Earnings Call Transcript - CWCO Q1 2024

Operator, Operator

Good morning. Thank you for joining us today to discuss Consolidated Water Company's First Quarter of 2024 Results. Hosting the call today is Chief Executive Officer of Consolidated Water Company, Rick McTaggart; and the company's Chief Financial Officer, David Sasnett. Before we conclude today's call, I'll provide some important cautions regarding the forward-looking statements made by the company during the call. I'd like to remind everyone that today's call is being recorded and 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, Rocco, and good morning, everyone. Thank you for joining us today to discuss our results for our first quarter of 2024. As you saw in our press release issued yesterday, we reported a 21% increase in revenue to $39.7 million for the quarter, with substantial growth across 3 of our 4 business segments. Our retail water segment benefited from a 10% increase in the volume of retail water sold within our utility service area on Grand Cayman. We believe this was due to resident population growth and lower rainfall amounts on Grand Cayman during the first quarter of this year compared to the first quarter of 2023. Retail revenues also benefited to a lesser extent from nonrecurring water sales to the Water Authority Cayman and water truckers during the quarter. Our Services segment revenue was $17.4 million this quarter, a 37% or $4.7 million increase compared to last year. This increase resulted from slightly higher design build revenues and a 93% increase in recurring operating and maintenance revenue generated by PERC and our newest subsidiary, Ramey Environmental Compliance or REC. During the first quarter, we recognized $1.8 million in operations and maintenance revenue from REC, which we acquired in October of last year. REC's stellar track record and industry reputation provides a very effective new channel for the company to provide design build and operation services in water-stressed regions of Colorado. 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. REC's O&M business is very similar to PERC. PERC's strong operating performance and revenue growth continues to significantly improve the results of our Services segment in our top and bottom line. Its expanding presence in the Southwest U.S., a region that urgently needs new freshwater resources due to population growth and continued drought conditions, has positioned us for further growth and development in this important segment of our business. In Hawaii during the quarter, we continued our site investigations, engineering, permitting and public outreach under our contract to design, construct, operate and maintain a $150 million seawater desalination plant in Oahu, Hawaii. We're pleased to report that we completed the installation and commissioning of the Hawaii pilot plant during the quarter and on schedule. This pilot plant is collecting the detailed operating data necessary for the final design and permitting of the full-scale project and is scheduled to continue operating well into 2025. The Hawaii project is comprised of a 2-year development phase and 2-year construction phase, followed by a 20-year operating phase after which there are 2 potential 5-year operating phase extensions that can be implemented at the clients' option. Now before discussing more about 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 Sasnett, CFO

