side. You had mentioned earlier that the ACC position will be coming around late third quarter of this year. Will that—can you remind me if that'll also include the decision on the treatment of funds that you received from developers in the past? Is that a separate decision? Or is that part of the overall decision? Trevor Hill "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Yeah. It's part of the overall decision and we certainly hope, Khurram, that those two things are tied together. It was a big part of our filing… Khurram Malik Mm‐hmm. Trevor Hill Was to reconcile the balance sheet and reconcile some of the accounting associated with those ICFA contracts. As you know, the two years leading up to the filing we went through an extensive workshop process, and during the discovery phase of the rate case we've spent a lot of time with staff walking them through the mechanics of what ICFAs are and the accounting treatment that we received. So I remain optimistic that we’ll come to a meeting of the minds... Khurram Malik Right. Trevor Hill On this through the rate proceeding, and we expect both issues to be resolved contemporaneously sometime around the end of the third quarter, beginning of the fourth. Khurram Malik Okay. So all that, if you strip out the impact of the ICFA, how are the rate increases you're asking for compared to some of your peers that are sort of going through a process that are at a "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results similar stage going into this year? Are they comparable? I know everyone's got a different reality, but just from an optic (phon) standpoint? Trevor Hill Yeah. I mean I think the program here in Arizona we've tried to coordinate this a little bit with the other utilities is people are going in about—or utilities are going in about once every three years. The last increase we went through was very significant. We'd asked for about 15 million in incremental revenue, received 9 million or 9.5 million, and so that ultimately was a 50 percent increase. This particular one we're asking for 28 percent, although it'll probably be skewed over several years. And I think it's approximately in line with some other filings that we have seen over the last couple years. So I wouldn't say that this is materially larger or smaller than others. I think if you go in once every three years and there's CPI adjustments and other things, it's not—it's quite an expensive and difficult process. It's truly not worth going in unless you have the case for 10 or 15 percent plus in incremental revenue. Khurram Malik Okay. That's great. Thank you. Operator And your next question comes from Jeremy Hellman with Divine Capital. Your line is now open. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Jeremy Hellman — Divine Capital Good afternoon. Trevor Hill Hey, Jeremy. Jeremy Hellman Hey. I wanted to speak specifically about taxes, and in particular I think it was just yesterday the Texas House passed a $2 billion water funding bill. Presuming that does become law of the land in Texas, I'm curious for your perspective on how you think that will spur demand in Texas, particularly now you've got a beachhead there. As I read the language in this bill, it seems like they're going to be giving some significant consideration, significant being a variable term, but consideration to projects that deal with water conservation, feasibility, cost effectiveness, and the like. So it would certainly seem to be something that could be a pretty significant catalyst for demand for you guys there. Trevor Hill Yeah. It's a good observation, Jeremy, and we agree. In fact, we've had guys pretty close to that bill over the last year. It really arose out of the extreme scarcity in West Texas that they've seen. As you know, and I've been quite public on this, we think that the water crisis will be solved largely on the demand side and less so on the supply side. And Texas really has fewer supply "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results side options as a function of where they are. So they had some large RO facilities on the coast and things of that nature, but there is tremendous opportunity on the demand side in Texas, and we think the beachhead that we're establishing there concurrent with this funding bill that's just been announced could be very catalytic for the opportunities that we're progressing there. So these things don’t happen quickly, as you know, but certainly this is a good market for FATHOM. Jeremy Hellman Well would you maybe—and I appreciate that. Have you had any—or I guess can you provide some sense of the magnitude in terms of either size or number of potential buyers in the area? I mean have you had a significant numbers say yeah, we're thinking of doing something and if this happens then we'll really be interested in moving quickly? That sort of thing? Trevor Hill Yeah. It's a very—it's a great question, and it's very difficult to quantify. We have full‐time direct salespeople in Texas. We're making the rounds very regularly. There are about 350 municipalities in Texas of varying degrees of need for the product, so it's difficult to know. All I can tell you for sure is that we see it as a very good market, and we are all over it. Jeremy Hellman Great. Thanks. Operator "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results And your next question comes from Jon Jung with Trailhead Asset Management. Your line is now open. Jon Jung — Trailhead Asset Management Thank you. Trevor, wonder if you could give us a little more insight into your contract and what you expect to be coming in the London area and what's the purpose of moving to London and how does it make sense with regard to the limited resources you’ve got? Trevor Hill Yeah. It's a good question. I