Earnings Call Transcript - CWCO Q3 2024

Operator, Operator

Good morning. Thank you for joining us today to discuss the results for Consolidated Water's Third Quarter of 2024. Hosting the call today is the Chief Executive Officer of Consolidated Water Company, 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 for the instructions in yesterday's press release which is available in the Investor Relations section of the company's website. Now I'd like to turn the call over to Consolidated Water Company's CEO, Rick McTaggart. Sir, please go ahead.

Rick McTaggart, CEO

Thank you, David. Good morning, everybody. Thank you for joining us today to discuss our financial and operating results for our third quarter of 2024. As you saw in our press release issued yesterday, we reported revenue of $33.4 million and net income from continuing operations of $5 million or $0.31 per diluted share for this past quarter. These results were consistent with our expectations given the completion of two large design-build projects earlier this year. We were pleased to see the continuing trend of increasing retail water sales in our exclusive utility service area on Grand Cayman, which was due to business and population growth on the island. Our Bulk segment had relatively consistent revenue compared to last year. However, we saw an increase in gross margin due to the operations and maintenance contract for the new Red Gate II plant for the water authority in Grand Cayman, which became effective May 1st of this year. I'll just note because we guarantee the energy consumption of our plants to our clients in this type of contract, which gives the client certainty of costs, our margins are typically better early in the contract lifecycle when the equipment, particularly the RO membranes, are new. Looking at services revenues, they declined by about half due to our anticipated reduction in construction revenue related to the conclusion of our Liberty Utilities and Red Gate II construction projects. These projects had a major impact on 2023 revenue but were completed prior to the start of the third quarter of this year. The decline in construction revenue was partially offset by a $2.5 million increase in O&M revenue, which is recurring revenue. This increase included $2.1 million from our REC subsidiary in Colorado, which we acquired in October of last year. REC provides us with a new channel for expansion of our design-build and O&M businesses into water-stressed regions of Colorado. The balance of the increased recurring revenue resulted from incremental O&M contracts with our PERC Water subsidiary. We continue to advance our development activities on the $147 million project to design, construct, operate, and maintain a seawater desalination plant for the Board of Water Supply in Honolulu, Hawaii. Since we announced the project in June of last year, we have been advancing through the piloting, design, and permitting stages. We plan to begin the construction phase late next year, which represents the largest portion of revenue we expect to generate from this project. We continue to gather essential operational data from the seawater desalination and post-treatment pilot systems that will inform the final design and permitting of the full-scale project. At present, we are close to completing the first phase of the pilot testing and are nearing 60% completion of the final design for the project. The entire Hawaii project comprises a two-year development phase, followed by a two-year construction phase, and after construction and commissioning, we expect to operate the plant under a 20-year O&M agreement, with two additional five-year extensions to that O&M agreement exercisable at the client's option. So now, before getting into recent developments and our outlook for the rest of the year, I'd like to turn the call over to our CFO, David Sasnett, who will take us through the financial details for the quarter. David.

