Earnings Call Transcript - CWCO Q3 2023

Operator, Operator

Good morning. Thank you for joining us today to discuss Consolidated Water Company's Third Quarter of 2023 Results. Hosting the call today is the Chief Executive Officer of Consolidated Water Company, Rick McTaggart, and the company's Chief Financial Officer, David Sasnett. After their remarks, we will open the call to your questions. Before we conclude today's call, I will provide some important cautions regarding the forward-looking statements made by management. I would like to remind everyone that today's call is being recorded, and it will be available for telecom replay as per the instructions in yesterday's press release, which can be found in the Investor Relations section of the company's website. Now, I would like to turn the call over to Consolidated Water Company's CEO, Rick McTaggart. Please go ahead.

Rick McTaggart, CEO

Thanks, Joe. Good morning, everybody. Thank you for joining us today to discuss our results for the third quarter of 2023. Like last quarter, we're reporting record quarterly revenue and earnings. As you saw in our press release yesterday, we reported a nearly 100% increase in revenue to $49.9 million, compared to the third quarter last year. Revenue was up in three of our four business segments. Our Retail Water segment benefited from a 16% increase in the volume of water sold in Grand Cayman, and we attribute this increase to improved tourist activity. Since the third quarter last year, the island was still recovering from the lingering impacts of the pandemic. Our Services segment revenue increased by $20.7 million in the third quarter, with much of that increase generated by the progress our PERC water subsidiary has made on the construction of an $82 million advanced water treatment plant in Goodyear, Arizona. We've managed to control our costs on this project much better than anticipated, resulting in improved gross margins for our Services segment. Construction on this project is progressing as planned, and we anticipate generating additional revenue from the project until construction, commissioning, and start-up is completed at the end of the second quarter of next year. PERC's continued strong operating performance and revenue growth continue to significantly improve our top and bottom line. Its strong operational presence in the Southwestern U.S., a region that urgently needs new freshwater sources due to unprecedented drought conditions, has positioned us for further growth and development in this important segment of our business. In our U.S. desalination business, we commenced work last quarter on site investigations, engineering, permitting, and public outreach for our contract to design, build, operate, and maintain a 1.7 MGD seawater desalination plant in Oahu, Hawaii. This project includes a two-year development phase, a two-year construction phase, and a 20-year operating phase with two potential five-year operating phase extensions at the client's option. Our footprint continues to expand in the U.S. with the recently announced acquisition of Ramey Environmental Compliance, or REC, by PERC. REC operates and maintains water and wastewater treatment plants and provides technical services to more than 100 clients in the Mountain and Eastern Plains regions of Colorado, and their business is very similar to what PERC does in its O&M business. Now before discussing more about recent developments and talking about 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 Sasnett, CFO

Thanks, Rick, and good morning, everyone. As Rick mentioned, the revenue for the third quarter was up to $49.9 million, which is a 99% increase compared to the third quarter of last year. This increase was driven by revenue increases of $900,000 in our Retail segment, $20.7 million in our Services segment, and $3.3 million in our Manufacturing segment. Our retail revenue increased primarily due to a 16% increase in the volume of water sold during the quarter. This is due to increased tourism on Grand Cayman. The number of tourists driving by air, those are the tourists that stay, was not using the hotels, and increased our water volume significantly in the third quarter of this year compared to last year as the lingering effects of the pandemic have disappeared. We think tourism is back to normal on Grand Cayman. Retail revenue also increased as a result of higher energy costs that increased the energy pass-through component of our water rates. Our bulk revenue decreased slightly, primarily due to a decrease in the price of energy paid by CW-Bahamas. This decrease in Bulk segment revenue was partly offset by a 6% increase in CW-Bahamas' volume of water sold. I can say that we're producing as much water as we can in the Bahamas for the Water and Sewage Corporation, so operations there are very favorable to our company. The increase in Services segment revenue was due to an increase both in construction revenue and O&M revenue. We recognized approximately $20 million in revenue in the third quarter this year for the construction of the water treatment plant in Goodyear, Arizona for Liberty Utilities. The retail generated under operations and maintenance contracts in our Services segment also increased a total of $5 million in the third quarter this year, up 48%, compared to $3.4 million in the third quarter of 2022. This is attributable to both the better margins earned on our existing contracts and the addition of new contracts. The increase in our Manufacturing segment revenue was due to increased production activity as some of the supply chain and economic issues that affected our manufacturing operations in 2022 have abated. Gross profit for the third quarter of 2023 was $16.6 million or 33% of total revenue, compared to $6.8 million or 27% of total revenue for the same quarter last year. Net income from continuing operations attributable to Consolidated Water shareholders for the third quarter of 2023 was $8.8 million or $0.55 per diluted share. This compares to net income of $800,000 or $0.05 per diluted share for the same quarter of last year. Net income attributable to Consolidated Water shareholders for the third quarter of 2023, which includes the results of discontinued operations, was $8.6 million or $0.54 per fully diluted share. This was an increase from net income of $300,000 or $0.02 per basic and fully diluted share for the third quarter of 2022. Now, turning to our balance sheet and financial condition, cash and cash equivalents totaled $48.8 million as of September 30, 2023. This compares to $47.7 million as of June 30, 2023, with working capital at $83.1 million, debt of just $200,000, and stockholders' equity totaling $178 million. As of the end of the quarter, our projected liquidity requirements for the remainder of 2023 include capital commitments for our existing operations of approximately $5.1 million. This includes $292,000 that we expect to incur in 2023 to finish the refurbishment and replacement of our West Bay desalination water plant. It also includes about $2.5 million for construction of the new Red Gate desalination plant on Grand Cayman for the Water Authority Cayman. We had approximately $4.7 million in raw material purchase commitments outstanding as of September 30, 2023. We paid approximately $4 million in dividends this year, and our future liquidity requirements may also include any future potential dividends declared by our Board. So this completes our financial summary for the quarter. Now I'd like to turn the call back over to Rick.

