Earnings Call Transcript - CWCO Q4 2025

Operator, Operator

Good morning. Thank you for joining us today to discuss Consolidated Water Company's 2025 Full Year Operating and Financial Results. Hosting this call today is the Chief Executive Officer of Consolidated Water, Rick McTaggart; and the company's Chief Financial Officer, David Sasnett. Following their remarks, we'll open the call to your questions. Before we conclude today's call, I'll provide some important cautions regarding the forward-looking statements made by management during the call. I'd like to remind everyone that today's call is being recorded, and it will be made available for telecom replay. Please see the instructions in yesterday's press release that has been posted to the Investor Relations section of the company's website. Now I'd like to turn the call over to Consolidated Water's CEO, Rick McTaggart. Sir, please go ahead.

Rick McTaggart, CEO

Thank you, Chloe, and good morning, everyone. Our retail, bulk, and manufacturing revenues and operating incomes in 2025 were consistent with our expectations for the year. However, our services revenue did not perform as expected due completely to a permitting delay relating to our 1.7 million gallon per day seawater desalination project in Kalaeloa, Hawaii. We believe this type of delay is common for the complex multi-agency permitting process required for a project of this scale and has not been due to any failures on the part of Consolidated Water. In fact, over the past year, we have achieved all other major project milestones under this phase of the Hawaii project, which include successful pilot testing, receipt of confirmation from the Honolulu Board of Water Supply that we are able to produce water that is a reasonable match to the quality of their current water supply and that we are able to produce water that causes no detrimental impact to the Board of Water Supply system or their customers' assets. And then finally, we completed 100% of the design for this project. Achieving these other significant project milestones enables us to begin construction once all permits have been issued. We continue to work closely with the Honolulu Board of Water Supply and the regulatory authorities to advance the permitting process and mitigate schedule impacts. While our total revenue on a consolidated basis was slightly down compared to the previous year, our consolidated gross margin in terms of percentage and dollars improved and our consolidated net income from continuing operations noticeably increased compared to 2024. Gross profit generated by all four of our business segments increased in terms of percentage, which speaks very well for our attention to efficiency and cost control. Our retail water operations continued to grow in 2025, driven by the strength of the Cayman Islands economy and historically low rainfall in our exclusive utility service area on Grand Cayman. We saw ongoing growth in population and business activity on the island, coupled with very low precipitation, which resulted in a record volume of water sold to a record number of customers in 2025. Although our Caribbean-based bulk segment revenue declined slightly this past year, primarily due to lower fuel-related charges that we pass through to our customers, we achieved higher profitability in dollars and gross profit percentage in this segment. This improvement was driven by lower cost of revenue, reflecting our focus again on operational excellence in our Bahamas and Cayman Islands bulk businesses. Our Services segment revenue decreased in 2025, primarily due to the completion of two major design-build projects in 2024 and the lull in Hawaii project activity while awaiting the issuance of a key project permit, and this was subsequent to the completion of the pilot plant testing phase of the Hawaii project in early 2025. The Services segment revenue decrease is also due to a lesser extent to a decrease in nonrecurring consulting revenue, which actually has picked back up in the last quarter. The decrease in Services segment construction and consulting revenue was partially offset by a 9% increase in recurring revenue from O&M contracts. This increase in O&M revenue was attributable to incremental revenue generated by both our PERC Water subsidiary and REC in Colorado, and it includes revenue from a new municipal client in Southern California and from additional services provided to a large federal client for the second half of last year under a contract which expires at the end of this month. Our Manufacturing segment during the year continued to improve its revenue and gross margin, which reflects the production this past year of primarily higher-margin products for nuclear power and municipal water clients as well as our continued focus on maximizing efficiency and throughput of our facility. Completion of our new 17,500 square foot manufacturing facility in the third quarter of 2025 has further enhanced efficiency and throughput and is key to growing that business segment through continued customer and product diversification. And that diversification is occurring primarily in the municipal water client or municipal section of our business. Now before getting into recent developments and our outlook for the rest of the year and beyond, I'd like to turn the call over to our CFO, David Sasnett, who will take us through the financial details for 2025.