Thanks, Rick. Good morning, everyone. As Rick mentioned, our revenue for the first quarter of 2024 totaled $39.7 million, which represents a 21% increase on the revenue we generated for the first quarter of last year. This increase was driven by revenue increases of $854,000 in our retail segment, $4.7 million in our Services segment, and $1.9 million in our manufacturing segment. These increases were partially offset by a decrease of $662,000 in our bulk segment revenue. Our retail revenue increased due to an overall 6% increase in the volume of water we sold during the quarter. However, the volume of water sold to consumers within our retail service area actually increased by 10% to a record 267.6 million gallons for the quarter. This increase was partially offset by lower sales to the Water Authority Cayman, which purchased water for our retail operations in the first quarter of 2023 and also purchased water in the first quarter of 2024, but to a lesser extent than last year. We believe the increase in the volume of water sold within our retail service area was impacted by resident population growth and less rainfall on Grand Cayman in the first quarter of 2024 as compared to the first quarter of 2023. In September of last year, the government of the Cayman Islands reported the results of the labor survey, which estimated that the population of the Cayman Islands have increased to more than 83,000 by mid-2023, reflecting a 2.6% increase over the previous 12-month period. Most of this growth has been driven by an increase of more than 10,000 ex-patriot workers on the islands between December 2021 and June 2023. This government data is consistent with a 2.8% increase in the number of customers within our retail service area between March 2023 and March 2024. We desalinated and sold more water in the first quarter of 2024 than in any other quarter in the history of our company. Our bulk segment revenue decreased by 7% or $662,000 due to a decrease of 2% in the volume of water sold by our Bahamas subsidiary, as well as lower energy costs that decreased the energy pass-through component of our bulk water rates in the Bahamas. The increase in Services segment revenue was due to an increase in both construction revenue and revenue from operations and maintenance contracts. Most notably, revenue generated under operations and maintenance contracts increased 93% to $7.1 million in the first quarter as compared to the first quarter of last year. Included in the $7.1 million increase is approximately $1.8 million generated from Bahamas subsidiary IC. The remainder of this increase in O&M revenue is attributable to new contracts for PERC. The increase in our manufacturing segment revenue was due to increased production activity. Gross profit in the first quarter was $13.9 million or 35% of total revenue, which was up 31% from $10.6 million or 32% of total revenue in the first quarter of last year. Net income attributable to Consolidated Water stockholders for the first quarter of 2024, which included the results of discontinued operations, was $6.5 million or $0.40 per diluted share. This was up from our net income of $3.8 million or $0.24 per diluted share for the first quarter of 2023. Now turning to the balance sheet and our financial condition. Our cash and cash equivalents totaled $46.2 million as of March 31, 2024. Working capital was $95 million, and our debt was just $333,000. Our total stockholders' equity was $192.1 million. As evidenced by these strong numbers, we continue to maintain ample levels of liquidity and credit capacity and an extremely solid financial condition. Included in our working capital as of March 31, 2024, is $25.6 million of accounts receivable due to our CW-Bahamas subsidiary from the Warren Sewage Corporation of Bahamas. During meetings with the Water & Sewage Corporation in March 2024 and with representatives of the Bahamas government in April 2024, we were informed that the Bahamas government intends to reduce CW-Bahamas accounts receivable to below $20 million by June 30 and then to below $10 million by the end of this year. Our projected liquidity requirements for the balance of 2024 include capital expenditures for existing operations of approximately $9 million, which includes approximately $2.8 million to be incurred for our new West Bay plant. Our liquidity requirements may also include future quarterly dividends if such dividends are declared by the Board. We paid approximately $1.6 million in dividends in April 2024. And this completes our financial summary. With that, I'd like to turn the call back over to Rick.

Rick McTaggart, CEO

Thanks, David. We believe our strong first quarter results once again reaffirm our growth strategy, which is to focus on the most water-stressed regions of the U.S. and Caribbean, as areas that will benefit the most from our state-of-the-art desalination solutions, are highly efficient and aesthetically pleasing water treatment plant designs, our world-class operating and maintenance capabilities, and our innovative project delivery models that we believe are all superior to our competitors. In our U.S.-based manufacturing business, we successfully diversified our manufacturing customer base in terms of concentration and types of products over the past several years. We anticipate that such diversification will support improved results and provide more consistent financial performance in future periods. Last year, business returned from our historically largest manufacturing customer and remained strong in the first quarter, and it is expected to continue to remain strong through the first half of this year. We also believe that orders from this customer will be more regular and consistent in terms of value. As part of our continued efforts to diversify our business offerings, we formed last year a joint venture with 2 membrane technology giants to pursue specialized, high-value liquids separation projects using patent-pending technology developed by these partners. Over the past 3 quarters, we have developed product offerings proposed on several new projects and so far have had a great deal of interest in these projects or products from various industries, particularly, the mining industry. If we are successful in developing this business, we expect that it could significantly and positively impact our financial performance in the future. Now looking to the Hawaii project, our 1.7 MGD seawater desalination plant project in Oahu, Hawaii is well underway and on track. We continue to perform development activities, including pilot testing, design preparation, and permitting. We anticipate recognizing significantly more revenue for this project in the second half of 2025, and we expect to break ground on construction of the full plant. The Hawaii plant will represent our 24th desalination plant we have constructed worldwide and our first plant in the United States. For PERC specialty, we believe demand remains strong for its world-class design, construction and asset management services. This potential is clearly demonstrated by the several design build and O&M contract opportunities we are currently pursuing in the Western U.S. PERC's advanced water treatment experience enables us to pursue a number of emerging opportunities. For example, last December, the state of California approved direct potable reuse or DPR regulations that will allow water systems to develop treatment protocols for converting wastewater directly into drinking water. This new regulation is expected to bolster statewide drinking water supplies and thereby make regional water systems more drought-resilient. PERC currently operates 3 of the most advanced water treatment plants in California, one of which could be on track to be the first DPR plant in the state. As I mentioned earlier, REC, which we acquired last October, generated $1.8 million in O&M revenue in the first quarter of this year. These results bode well as we continue to grow our water treatment plant operating and maintenance business in the Western U.S. It also supports our belief that our historical success with PERC can be replicated with this strategic acquisition as well as other similar future opportunities. Looking ahead for the remainder of the year and beyond, we remain very optimistic about our future growth opportunities for many reasons. This includes strong water sales growth in Grand Cayman and our Hawaii design build operate project underway in the U.S., as well as the robust project bidding activity we continue to see in the Western U.S. We are currently pursuing a number of design-build projects, which could begin in 2025 and subsequent years. Some of these projects are being pursued through competitive public bidding and others using our proprietary customized design report or CDR sales tool. We believe our highly efficient and aesthetically pleasing treatment plant designs, world-class operating and maintenance capabilities, and our innovative project delivery models are all superior to others and therefore, provide us with strong competitive advantages. Combined with flourishing markets, we believe that this all represents strong drivers for growth, increased profitability and further strengthening of shareholder value. Rocco, now I'd like to open the call up for questions.