think that first of all the London opportunity arose as a function of significant water scarcity in the London area last year this time. And at the same time, their regulator has imposed some conditions on all utilities in the UK that manage customer service metrics in a way that has a direct financial implication to the utility. As you know, FATHOM was designed to deal with both of those things. So improved customer service and visibility for the customer in self‐serve ways, what we call channel shift, allowing customers real‐time access to their own bills and ability to manage their own accounts, as well as the demand side management element that UK companies were in search of. So it was one of these unusual opportunities that arose. Thames Water is the tenth largest water utility in the world, and the way that they approached us and the way that we've been able to work with them was very complementary to us, and I think a direct fit as far as FATHOM and their "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results needs were concerned. We've been walking slowly forward with them in an effort to effectively particularize FATHOM for their particular needs. So that's how it arose. It wasn't particularly like we were out building an international sales strategy. It's the only international piece that we're working on currently, but it is a direct fit for FATHOM, and a great—a very complementary opportunity for us as we move forward. It's also had significant benefit back here in the US. As people start to hear that we are working with Thames, we've had a lot more interest in the platform. It's a very well‐known and extremely well‐run company. So I take your point. We've been very careful with our expenditure on this project, and I think it does deliver significant value in a variety of ways for the FATHOM go‐forward strategy. Jon Jung What resources are used in—what kind of people requirements do you have to service this relationship? And I guess secondarily, what are the revenue potential for the Company this year? Trevor Hill Well, right now our team from Phoenix is largely supporting the project. We have had three or four people in the UK pretty consistently since last December, but working on a contract that is fairly sizable in nature. And we'll continue through a series of gates this year as we move forward with Thames. So it hasn't been—it's been a neutral revenue drain to us, revenue matching expenses as we go forward. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Jon Jung So your anticipation this year is 2013's impact from that financially is breakeven? Or I mean you're getting your expenses? I'm not sure what you meant by that. Trevor Hill Yeah. I think it's breakeven or a little better than that, to be honest. And you asked—the second question you asked was what's the opportunity? We expect that sometime in the next 12 months, and in some way related to the work that we've done with Thames and others, they will go out for a competitive bid on a system that services their entire company, and I think we'll be in a good position to be competitive on that. That contract is very significant. Jon Jung Okay. All right. Thanks very much. Trevor Hill Thank you. Operator And your next question comes from Lukasz Michalowski with CIBC. Your line is now open. Lukasz Michalowski Hi. Just a couple quick follow‐up questions. I know, Trevor, you kind of try to stay away from giving guidance in terms of how many kind of RFP processes you're involved with or how many "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results connections. Is there any more clarity you can provide in terms of kind of your internal expectations or anything like that on that front? Trevor Hill Well, I would say that as far as RFPs go, we continue to be highly selective of these. There are currently four RFPs in‐house right now, and I would say that still about half of the deals that we're winning are a function of RFPs. The other half are going through a unique procurement process. I would say that the pipeline is continuing to grow in size, and that this is becoming a bit more predictable over time, but I'm still really reticent to make any predictions. It's such a difficult market to predict in. We have contracts where the cities have told us you've been selected now nearly six months ago, and we haven't been able to contract for reasons that are not related to us. So cities continue to struggle through some of their own economic hardships and various things. We are omnipresent with these cities, but having to be patient. So all I can tell you is the pipeline is continuing to grow. We've done very well on RFPs that we have responded to of late, and there are—the pipeline is quite full. There's a lot of activity right now and a lot of implementations in‐house as well. Lukasz Michalowski Great. Thank you for that, and just one last question in terms of the opportunity in London. Are you, I guess, having discussions or your initial work with Thames Water, has it "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results materialized into having—starting discussions with some of the other utilities in the area, considering the circumstances in the region? Trevor Hill Yes. We have been approached by a number of utilities in the UK. Lukasz Michalowski Okay. Thank you. That's it for me. Operator And your next question comes from Andy Krystal with Global Capital Management. Your line is now open. Andy Krystal — Global Capital Management Hi. I was just wondering, is FATHOM now currently EBITDA positive for this past quarter? Or for the year? Trevor Hill No. It is not. We are still in the early stage growth. I would say in the first quarter did not—