David Sasnett, CFO

Thanks, Rick. Good morning everyone. Our revenue for the third quarter totaled $33.4 million. This was a 33% decrease from the same quarter of last year. This decrease is almost entirely due to a $20.6 million decrease in construction revenue, as the PERC Project for Liberty Utilities in Arizona and our Red Gate II construction project in Grand Cayman were both completed before the start of the third quarter this year. Our retail revenue increased due to a 4.2% increase in the volume of water sold, reflecting a 4.8% increase in the number of customer connections in our licensed area over the last year. Revenue for the third quarter typically is very solid for us. I just want to point out to people who follow our company that fourth-quarter revenues typically drop a little bit in the retail business because of seasonality. So we expect to do perhaps a little bit better than last year in our fourth-quarter retail revenue, but keep in mind that fourth quarter is one of our weaker quarters retail-wise. The increase in Bulk segment revenue was due to the commencement of operating and maintenance contracts for the new Red Gate contract for the Water Authority of Cayman and an amendment to our North Sound contract with the Water Authority of Cayman. Both the new Red Gate contract and the North Sound contract amendment became effective on May 1st this year. Revenue generated under our operations and maintenance contracts totaled $7.5 million in the third quarter, representing a 49% increase for the same quarter of 2023. REC contributed $2.1 million to this increase and the remainder related to incremental PERC contracts. Our manufacturing segment revenue decreased by $362,000 to $4.4 million in the third quarter, but despite this slight decline in revenue, our manufacturing gross profit grew by 84%, reaching $1.6 million, due to our focus on higher-margin products. Our consolidated gross profit for the quarter was $11.6 million or 34.8% of total revenue compared to $16.6 million or 33% of total revenue for the third quarter of 2023. Net income from continuing operations attributable to our shareholders for the quarter was $5 million or $0.31 per diluted share, compared to net income of $8.8 million or $0.55 per diluted share in the third quarter of last year. We reported a net loss in discontinued operations of $503,000 for the third quarter compared to a loss of $233,000 for the third quarter of 2023. We anticipate completing the formal dissolution of our Mexico subsidiaries, thus eliminating these losses from our overall operations by the end of Q1 next year. Including discontinued operations, net income attributable to Consolidated Water shareholders for the quarter was $4.5 million or $0.28 per diluted share, compared to net income of $8.6 million or $0.54 per diluted share for last year. Turning to our balance sheet at the end of the quarter, September 30th, 2024, we had $104.9 million in cash and cash equivalents. Our working capital was $133.9 million. Our debt was only approximately $200,000, and our stockholders' equity totaled $209.8 million. In all, we continue to maintain a very healthy level of liquidity and credit capacity and an extremely solid financial condition. Our projected liquidity requirements for the remainder of the year include capital expenditures for existing operations of approximately $3.8 million. This includes approximately $872,000 to be incurred for our new West Bay plant and approximately $3.1 million for a project in the Bahamas, the Cat Island project. We paid approximately $1.8 million in dividends in October, and our liquidity requirements obviously may also include future quarterly dividends if such dividends are declared by our Board. This completes our financial summary for the quarter. Now I'd like to turn things back over to Rick.