Operator, Operator

And today's first question comes from David Thomas from BofA.

David Thomas, Analyst

Congrats on the quarter. You guys seem to be heading in the right direction. I see that the shares are significantly undervalued. Would you be willing to do a share buyback?

Rick McTaggart, CEO

Yes. So under our articles, we actually have to have shareholder approval for that for a buyback. So it would be a bit of a process. And in any event, we see other more productive uses for the capital that we have right now. So we're going to continue to invest in growing the business organically and looking for other potential acquisition opportunities.

David Sasnett, CFO

Well, Rick, I'd like to add that. In the past, we actually proposed a share buyback amendment to our articles to our shareholders. This is more than a decade ago. And unfortunately, our shareholders voted it down. So we have tried to establish a platform for doing a share buyback. But as Rick said earlier, the shareholder approval on the one time we tried to get it to shareholders turned against it.

Operator, Operator

And our next question today comes from Matt Schwarz at MAZE Investments.

Matt Schwarz, Analyst

I've got a couple of questions. My first one is around the fixed development fee for Hawaii. I know in the 10-Q, you talk about booking for the remainder of the year, something like $15 million in the Services segment. So I'm wondering, is most of that development fee going to be booked this year for Hawaii? And was that amount increased?

David Sasnett, CFO

The fixed development fee is a bit of a misnomer in the contract. It implies the amount that we'll get paid for the development period. What FP actually represents is the amount of the total project cost or price to the customer that's fixed and can't be increased due to inflation. I believe that number has been amended to $27 million. Over the course of the development period, we are entitled to drawdowns of $27 million. But that's not necessarily the amount of revenue that we're entitled to record because we recognize revenue on the input method. The $27 million is backed out of the $150 million and when construction actually commences. The remaining $123 million of contract value will be adjusted based upon inflation in the consumer price indexes and the changes in labor rates for the period that occurs as we sign the contract until the date of construction commences. So you shouldn't infer the fixed development fee is not going to be correlated to revenue. The amount of revenue that we will recognize will be under the input method and will be based upon the actual costs we incur during the development period.

Matt Schwarz, Analyst

So when the revenues start coming in, where will they be recorded? Will they be classified under Services, in the project construction category, or will they fall under design and consulting?

David Sasnett, CFO

It will be under the construction because this is not a separate design contract. Every major construction project or I don't say every, most of them have a design element to them, and it's part of the construction contract. When we have design revenue, that's when we signed a contract to design revenue for a customer, but they have not committed to letting us build the project yet. We don't have a construction contract. So that's pure design work. Any design work associated with the construction of a plant as part of the main contract goes into the construction revenue side of it.