David Sasnett, CFO

Thanks, Rick. Good morning, everyone. Our 2025 revenue totaled $132.1 million, which is a slight decrease of 1% from 2024. This decrease was primarily due to decreased revenue for our Services segment as well as a modest decrease in the bulk segment revenue. And these decreases were partially offset by revenue increases in the Retail segment and in our Manufacturing segment. Retail revenue increased 6.6% to $33.6 million due to an 8.3% increase in the volume of water sold to a record 1.09 billion gallons, and this increase resulted from significantly lower rainfalls, in fact, historically low rainfall on Grand Cayman and an approximate 7% increase in the number of customer accounts in our license area. Our bulk segment revenue decreased less than 1%, and this decrease was due to a decline in energy prices, which decreased the energy pass-through component of our rates in the Bahamas operations. The decrease in Services segment revenue was primarily due to plant construction revenue decreasing from $18.6 million in 2024 to $13.5 million in 2025, and this decrease was a result of $8.2 million of additional revenue from PERC's contract with Liberty Utilities and $1.3 million in revenue from the Red Gate contract in Grand Cayman in 2024. These contracts were both substantially completed in mid-2024. Construction revenue recognized on the Hawaii project also declined by $2.9 million in 2025 due to completion of the pilot plant testing phase of the project. These decreases in construction revenue were partially offset by construction revenue generated under new contracts. Services segment revenue generated under our O&M contracts totaled $32.1 million in 2025, which represents an increase of 9% from 2024. The increase was due to incremental revenue generated by both PERC and by REC. Our Manufacturing segment revenue increased by $1.1 million or 6% to $18.7 million as compared to $17.6 million in 2024. Our gross profit for 2025 was $48.4 million, which represents 30% of total revenue as compared to $45.6 million or 34% of total revenue in 2024. And this improvement is due to increases in both the Retail and Manufacturing segment revenue. Our net income from continuing operations in 2025 was $18.6 million or $1.16 per diluted share. This compares to net income of $17.9 million or $1.12 per diluted share in 2024. Including discontinued operations, our net income attributable to Consolidated Water shareholders in 2025 was $18.3 million or $1.14 per diluted share. This compares to net income of $28.2 million or $1.77 per diluted share in 2024. Turning to our balance sheet. During the year, CW-Bahamas accounts receivable balances decreased to $20.7 million as of December 31, 2025, as compared to $28.4 million as of December 31, 2024. This decrease was the result of receiving significant payments in addition to current billings on CW-Bahamas delinquent accounts receivable from the WSC. As of February 28, this receivable from the WSC amounted to $22.6 million. We continue to be in frequent contact with officials of the Bahamas government, who continue to express their intention to significantly reduce CW-Bahamas delinquent accounts receivable balances. However, we are presently unable to determine if or when such reduction will occur. Our cash and cash equivalents totaled $123.8 million as of December 31, 2025, and our working capital as of that date was $141.9 million, and our stockholders' equity was $221.7 million. The working capital and cash amounts as of December 31, 2025, represent a $24.4 million increase in cash and a $9.1 million increase in working capital from the prior year-end. And as we have consistently reported on our calls, our balance sheet currently has no significant outstanding debt. Our projected liquidity requirements for the balance of 2025 include capital expenditures for existing operations of approximately $11.1 million, and this includes approximately $1 million in the first half of 2026 for a project in the Bahamas. We increased our quarterly cash dividend by 27.3% to $0.14 per share beginning in the third quarter of 2025, and we paid approximately $2.3 million in dividends in January of 2026. Our liquidity requirements may also include future quarterly dividends as such dividends are declared by our Board. And we continue to evaluate how to best utilize our ample cash balance and outstanding liquidity to increase shareholder value. So this completes our financial summary for the year, and I'll turn the call back over to Rick.