we were not EBITDA positive either. My expectation is that in 2013 we will achieve EBITDA breakeven, I hope, and potentially even cash flow positive as we're still investing in the back office platform as well. Andy Krystal "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Okay. I guess that leads me to my next question. On the balance sheet, how much on the balance sheet is related to the FATHOM operation? Are costs right now being capitalized onto the balance sheet? Or development of software? Or different things like that? Trevor Hill Yeah. I'm going to pass that question to Cindy. Andy Krystal Sure. Cindy Liles Yeah. I'd be glad to answer that. It is being capitalized, and we've spent a total of $9 million to date on FATHOM over the years, and we currently have around 6 million on the books today that's un‐depreciated. Andy Krystal Okay. So is the $6 million, I guess, the total that's on the balance sheet as of 2012 December 31st? Cindy Liles It is. Yes. Andy Krystal Okay. And sorry, I'm not 100 percent sure. This product was developed organically in‐
house? "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Cindy Liles Yes. It was. Trevor Hill Yes. That's correct. Andy Krystal Okay. And what does the goodwill on the balance sheet relate to? Cindy Liles Yeah. That relates to some acquisitions that we made in 2006, predominantly utility acquisitions only. Andy Krystal Okay. Sure. And then last question on FATHOM. Do you see any pushback from utilities in the sense that by using your product they're going to be having less water usage, which presumably would translate to less revenue? Trevor Hill Well, it's a good question. Ultimately what the smart grid for water is is a means of demand destruction if the cities want that. So there are different drivers for why we win FATHOM deals. In many cases in California, we win deals because the ability for us to bring economies of scale to smaller utilities and provide those cities with a robust platform for their customers is what's driving the sale. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results So in those cases, revenue generally goes up as a function of the methodologies that we deploy in FATHOM, costs go down as a function of economies of scale, and customer service goes up as a function of the robust nature of the platform. So it's a pure economic sale in most cases. Now in Texas it's a bit different, and the reason is is because cities are frantically trying to destroy demand. And there are only really two ways to do that. One is price signals and one is peer pressure. If water prices are too low, people tend to use more water. So what cities in West Texas are doing is using rates and benchmarking their customers against each other as a means to incent demand destruction. So in those cases they are raising rates for that end goal. So we really do not see pushback on FATHOM for destroying demand. It really is an option that is tied to the rate structure in the cities. Now in many cases once FATHOM's in, the cities come back to us and say okay, help us tune these rates so that we get this revenue and this amount of demand reduced. And that's the benefit of the platform, but we're not getting pushback at the get go on that basis. No. Andy Krystal Is there—do you find that there's generally a difference between municipally owned utilities and privately owned utilities? Trevor Hill "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Absolutely. So here's the reason. Historically in rate regulated businesses, which are the private utilities and represent about 15 percent of our sector, those utilities are very sensitive to demand destruction because it destroys rates and reduces the rate of return on their invested capital. And so in the cases where rates are high, or FATHOM was used in some way to reduce demand in those cases then, there is sensitivity. But in municipalities, which is 85 percent of our market, and frankly 99 percent of the utilities that we're going after, they have a different balance sheet regulation. They're not regulated on—their rates aren't regulated on the basis of a rate of return on invested capital, but rather they work on a cash basis. And generally speaking, those cities are interested in reducing their operating costs as a function of FATHOM, and somewhat less sensitive to demand destruction as it relates to revenue because raising rates or at least the commodity price on rates is much, much simpler for cities. They can do it in an order of council. Not to say that it's simple, but it doesn't take the year‐long process that we often see with the regulated companies, or the PUCs, in the nation. So there are material differences in the balance sheet and the income statements of those two different kinds of utilities, and it also goes to how the model—how we sell the model into those two different categories. Andy Krystal "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Okay. Sure. And then so let's say you roll out FATHOM with a utility is 20,000 customers or 20,000 households. Is the revenue model—are you then going to be compensated straight up to the 20,000 households? Or does it depend on the uptake or use of the actual households? Trevor Hill No. The model is based on meters, so it's a dollar amount per meter per month, and historically we have not chosen to participate in the impacts that FATHOM might bring to the community, either positive or negative. Andy Krystal Okay. So I guess the utilities clearly like the product, but do you have feedback from not necessarily the utility customers, but from the actual households that are using the product? Is there a response? Are they using it? Different things like that. I mean I downloaded the app just to see what it's like. I obviously didn't get the full advantage of it because I presumably am not a customer, but just if you could talk about that. Trevor Hill Yeah. Sure. Well, because the sector is so fragmented; remember that of the 50,000 utilities in the US there is only 300 greater than 30,000 meters. And that means by definition 99 percent or more of all utilities in the US are small and, therefore, most of them struggle to have much in terms of back office capability. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results We often see cities not even being able to manage credit cards for their customers or have them pay online or do ACH transactions or things of that nature. So in Global once we put them on the platform, we see immediate uptake in ACH transactions, credit card transactions, people managing their accounts online. And those—and we are running continuous campaigns to convert customers from the traditional ways of paying to the fully self‐managed methodology. So yes, we see continual uptick in the use of our products, both the Web portal, but also the app that you downloaded. And we see nothing but more of that in the future as people become more comfortable with managing their own financial transactions over their smartphones. Andy Krystal Okay. Sure. Perfect. And now just moving to the regulated business; is it possible just to—
I'm just trying to grasp the area that your utility is, and I guess kind of the shift in terms of the development area of the greater Phoenix area. How many more potential lots are in that service area? If that question... Trevor Hill Yeah. For sure. So geographically—I'll answer the first question first. Geographically our utilities are south of the city. We have about 300 square miles of monopolistic service territory that is directly south of Phoenix by about 20 miles and about 12 miles from a major employment corridor on the south side of town. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results And then our other major area is on the west side of town about the same distance from the centre of town, and we have a couple hundred square miles of service territory out there as well. So both these areas are what you would call suburbs really of Phoenix. They're one concentric ring outside of where Chandler, Gilbert, Mesa, Goodyear, Glendale, these cities are. And as a function of that that's why as growth pushes out in concentric rings, that's why we're seeing the high growth rates that we are. And your second question was what is the potential of these areas? Well, I can tell you that one of the reasons houses are inexpensive or affordable in Phoenix is because it's a very easy area to develop land. The land is very flat historically in agriculture, and so the land development process is quite inexpensive. You can still buy a finished lot in many of these cases for 30,000 or $40,000. Two years ago that was $12,000, and so that affordability and the ease of development in these areas is profound. If you looked at the maximum number of houses that you could build in our service territories, it's something like 1.2 million houses. So there is really unlimited potential for future growth in these areas. We have just started, to be honest. We have a toe in the water as far as the size of these service territories is concerned. Operator And your next question comes from Jim Belin with Aldebaran Asset Management. Your line is now open. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Jim Belin — Aldebaran Asset Management Hello. Between now and third quarter 2013 when you expect the rate increase approval, do you think that you might need to raise any additional capital? Trevor Hill Yeah. I don't think so. Right now, as I said before, FATHOM we expect to be on an approximately breakeven basis going forward for the rest of the quarters of 2013. And the regulated businesses—regulated business at the moment is growing inside the existing fitted infrastructure that's already there, and we don't anticipate the requirement for any growth CapEx on the regulated side. Jim Belin Thank you. Operator And your last question comes from Khurram Malik with Jacob Securities. Your line is now open. Khurram Malik One follow‐up question on the pipeline; could you just give us a flavour for how it sort of evolved with respect to you bringing your financing solution to the table, or customers asking for it, in let’s say the last two years and maybe into 2013? And also would these—are these potential customers that, let's say you won an award or given a contract, but the contracting process hasn't "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results started, how many of those are there typically experiences where you're bringing a financing option to the table and have that secured and ready to go versus them having to actually secure the funds from wherever in their budget they're finding them? Trevor Hill So the first question is on has financing been catalytic… Khurram Malik Mm‐hmm. Trevor Hill In the deals? And I would say absolutely. You'll remember that in the municipal market what a lot of technology companies are doing is trying to sell what appears to be a complex, somewhat risky product to a financially struggling municipality. And you could imagine that that business model doesn't work particularly well. So what FATHOM does is monetize those efficiencies. So basically we go in and say look, you're spending $10 per bill per month or something like that now. We can do it for $8 a month, including financing. And what that effectively allows, and I'm making up these numbers, but what that allows the city to do is both get the deployment of smart grid, that means new meters, AMI solution, integrations, implementation, all these pieces, but at a cost, a bundled cost less than what they're currently spending. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results There's really no way to get the visibility on what it will cost unless you can do all the pieces, so that's meter replacement, AMI, all the implementations, integration, and finance, and finance it at very attractive rates. The combination of all those things together, plus the fact that we are a utility, we're approaching a couple hundred thousand meters on the platform now, which means that we're bigger by a multiple than every utility in the pipeline right now of these smaller utility opportunities, that is something that municipal decision‐makers can act on. And so it's been very important, I think, and still something like 70 percent of all the deals we're closing have an element of finance from us in it. Khurram Malik Okay. So 70 percent; that's an interesting point. Okay. And (unintelligible) some of these utilities that you would have liked to have closed in 2012 or that had given you the award or given you the green light that you’re ready to go, but work hasn't started or they haven't gotten to that final stage, can you tell me what some of these hurdles or problems are on their side? Trevor Hill They vary. There's a variety. There's a couple utilities like that even here in Arizona where for a variety of reasons it's been political or changes in Council or other operating priorities. We see the cities really did reduce staff levels very significantly over the last few years. Their revenue really hasn't ticked up yet because it's driven by tax, taxes primarily, and so those are lagging revenue items for the city, so they're just really unmanned in many cases. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results And the deals we are getting done, we're literally working hand in glove with the city to move through their own internal processes. So this is no different for me as it is for anyone else in the sector. The cities are scrambling, I think, in many cases. Good people in good cities, but really just limited personnel, and that's what we're finding in most cases. It's really nothing to do with the technology. In some cases it has to do with the attrition of certain employees or labour‐related items, but in most cases it's just getting the bandwidth to move us through the process. Khurram Malik Have you changed your approach to how your implementation of your technology relates to union jobs going away or that are disappearing or whether, you know, getting more automated? Or are you still sort of staying back on that and not willing to ruffle feathers as it relates to your long‐term brand value or ability to get into markets? Trevor Hill Well, I think we have been very sensitive to this… Khurram Malik Right. Trevor Hill And we try not to go into cities and say this means job headcount reduction for sure. Basically you've got to think of FATHOM as a pizza menu. And what we're seeing is that about an "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results even split going forward of cities who want the full outsource package, including our call centre, which is quite robust, but we also see a model emerging where on the pizza menu they do not select our customer service agents, but use our platform. So when you think about the verticals in this market and all the different things that FATHOM does for a city, one of those pieces is the customer service piece. And what we've done in the model is made it so if they want to use their own customer service people on our platform, that's an option they can select. Khurram Malik Mm‐hmm. Okay. That's fine. So you're still maintaining that tact of not getting too aggressive, which I would agree with, to get somebody to cross the line because—or maybe you can quantify it differently. I mean how much of an impact is it in a typical utility when you go in and you sign a contract in terms of jobs going away or disappearing or other efficiency gains in that regard? Trevor Hill Well, I think certainly it's part of it… Khurram Malik Okay. Trevor Hill But I think what you've got to remember unlike many sectors is that the water sector is frantic for new people. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Khurram Malik Right. Trevor Hill And we have a massive attrition occurring as the average age of water utility operators is about a decade higher than the average age of all workers in the US. And what that means is that fewer entrants—we're seeing fewer entrants into the sector, and in the next three years something like 40 percent of all water‐related workers will leave the sector. So in most cases what we hear from cities is they want to advance their people meter readers or other technicians into higher and better uses, and maintain their knowledge in the city. So in very few cases does FATHOM mean we're putting people on the street, and it's really not what's happening. In most cases it has to do with other economic drivers, archaic CIS systems, their interest in having AMI and meters, and the variety of other pieces. This is a consideration, but it's definitely not the only one. Khurram Malik Okay. So it’s definitely—it's down the ladder in terms of the bigger issues that's delaying implementation or whatever the case may be? Trevor Hill Yeah. That's what I would say. Khurram Malik "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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GWR Global Water Resources, Inc. Fourth Quarter Results Okay. Great. That's all I have. Thank you. Operator And we have no further questions at this time. Trevor Hill Okay. Thank you, everyone; we appreciate it. As always, Cindy and I are available for questions, and don't forget to download our book on Amazon. Operator And this concludes today's conference call. You may now disconnect. ***** "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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