Matt Schwarz, Analyst

My second question is maybe I'm reading into the tea leaves a bit too much, but I know how conservative you both are. And I think in the last call, Rick, you made some comments around the things you're pursuing wouldn't come to fruition this year. But when I read this most recent press release and hear the comments you made earlier on the call, it sounds like you're talking about some potential new projects starting in 2025. So I'm interested in how things have changed over the last few months in terms of your confidence in projects that you're bidding on? It sounds like there's been progress there for you to put a little bit more, I guess, bullish commentary in the release and some of your earlier comments.

Rick McTaggart, CEO

I think in March, we were just trying to make investors aware that some of these bigger projects that we've been working on are winding down in 2024. I've been trying to give sort of a consistent message on future opportunities that we don't really see anything impacting 2024. But we are seeing some more opportunities that would potentially impact 2025 if we were successful pursuing those. So I think that's really all that we're trying to message there.

Matt Schwarz, Analyst

In terms of your capacity, I know you've got a big project starting in the middle of 2025. What's the company's ability to layer in sizable contracts? Maybe you could talk to that a little bit in addition to Hawaii, to run them simultaneously.

Rick McTaggart, CEO

We definitely have the bandwidth for that, Matt. We're not concerned about that at this point. Our biggest focus is getting that next job in place. We think that anything that would run concurrent with Hawaii would be completely manageable by our team.

Matt Schwarz, Analyst

And then lastly, I'd like to look at the balance sheet for a second, and maybe it's for David. But I forget that cash for the quarter, $46 million and change maybe. But if I understand correctly, there's a number of cash inflows that you guys should see in addition to potentially recovering some of the Bahamas receivables. Could you talk about how you would expect the balance sheet to progress as you move through this year outside of just free cash flow generation?

David Sasnett, CFO

Well, we have receivables due from the Bahamas. We also have money due from the Water Authority Cayman for the construction of the Red Gate plant, which we expect to be paid shortly. Those are the two collections of receivables that are pending that are substantial in size that will affect our cash flow. Other than that, it's just cash generated from normal operations, but we'll collect some more money for the project contract. There is an $8 million retainer on that contract, and that will be paid until a significant time period. I think it's something around 6 months after we've completely finished the project.

Matt Schwarz, Analyst

And that was on Liberty, but how much for Red Gate?

David Sasnett, CFO

I think Red Gate is around $9 million spend a year.

Matt Schwarz, Analyst

So $17 million between those two incoming cash? And where do you think the Bahamas receivables? I know it's hard to say what that's going to come down to, but is there a normalized level we should think about for that?

David Sasnett, CFO

Well, I mentioned in the call, they informed us they're going to try to get it down to $20 million by June 30. It's in the end of the year.

Operator, Operator

Our next question comes from Gerry Sweeney with ROTH Capital.

Brandon Rogers, Analyst

This is Brandon Rogers on for Gerry Sweeney. I was just wondering, I know you provided some info around the Hawaii project timeline. So you're anticipating to start or expecting to start construction of the plant in the second half of 2025. With the 2-year development phase to your construction phase and 20-year operating phase, would that imply that you're thinking of the operating phase beginning in the second half of 2027?

David Sasnett, CFO

If we stick to schedule, that's what it would look like.

Brandon Rogers, Analyst

And then switching over to PERC. You mentioned a few new PERC contracts that are either in the pipeline or that you have your eyes on? I was just wondering if you can just give us kind of an update around the pipeline of opportunities with PERC.