Rick McTaggart, CEO

Thanks, David. We believe our strong results this past quarter once again reaffirm our growth strategy, which is the focus on the most water-stressed areas of the United States and the Caribbean and provide not only desalination solutions but also advanced wastewater treatment and recycling solutions. Looking at our Caribbean seawater desalination business, the revenue we recognized from the design and construction of the 2.6 million gallons per day Red Gate desalination plant in the Cayman Islands also contributed to the year-over-year increase in our Service segment. Construction of this project for a valued client that we have had for more than 30 years is progressing well and is expected to be completed in April next year. Our retail water utility's new 1 million-gallon per day West-based seawater desalination plant, which replaced a 30-year-old plant and provides additional capacity to supplement our retail water business in Grand Cayman, is currently being commissioned and will be fully operational in time for us to meet the higher retail water demand that we typically experience from mid-December through April each year in Grand Cayman. Human post-pandemic travel rebound continues, as David mentioned. During the winter season, major airlines such as Delta and Cayman Airways have been adding additional direct flights to the islands. Delta added a new flight from Minneapolis to Grand Cayman, which starts next year, and Cayman Airways also announced the resumption of its seasonal service to Denver, Colorado, with weekly Saturday flights beginning in December. Also, Southwest Airlines, which currently flies from Fort Lauderdale to the island, is moving that flight to Orlando, Florida, set to begin in the summer of next year. Given these favorable indicators, we expect a strong tourism season in the Cayman Islands, which should help our retail business. In our Manufacturing segment, relief from severe supply chain constraints and customer-requested delivery delays that had adversely impacted our results last year have allowed us this year to advance more of our order backlog through the manufacturing and billing process. Over the last couple of years, we've also diversified our manufacturing customer base in terms of customer concentration and types of products. We anticipate this diversification will facilitate improved results and provide greater consistency in future Manufacturing segment performance. We also saw this year the return of business from our historically largest manufacturing customer, a business that had been suspended over the past several years, and we expect this level of business to continue into 2024 from this customer. Now talking about Hawaii for a bit, work on the 1.7 MGD seawater desalination plant in Oahu is underway and on track. The Hawaii plant will be the 24th desalination plant that we've constructed worldwide and our first desalination plant in the U.S. We believe that our 50 years of experience designing, building, and operating these types of plants, which are some of the world's most energy-efficient seawater desalination plants, coupled with PERC's significant experience working with municipal clients and regulators in the U.S., will ensure that this project is successful and will exceed the expectations of our clients, the board of water supply of Honolulu. We believe that this entrance into the U.S. desalination market positions us well for additional opportunities in the Western Continental U.S., a region that continues to experience unprecedented drought conditions combined with growing populations. This is according to the U.S. drought monitor; more than 22% of the Western U.S. has been experiencing drought conditions and this number is up more than 51% since October of last year. Looking at PERC in a bit more detail, our subsidiary that provides world-class operational and asset management services in the Western U.S., we believe PERC's growth potential remains very high. This potential is demonstrated by the number of design-build and O&M contract opportunities that we are currently tracking in the Western U.S. So far this year, we've been successful in obtaining wastewater treatment plant O&M contracts at Edwards Air Force Base and on Catalina Island in California, which contributed to the increase in O&M revenues that David mentioned earlier for PERC. We have also, through our PERC subsidiary's assistance, obtained a new seawater desalination plant in Hawaii. These new projects have positively impacted our Services segment results this year and we expect that they will continue to do so through the coming year. On the acquisition front, we announced on Tuesday that PERC had acquired a 100% ownership interest in Ramey Environmental Compliance or REC. They are located in Frederick, Colorado, which is north of Denver. REC specializes in helping municipalities and districts comply with environmental regulations and properly manage their precious water resources through a variety of service offerings, including O&M contracts. REC brings deep experience and excellent relationships in the Colorado water and wastewater treatment industry, and its commitment to delivering superior water and wastewater services has won numerous awards over the years, including national recognition for excellence by the EPA. The company's field staff is professionally certified for the operation, maintenance, and management of all types and sizes of water, wastewater, and industrial wastewater treatment systems. The acquisition of REC immediately expands our operational presence into a new growth area of the Western U.S. PERC and CWCO's greater financial capacity and incremental management expertise will help REC qualify for larger and potentially more complex O&M contracts in its home market. The acquisition also creates an important new selling channel for PERC style design-build projects in the growing Colorado market. Our third quarter results demonstrate how we have effectively applied our financial and management expertise to grow PERC's business exponentially. We believe that our success with PERC can be replicated with this strategic acquisition as well as with future opportunities. So looking ahead, we remain very optimistic about our future growth for many reasons. This includes the recovery of tourism in Grand Cayman, our current construction projects that are underway there in the U.S., as well as increased project bidding activity we are seeing in the U.S. We believe our recent activities and successes, along with our current positive trends in the market, represent strong drivers for growth, increased profitability, and further strengthening of our shareholders' value. Now with that, I'd like to open the call up for questions, Joe.