Rick McTaggart, CEO

Thanks, David. We are pleased with the ongoing growth in our retail water business in Grand Cayman, particularly in sales and sales volumes. Our Caribbean-based bulk water business continues to generate stable and recurring revenue over the long term. The demand for our water in the Cayman Islands is influenced by changes in tourism and rainfall levels. According to the Department of Tourism Statistics, tourist air arrivals in the Cayman Islands rose by 2.9% to roughly 450,000 in 2025 compared to the previous year, which likely aided our retail sales growth. Preliminary stats indicate that January this year was a strong month for tourism arrivals as well, and we are eager to see how this will affect our sales going forward. However, in the first couple of months of 2026, we experienced significantly wetter weather, with rainfall increasing by about 280%, which we expect will also impact our sales in the first quarter of 2026. Concerning our Cayman Water utility license, last February we received a new concession from the government that extends the terms of our 1990 license until a new license from OfReg is finalized. Negotiations with OfReg for a new license are more active than in previous quarters but are still ongoing. Turning to the Hawaii project, we completed 100% of the design for the seawater desalination plant for BWS this past quarter. We are focused on obtaining the remaining permits required for our client to issue a notice to proceed with the construction. This includes responding to regulatory inquiries and working with BWS to minimize schedule delays. The postponement of construction has shifted expected revenue and cash flows related to the Hawaii project into future periods. We anticipate that construction will recommence or start later this year, significantly contributing to our revenue and earnings in future reporting periods. Our Construction Service segment revenue is expected to remain below last year's record until the Hawaii project begins construction. Looking at our Services segment, we announced the awarding of two water treatment plant construction projects this past quarter, including a $3.9 million drinking water plant expansion in Colorado and an $11.7 million wastewater recycling plant in Northern California. The revenue from these projects is expected to come primarily this year, totaling $15.6 million. REC, our Colorado subsidiary, secured the first project, which will help us pursue more design-build opportunities in Colorado. Our PERC Water subsidiary secured the other contract for the wastewater recycling plant to convert untreated wastewater into irrigation water for a golf club in the San Francisco Bay Area, saving 36 to 38 million gallons of potable water annually. Because this facility will be underground, we will start construction after the rainy season in Northern California to avoid delays; therefore, we expect to recognize revenue from this project primarily this year. Meanwhile, we have been preparing subcontracts and ordering necessary long-lead equipment. PERC Water's customized design report program develops comprehensive plans for water infrastructure that minimize risks and enable optimized plant performance for our clients, making them attractive to large homebuilders and private utilities. In Arizona, PERC is using its program to pursue several design-build opportunities in the Phoenix area. Similar to the Liberty Utilities project a few years back, we believe these reports may lead to design-build contracts for important wastewater treatment facilities, though the sales cycle can be lengthy. In our manufacturing operations, we completed the expansion of our facility in Fort Pierce, Florida, in August 2025. We added 17,500 square feet of plant space, bringing our total to 47,500 square feet, allowing us to increase production capacity and manage multiple projects simultaneously. This expansion is timely, as bidding activity for municipal water projects in Florida has risen significantly. We expect these municipal initiatives to contribute to our growth in 2027. Our experience in manufacturing large-scale filtration systems and our location in Fort Pierce position us well for further growth in the Florida market. Additionally, we hold NQA-1 certifications from two major nuclear industry companies, and we are seeing renewed interest in U.S. nuclear power solutions, which positions us for continued growth. As we move through the year, we believe our diverse business segments will continue to improve results for shareholders. This includes growth in our retail business in Grand Cayman, stable revenue from our bulk water operations, and the potential for growth in our manufacturing and design build businesses in the U.S. With global demand for clean water increasing, we are well-positioned to seize opportunities in desalination and water infrastructure across the Caribbean and North America, along with potential strategic acquisitions or partnerships. I would now like to open the call for questions. Chloe?

Operator, Operator

The first question today comes from Gerry Sweeney with ROTH Capital.

Gerard Sweeney, Analyst

I wanted to ask a couple more questions on the Hawaii desal project. Just curious as to what that permit is and who's responsible for obtaining the permit.

Rick McTaggart, CEO

Well, I guess that would be all right to say it's the state historical preservation department. I think we mentioned it in the call in November. I mean that permit is required before we can put in applications for all the building permits and ground clearance permits and that sort of thing. We're making progress on it. It's just a very slow process for everybody. It's not just us.