Rick McTaggart, CEO

I mean without getting into specifics of the projects, there are at least 3 that on the design build side that we're looking at. As I mentioned in the script, some of them are public bids. The other ones are CDR customized design report opportunities that we're pursuing. At least one of the potential opportunities is in a sector that we're very familiar with. So it's early on, but we made the point that these are all fairly large-sized projects. So not as big as Cayman, but we're getting there. We think there's opportunities there to land at least one of these. From the standpoint of O&M, there is a pretty regular flow of O&M contracts that come up for bid. And as you can see from our results this year compared to the beginning of last year, we've been successful landing some of these projects. We see that continuing certainly for the rest of this year and into 2025. So maybe not to the extent that in revenue terms that we benefited from over the last year, but there is a steady flow of the bids that come up, and we're certainly chasing those. We think we're well placed in terms of the more technical bids that require advanced water treatment and recycling. We're certainly well placed and we have the experience and the credentials to make a superior presentation over some of our competitors in the region.

Brandon Rogers, Analyst

And then just one more for me. Just like general market environment, I know you're still seeing lots of opportunity in Western U.S. Is there any other areas of interest that have been drawing significant amounts of demand that you're seeing?

Rick McTaggart, CEO

We are concentrating on opportunities in the Western U.S. and the Caribbean, as previously mentioned. There isn't much else to discuss at this time beyond what we're currently focused on. These areas are our priority for newer projects, such as the equipment business and joint venture business. These projects have the potential to be global, but they would primarily involve equipment sales utilizing our patented technology, meaning we wouldn't be operating in other regions.

Operator, Operator

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

John Bair, Analyst

One of my questions was somewhat answered there about expanding to other areas within the U.S. So I guess the response was pretty much focusing in the Southwest. What about from an acquisition standpoint, are there potential maybe privately owned outfits that would give you an entry into different areas of the United States?

Rick McTaggart, CEO

Yes, sure, John. I mean, we purposely didn't mention anything about acquisitions in this call. I mean, we're not pursuing anything specific at this point. The focus is really growing that REC business. We think there's a lot of opportunity in Colorado, and we've just gotten on the ground there with our sales team and integrating that business into the Consolidated Water group. So we're really going to focus on that. That's an untapped market right now. And then as I was mentioning to Brandon from ROTH, there's a number of opportunities that we're pursuing, which would be organic growth opportunities within the PERC area right now. So we think those are meaningful enough that we can focus on those instead of just potentially looking at another acquisition right away.

John Bair, Analyst

And then in the past, the business was lumpy. It had a period where things dried up. It appears that that's more on a stable footing now. Is that right? I think in the comments on the previous question here mentioned OEM type of order flow was reasonably good. Did I hear that correctly?

Rick McTaggart, CEO

Yes, that's correct, John. We were talking about backlog, I guess, maybe 1.5 years ago, and that was due to backlog post-COVID, which was a bit of a challenging time for us. Right now, the shop is operating on a very much smoother basis. We have a good flow of orders that we're working through, and we think that this business will be much more consistent and significant to the earnings of the company in the future.

John Bair, Analyst

And going back to David's comment about the shareholder proposal to allow share buybacks given that that was 10 years ago, would you consider putting that out again? It seems like share buyback efforts by companies seem to be fairly robust these days. So maybe the share base would be more favorably inclined to allow you to do that? Would you consider bringing that up?

Rick McTaggart, CEO

Well, I think we have probably more productive uses for the capital that we have. A lot of it is once we collect some of these receivables in the Bahamas and get paid for some of these projects that were on deferred payment schedules. It’s something we could consider. We take a shareholder approval to give us the flexibility as a management team to be able to respond to market conditions that actually make it worthwhile to do something like that. But we can certainly consider it.

John Bair, Analyst

I think this is my own personal observation or belief is that, right or wrong, if a company has a share buyback program in place and does take advantage of it under certain conditions, that's viewed favorably in many cases. So that might help alleviate what a lot of folks feel that the share price is undervalued. So just perception on my part.

Operator, Operator

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

Rick McTaggart, CEO

Thank you, Rocco, and I appreciate everybody joining us today for the call. I look forward to speaking with you all again in August when we report our second quarter earnings. 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 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 management's discussion and analysis of financial conditions or results of operations and Risk Factors sections of the company's SEC filings, including, but not limited to, its annual report on 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 on 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 www.cwco.com. Thank you for attending today's presentation. This concludes the conference call. You may now disconnect.