Operator, Operator

And our first question here will come from Gerry Sweeney with ROTH Capital. Please go ahead.

Gerry Sweeney, Analyst

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

Rick McTaggart, CEO

Hi Gerry.

David Sasnett, CFO

Good morning, Gerry.

Gerry Sweeney, Analyst

I appreciate the detail on the Ramey acquisition and how it fits into PERC. So that was one of my main questions coming in. So I do appreciate that. But staying with PERC. Obviously, you've had a history of some really nice wins, not just Goodyear, but Edwards Air Force Base, Catalina. Could you either qualitatively or quantitatively give us a little bit of a view to the pipeline that you're seeing out there with potential projects over the short and medium term?

Rick McTaggart, CEO

So right now, we're focused on some opportunities, some O&M opportunities. Obviously, they're longer-term deals. They're competitively bid, so it's something that we're going to have to be mindful of our margins and that sort of thing. From the standpoint of the design-build business, we are looking at other opportunities that potentially could develop into next year.

David Sasnett, CFO

I guess you're looking, Gerry, for some type of quantification.

Gerry Sweeney, Analyst

Yes, just. I mean, is the pipeline as big as it's been or bigger? There are a lot of dollars coming in because of the JOBS Act?

David Sasnett, CFO

I would say it's bigger than it's ever been. In terms of number of projects and opportunities, it's very robust. It's difficult to quantify some of these things. We will pursue some of these things but not all. I can say that there's enough opportunity out there that we are going to have to go through an evaluation process because we can't pursue everything. We want to focus our business development activities on those projects that make the most sense for us, where we have the highest chance of winning and where we will earn what we consider to be a sufficient margin to justify investments in pursuing that business. But it's a very good time for us to be in PERC because it seems like the situation in the Western United States gets worse day-by-day.

Rick McTaggart, CEO

And the acquisition of the Colorado company. I mean, obviously, that's early days, but we see additional opportunity there to develop a design-build business through REC, which was really one of the key parameters of our decision to acquire that company.

David Sasnett, CFO

Colorado is very similar to Arizona and California; they've got water issues.

Rick McTaggart, CEO

And this is, and they're growing pretty much twice the national average population-wise. So it's a growing market there.