Rick McTaggart, CEO

Thanks, David. Now for more operational details across our business segments. We've been pleased with the revenue growth in our retail segment, as David mentioned, which has resulted from increased business activity and additional service connections on our utility system in Grand Cayman. Fortunately, Grand Cayman did not see any significant or lasting damage from the hurricanes that impacted the island earlier this year. Although the total rainfall during the storms this past quarter was higher than the same quarter last year, the rainfall was concentrated over just a few days and ultimately did not adversely impact our water sales on the island. Bulk revenue and gross profit margin increased because of the start of the new Red Gate II operating and maintenance contract, which commenced in the second quarter of this year. This additional O&M contract revenue offset revenue declines in our Bahamas business that resulted from lower energy costs, which in turn reduced the energy cost pass-through charges to our customers. Also during the second quarter, we secured a 29-month extension of the North Sound plant operating and maintenance contract in Grand Cayman with only a minor reduction in fees to the client. As David mentioned, despite the small decline in manufacturing revenue this quarter, our gross profit in that segment grew by 84% to $1.6 million, thanks to our relentless pursuit of higher-margin products, focused on maximizing production efficiency for that business. Based on the opportunities we see ahead, we believe that this improving trend in our manufacturing segment will continue and operating results of this business segment will remain stable and profitable. In the services segment, we made solid progress with the steady growth in operations revenue bolstered by our newest subsidiary, REC. REC has integrated well and opened up important new opportunities in Colorado as expected. Similar to our experience with PERC, we see that our greater management and financial capabilities will enable REC to pursue larger projects and achieve accelerated growth. We're especially optimistic about the synergies between REC and PERC sales teams. REC has become a natural extension of PERC, enabling us to replicate the success PERC has achieved over the past five years in a new market. Colorado's recent statutory changes to treated wastewater discharge requirements created several opportunities for us to support municipalities in need of upgrades. This regulatory change positions REC and PERC to capitalize on a number of smaller design-build project opportunities in the state. In the Bahamas, we’re progressing as anticipated on the new $7 million 15-year agreement with the Water and Sewerage Corporation to design and build, own, operate, and finance seawater desalination plants on Cat Island in the Bahamas. Construction will include installation of 250,000 gallons storage tanks along with supply and disposal wells and backup generators. Each facility will be designed to produce 90,000 imperial gallons of desalinated water daily and is expected to provide a potable and reliable water supply to more than 1,100 homes on the island. This is our first project with WSC in what they call the family islands in the Bahamas. So that's pretty much everywhere except Providence. In that area, the family Islands have historically been served by our competitors. So we're excited about this opportunity and see it as a key step forward to expanding our Bahamas operations beyond Nassau. Looking forward, we remain excited about the future for many reasons. At the macro level, growing water scarcity continues to build interest in advanced treatment and desalination solutions for impaired water sources. As water supply challenges increase, there's a rising demand for the specialized capabilities that we provide. Specific positive factors include the strong water sales growth in Grand Cayman, long-term recurring revenue from our Caribbean-based bulk water businesses, and our US-based O&M business. Our manufacturing business continues its positive trend, and we expect our desalination plant project in Hawaii to significantly enhance revenue and earnings over the coming years. Enabled by an exceptionally strong balance sheet, we will continue to invest in new long-term projects, including the new desalination plants in the Bahamas and Cat Island, as well as new infrastructure for the growing water needs of our utility customers in Grand Cayman. Both of these projects will ultimately drive future bulk and retail revenue growth. Our strong balance sheet also enables us to move quickly on any potential opportunistic acquisitions. But we are currently in a period between large construction projects. We believe that our award-winning plant designs, cost-efficient project delivery models, and our unmatched industry experience will help us secure new projects we are pursuing. Of course, we started for the company several years ago, which involved diversifying our product offerings and marked areas beyond seawater desalination in the Caribbean, has continued to prove successful and laid the path for strong growth ahead. As we complete 2024 and prepare for the new year, we anticipate that all of these positive factors will continue to support our long-term growth and future profitability for their strength in shareholder value. So with that, I'd like to open the call up for questions.

Operator, Operator

We will now begin the question-and-answer session. First question comes from Gerry Sweeney with Roth Capital. Please go ahead.

Gerard Sweeney, Analyst

Good morning Rick and David, thanks for taking my call.

Rick McTaggart, CEO

Hi, Gerard.

Gerard Sweeney, Analyst

I had a couple of questions. I'm going to start with the Hawaii desal project. Can you provide more details about it? I believe you mentioned that there is a pilot, design, and permit construction phase. Do you know when the construction phase is planned to start? Also, could you remind us how much of the tender or cost is allocated to the construction phase?

Rick McTaggart, CEO

Yes, we expect to start it in the fourth quarter of next year. The development phase is approximately $27 million, and the remainder of the $147 million will cover the construction costs.

David Sasnett, CFO

Let me clarify, Gerry. We can draw $27 million during the design phase, but the revenue we recognize will not be that full amount. It will depend on our actual incurred costs. Typically, these projects are funded in advance to avoid cash flow issues. Once we begin construction, the actual construction price will be reassessed because our contract includes provisions for cost adjustments based on changes in materials and labor from the time the contract was signed until construction starts. I hope that clears things up.

Gerard Sweeney, Analyst

Inflation adjustments available. Okay. Got it.

David Sasnett, CFO

Yes, correct.

Gerard Sweeney, Analyst

But roughly speaking, in the fourth quarter we should start seeing the construction phase, which is a significant part of the revenue side, impacting our results.