Gerard Sweeney, Analyst

Got it. So is Consolidated responsible for that permit? Or is the city responsible for it?

Rick McTaggart, CEO

The client is responsible for that. And they've been dealing with all the inquiries and that sort of thing from the department.

Gerard Sweeney, Analyst

Got it. And once that is received, you do have to put in some other building permits, et cetera. Did I understand that correctly?

Rick McTaggart, CEO

That's correct. Yes. Some of this permit is a prerequisite for applying for a number of other permits. That's my understanding.

Gerard Sweeney, Analyst

Got you. Best guess, I mean, once the historical permit is achieved, I mean, do you have any idea of how long the other permits take? Or is that sort of a little open-ended just because of the nature of permitting?

Rick McTaggart, CEO

My understanding is that the process is somewhat more straightforward now. We have completed the design, so it will be a matter of obtaining regulatory approval for the various components of that design before we can proceed with acquiring building permits. I'm a bit hesitant about making predictions since we've experienced delays from last year in the fourth quarter. Given the current stock price and related factors, it’s challenging to forecast these developments accurately. That's why we mentioned in our notes that we expect construction to commence later this year. However, pinpointing the exact quarter at this moment is quite difficult.

Gerard Sweeney, Analyst

No, that's understandable. I was just curious as to what are some of the other sort of milestones or steps post the historical permits. So that helps frame out when and how it all develops. So that's helpful. And then the other thing I want to talk about was just the O&M revenue that's ticked back up in the quarter. I think you mentioned a couple of project wins, but I think also another project was expiring. But that's around, I think, PERC and REC, I'm talking about, not the Caribbean. But how does that business look in pipeline and opportunity on a go-forward basis?

Rick McTaggart, CEO

There's a lot going on there, Gerry. I mean there are a couple of really big opportunities that we're chasing right now. One of them, it's very competitive. I mean these are bigger O&M opportunities. We think we have certain advantages. Obviously, they're both in Southern California, and we think our presence there and our record helps us. But it's a competitive market, and we're just working through trying to get some of these. It could be big winners for us if we get these projects.

Gerard Sweeney, Analyst

Got it. And then one last question. The West Bay facility was completed, providing up to 1 million gallons of water a day. It was finished in the fourth quarter last year, but how should we think about that? This adds incremental volume, and I’m curious about how much of that 1 million gallons a day is already allocated for use, if you have any insights on that.

Rick McTaggart, CEO

Last year, we utilized our capacity because we experienced significant quarters. We view our asset planning in a 5- to 10-year timeframe. The impact of higher rainfall this year is uncertain, as our production capacity is based on peak demand, which usually occurs in December, January, and February, before tapering off in the summer months. We established the original 1 million-gallon capacity about 2.5 years ago and began expanding it right away due to the need for more capacity. Our volume growth over the last 5 years, especially post-COVID, has been quite impressive.

Operator, Operator

The next question comes from John Bair with Ascend Wealth Advisors.

John Bair, Analyst

I probably ought to know this by now, but how quickly are the energy cost recovery increases reflected in your bulk services? Is that on a monthly, quarterly? How does that work?

Rick McTaggart, CEO

It's monthly. We look at the average cost for fuel and electricity every month, and then we charge the client back for that.

John Bair, Analyst

Okay. All right. And then the next one, you mentioned a federal contract for services that's finishing up at the end of the month, I believe it was. Is that a renewable contract? And if it is, is it something that's open for bid? Or is it over and done with?

Rick McTaggart, CEO

Yes. We submitted a bid for that during COVID, and it has been renewed annually since. Our understanding is that the decision has nothing to do with our performance or their willingness to renew with us specifically. The military had other priorities at that base, and it seems the contract is being awarded to a municipal entity adjacent to the base. They did not hold a bidding process; it was simply given to this public utility.

John Bair, Analyst

Okay. You mentioned project opportunities in your remarks, and I'm curious about the municipal projects that are available. Can you discuss the balance between public-private partnerships and purely public projects? Specifically, are there larger opportunities, such as in data center water aspects, that you're exploring?