David Sasnett, CFO

And REC was a great opportunity for us because they are a very well-respected company with great capabilities, but similar to PERC. It didn't have the capital. Once we bring them into the fold with us, we can apply PERC's and CWC's qualifications to the business that REC is doing. We think we can be a significant player in Colorado. The amount of cost of $4.2 million to get into this market is a great deal for us, because if we started the company ourselves, I certainly think we would set more than $4.2 million trying to penetrate that market. Now, we already have a company with a great reputation there that we can leverage to pursue business, so we're pretty excited about the acquisition of Ramey.

Gerry Sweeney, Analyst

Got you. Fair to say PERC brings technology, reference accounts, Ramey as well as consolidated water. Ramey brings 100-plus customers and customer relationships. It sounds as though the growth of Colorado is going to drive either upgraded or enhanced wastewater and water recycling and other facilities. Is that a fair way of looking at it?

Rick McTaggart, CEO

Yes. I think there's a need being unmet right now in the market, and we're going to go in and try to meet those needs, particularly upgrading facilities. There are needs to upgrade facilities to meet the tighter nutrient removal requirements that were enacted, about a year and a half to two years ago. Colorado has also enacted direct potable reuse legislation, which opens up a whole new opportunity for PERC as they're experts in that sort of level of treatment of wastewater.

Gerry Sweeney, Analyst

Got it. Staying with PERC for a second. Could you - I think you did $20 million in recorded revenue in the quarter from the project. Back to the annual, something like $45 million or $46 million? So that leaves just over $40 million left, or maybe just under $40 million because of $82 million. Is that - am I roughly in the ballpark with that?

David Sasnett, CFO

Yes, you are. I mean we've been very transparent in how much revenue we've recognized on this project. If you go back and simply add the numbers from last year as reported in our 10-K and then add in this nine months for this year, you'll have what percentage of the $82 million we've recognized to date. The remaining revenue, Gerry, will be recognized in the fourth quarter this year and in the first two quarters of next year, after which the project will essentially be done.

Gerry Sweeney, Analyst

Am I correct that a large portion of the project is scheduled to be completed this year with, I don't want to say tag-ends, but with the remainder next year?

David Sasnett, CFO

Yes. I think that's I don't have the exact construction schedule in front of me, but there will still be a lot of progress made in the fourth quarter of this year.

Gerry Sweeney, Analyst

Got it. And I know this may be a little forward-looking. It sounds like you've been executing very well. Margins are above trend as far as you can tell, do you think that can continue?

David Sasnett, CFO

No, I don't think it's going to continue. I would be surprised if there is a significant amount of further margin adjustment in future quarters. I think we've got a really good handle on the cost necessary to complete the project, so I don't think there will be cumulative type adjustments of any significance going forward. That's what you're asking.

Gerry Sweeney, Analyst

Yes. I just wasn't sure if it would stay. I think it came in around 30%. I wasn't sure if it would trend down. You were just - I'm not sure if you had a good run and things were ahead of schedule or ahead of margin, and maybe they kind of revert back down to more previously projected levels is what I'm really at?

David Sasnett, CFO

No. The accounting doesn't work that way, unless we have missed our cost estimate, the margin should be pretty steady going forward. We're a lot more comfortable with the costs now than we were during the first six months of construction. The initial margins were lower due to uncertainty in the anticipated additional cost. The people at PERC have done a fantastic job controlling costs.

Gerry Sweeney, Analyst

Got it. Super helpful. That's it from me. I'll jump back in line. So thanks guys. Congrats on a great quarter.

Rick McTaggart, CEO

Thanks, Gerry.

Operator, Operator

Our next question will come from John Bair with Ascend Wealth Advisors. Please proceed.

John Bair, Analyst

Thank you. And good morning.

Rick McTaggart, CEO

Good morning, John.

John Bair, Analyst

Congratulations on a great quarter and really strong momentum that you have. I wanted to ask about the opportunities that you might see with having won the water treatment contract on the military base. If there are other opportunities like that in the country that you might be able to address or pick up?

Rick McTaggart, CEO

Yes, I think there are. I mean, we probably haven't mentioned it too much in the calls. I mean, we've been operating the Camp Pendleton wastewater system for the Marine Corps for several years now. We added the Edwards Air Force Base contract this summer. Those types of contracts go out to be pretty regularly. So, we anticipate continuing to pursue those types of agreements.

John Bair, Analyst

And those extensions on the annual basis, do those go out for an annual bid? In other words, is it competitive, or do you have to continue to offer a bid against others for them to decide to extend the contract or not?