David Sasnett, CFO

That's correct. That's about 80% of the revenue, I think it's somewhere in that range.

Gerard Sweeney, Analyst

Yes. And two years construction time, would it be sort of equally allocated?

David Sasnett, CFO

Yes.

Rick McTaggart, CEO

No, that's going to be sort of the curve. I mean.

Gerard Sweeney, Analyst

I understand. The ramp up will begin.

Rick McTaggart, CEO

The construction project incurred. And obviously, if we can do it faster, that works for everybody. But the maximum amount of time that we have is about two years to build the plant.

Gerard Sweeney, Analyst

Got it. Switching gears to PERC, REC US, what does the project backlog look like? Obviously, a lot of talk about heavy civil water infrastructure in the United States long-term opportunity there. I'm just curious as to what you're seeing in the project RFP pipeline, et cetera.

Rick McTaggart, CEO

We are actively engaged in bidding and pursuing various projects, particularly in Arizona and California where several opportunities are available. Although we have lost some jobs recently, the overall prospects in the market seem to be improving. Our bid teams are consistently busy preparing proposals, and while we've secured a couple of smaller contracts in the last several months, we will communicate widely when we land larger projects.

Gerard Sweeney, Analyst

Got it. But the key message here is that market is strong and has gotten stronger over the past year per se?

Rick McTaggart, CEO

Yes. I mean in all honesty, I mean, it is attracting a lot of attention from competitors. So we're adapting to be more competitive and to sell the client and the types of project delivery models and things that we do best. And then work with us for the clients as well.

Gerard Sweeney, Analyst

Got it. And then just one last question for me. The Cat Islands, the Family Islands. How big of an opportunity can that be? How many potential projects or maybe just a background?

Rick McTaggart, CEO

Yes. I mean, they pulled us informally in the Bahamas that there's probably another three islands that require immediate attention. And they're smaller projects. They're not Nassau-sized islands with 350,000 people or whatever. I mean, Cat Island has 180,000 imperial gallon a day total capacity in our Nassau plants produce 14 million gallons a day or something. So, but the size and scale require that we charge more for the water. And that's just the way it is. So these projects could generate $1 million a year in incremental revenues fairly easily over a 15-year period, 20-year period whenever the contract earns on, so.

Gerard Sweeney, Analyst

Got it. But I mean you have Cat Island additive, I mean, Nassau is close to capacity and demand, there may be some opportunity there. Is that fair as well?

Rick McTaggart, CEO

Yes. We are optimistic that at some point they will request us to increase our capacity there. Last year, we were operating at a high 90% capacity online, which is impressive for this type of equipment. We would really appreciate it if they could expand the plant to provide us with a bit more flexibility and also to benefit them. We are significantly exceeding the guaranteed amounts we are supplying to those clients.

Gerard Sweeney, Analyst

Got it. So Cat Island, Nassau and then obviously, the Caymans are continue to grow. So you have a nice little growth trajectory on their core desal business or historical or legacy desal business.

Rick McTaggart, CEO

Yes.

Gerard Sweeney, Analyst

Okay. All right. That’s it from me. I appreciate it. Thanks.

Operator, Operator

At this time, we are showing no further questions. This concludes our question-and-answer session. I'd now like to turn the call back over to Mr. McTaggart. Please go ahead.

Rick McTaggart, CEO

Yeah. Thank you. I just like to say thank you to everybody for joining today and wish everybody happy holidays. Our next earnings call will be in March of next year when we discuss our full year 2024 results. So thank you and take care.

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 revenues, 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 statement 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 area 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 other information about risks and uncertainties associated with the company's business, please refer to the management's discussion and analysis of financial conditions or results of operations and risk factors section 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 this conference call speaks as of today's date. The company expressly disclaims any obligation or undertaking to update or revise any forward-looking statements made during the conference call to reflect any change 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 made 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 www.cwco.com. Thank you for attending today's presentation. This concludes the conference call. You may now disconnect.