Rick McTaggart, CEO

We are not pursuing data center opportunities, John. What I'm discussing is our strong municipal business, especially in Florida. There have been regulatory changes regarding shallow aquifer withdrawals, which means that any new drinking water capacity being developed will have to turn to deeper, more saline aquifers if cities have already maxed out their shallow water withdrawal permits. This situation opens up significant opportunities for us in the low-pressure reverse osmosis market. There are several municipal projects, with various cities along Florida's East Coast looking to expand their drinking water production capacity. Cities like Pompano Beach, Delray Beach, West Palm Beach, Stuart, and Port St. Lucie are all involved in projects that allow us to provide equipment. We have made substantial progress over the years collaborating with consulting engineers in Florida, who appreciate our products and quality, and we are being included in various project specifications.

John Bair, Analyst

That's good to hear. That kind of leads in a little bit to my last question here. And wondering if there's any new opportunities, any new market opportunities that are addressable by your Manufacturing segment, given that you've expanded it and so forth, you're looking at any new potential market opportunities to provide equipment?

Rick McTaggart, CEO

Yes, you can see the municipal RO system market as a renewed opportunity. We haven't seen much business from that market for several years, as our focus has been on producing smaller equipment, assemblies, and piping. The new space in Fort Pierce allows us to engage more significantly in the municipal water market and to create larger assemblies and production skids needed for those plants. That's our main focus right now. Additionally, we are still producing for the nuclear market, which is a bit more cyclical compared to the strong demand we currently see in the municipal market. So, that's where we're directing our efforts.

John Bair, Analyst

And that nuclear market, is that more domestic? Or is it global, I guess, broadly speaking? Is it pretty much...

Rick McTaggart, CEO

Yes. The two clients that we have, I mean, they sell domestically and globally. I don't really have that sort of number off the top of my head, but I know there's projects in the U.S., in Canada and Japan, things like that, Korea that these products are used on.

Operator, Operator

All right. At this time, this concludes our question-and-answer session. I'd like to now turn the call back over to Mr. McTaggart. Sir, please go ahead.

Rick McTaggart, CEO

Yes. I'd just like to thank everybody for joining us today, and happy St. Patrick's Day, by the way. And I look forward to speaking with everybody when we release our Q1 report in May. Take care. Thank you.

Operator, Operator

Thank you. Before we conclude today's call, I would like to provide the company's safe harbor statement that includes cautions regarding forward-looking statements made during today's call. The information that we have provided in this conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements regarding the company's future revenue, future plans, objectives, expectations and events, assumptions and estimates. Forward-looking statements can be identified by the use of words or phrases usually containing the words believe, estimate, project, intend, expect, should, will or similar expressions. Statements that are not historical facts are based on the company's current expectations, beliefs, assumptions, estimates, forecasts and projections for its business and the industry and markets related to its business. Any forward-looking statements made during this conference call are not guarantees of future performance and involve certain risks, uncertainties, and assumptions, which are difficult to predict. Actual outcomes and results may differ materially from what is expressed in such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, tourism and weather conditions in the areas we serve, the economic, political and social conditions of each country in which we conduct or plan to conduct business, our relationships with the government entities and other customers we serve, regulatory matters, including resolution of the negotiations for the renewal of our retail license on Grand Cayman, our ability to successfully enter new markets and various other risks as detailed in the company's periodic report filings with the Securities and Exchange Commission. For more information about risks and uncertainties associated with the company's business, please refer to the Management's Discussion and Analysis of Financial Conditions and Results of Operations and Risk Factors sections of the company's SEC filings, including, but not limited to, its annual report on the Form 10-K and quarterly reports for Form 10-Q. Any forward-looking statements made during the conference call speak as of today's date. The company expressly disclaims any obligations or undertaking to update or revise any forward-looking statements made during the conference call to reflect any changes in its expectations with regard thereto or any changes in its events, conditions or circumstances of which any forward-looking statement is based, except as required by law. I would like to remind everyone that this call will be available for replay starting later this evening. Please refer to yesterday's earnings release for dial-in replay instructions available via the company's website at cwco.com. Thank you for attending today's presentation. This concludes the conference call. You may now disconnect.