Rick McTaggart, CEO

It's at the client's discretion to extend, but those prices are already included in the bid that we put in for the initial one-year term. You bid out to five years basically in your bid submission. It's really up to the client to decide what they want to do the following year. Typically, our experience has been that they renew them through the life of the contract.

David Sasnett, CFO

Yes. We've had very good experience there, John. I mean, it's guaranteed though the history….

John Bair, Analyst

And that falls on that you have experience with a couple of them that do you sort of become a preferred operator for other facilities. That's kind of where I was driving it. The opportunities throughout the U.S. base?

David Sasnett, CFO

We have panels in Edwards Air Force Base gives us a lot of credibility. And that counts for a lot when you're bidding on new contracts.

John Bair, Analyst

Yes, right. And then turning to the Hawaii contract. In your release, you mentioned that you're moving on in the first phase. At what point do you start receiving revenue on that project? And I guess it's going to be like some of these other ones where it's as you move forward, that's when you receive revenues against the overall contract win?

Rick McTaggart, CEO

Yes. I mean, this is sort of more David's area, but we're booking the revenues for that project based on the costs that we incur to date. What do you call that?

David Sasnett, CFO

It's called the input method.

Rick McTaggart, CEO

So although we have had some substantial payments from the client upfront for mobilization and various insurances required for the project, we are in the development phase right now, so we're not incurring a lot of costs relative to the size of the contract that would allow us to book any meaningful revenues on that project. By this time next year, I think it will be a different picture—we’ll be booking some meaningful revenues from the development phase, which totals about $11.5 million or something out of the contract. The construction revenues are still probably a year and a half away, and then we start booking the balance of that, which is about $138 million.

David Sasnett, CFO

Yes, the construction revenue will be subject to adjustment because the contract has inflation clauses in it. When we finish the design phase, the development phase, we'll adjust based upon CPI and things like that, so that we're not hit for inflation over the design period. But the big impact from Hawaii will come in 2024, but construction starts towards the end of 2024 or 2025.

John Bair, Analyst

Yes. That's good. That's - you've elaborated a lot on what I was thinking on this. When construction starts and so forth. So that's very positive. Another question. You alluded to a pretty full pipeline of bid opportunities and so forth. Do you think that is as much a function of the federal Inflation Reduction Act and federal money flowing into that? Or do you think it's more or just as much just the absolute need to develop new water resources capabilities?

Rick McTaggart, CEO

The only project that I'm aware of that's receiving those funds from the federal government is the Hawaii project. Presumably, that wouldn't have moved forward if they weren't able to get those commitments. These other opportunities we're seeing are either with private clients or projects that are in the normal course of business. I mean, it's not that I know they're getting any supplemental funding from those federal sources.

David Sasnett, CFO

Yes, we haven't heard anything from our prospective clients that this is any federal money involved. It's really just projects that are driven by the need, not necessarily by extra funding available.

John Bair, Analyst

That's interesting. That's very interesting. My last question is you got a nice chunk of cash there. How do you have that positioned? Are you in short-term treasuries? How are you addressing that?

David Sasnett, CFO

For the U.S. funds, we have cash in several different locations. We historically have significant cash balances in the Bahamas, Grand Cayman, and the U.S. We don't move money around between countries that often, especially not between the U.S. and our foreign subsidiaries due to tax considerations. We're somewhat limited in how much we can earn on our money in Grand Cayman. The banks there aren't paying what they are in the U.S. But we're earning nice returns on money market returns we have in the Bahamas. We're also opening up interest-bearing accounts in the U.S. because PERC is generating a lot of cash right now, and you'll see us reporting more interest income going forward as we invest those balances in the short-term, very secure type of money market accounts.

John Bair, Analyst

Sure. Very good. Thank you very much for taking my questions. Congratulations again on really strong momentum and very positive outlook.

Rick McTaggart, CEO

Thank you. Thanks, John.

John Bair, Analyst

Worthwhile being patient.

Rick McTaggart, CEO

Yes, that's what I'll say, yes.

Operator, Operator

At this time, we will conclude 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

Thanks, Joe. I'd just like to thank everybody once again for joining us today. David and I are looking forward to talking with you again when we present our year-end results, I guess, in March of next year. So take care, and I hope everybody stays safe. Thanks, Joe.

Operator, Operator

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 and 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 or results of operations and Risk Factors section of the company's SEC filings including, but not limited to, its annual report on Form 10-K and quarterly reports on 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 statements 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. And lastly, thank you for attending today's presentation. This will conclude the conference call today. You may now disconnect your lines.