Earnings Call Transcript
Consolidated Water Co. Ltd. (CWCO)
Earnings Call Transcript - CWCO Q4 2023
Operator, Operator
Good morning, everyone, and welcome. Thank you for joining us to discuss Consolidated Water Company's Full Year 2023 Results. Hosting the call today is Chief Executive Officer of Consolidated Water Company, Rick McTaggart; the company's Chief Financial Officer, David Sasnett. Following their remarks, we'll open the call for 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 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 floor over to Consolidated Water Company's CEO, Rick McTaggart. Sir, please go ahead.
Rick McTaggart, CEO
Thank you, Jamie. Good morning, everyone. Thank you for joining us today to discuss our results for 2023. It's only fitting that 2023, which was our 50th year in business, was also the most successful year in the history of the company. In our press release issued yesterday, we reported revenue of more than $180 million with gross profit of almost $62 million. Revenue was up across all four of our business segments. Our retail water segment benefited from higher numbers of tourist visitors on Grand Cayman compared to 2022, which was lower than historical levels due to the pandemic. Our Services segment revenue increased by $69.1 million in 2023, with much of that increase generated by construction of the $81 million water recycling plant for Liberty Utilities in Goodyear, Arizona. We successfully managed costs on this project and delivered it to the client much faster than expected, resulting in improved gross margins in our Services segment. On January 12 of this year, we received a substantial completion certificate from the client, which was 18 days ahead of schedule. On March 19, we received the approval of construction certificate from the county regulator, which was achieved 42 days ahead of schedule. We anticipate generating additional revenue from this project until it is fully completed in June of this year. FERC's 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 of this important segment of our business. In our U.S. desalination business, we commenced work in the fourth quarter on site investigations, engineering, permitting, and public outreach in accordance with our contract to design, build, operate, and maintain a 1.7 MGD Seawater Desalination Plant in Oahu, Hawaii. Already this year, we have installed the seawater desalination and post-treatment pilot plants, which use feedwater from our clients' wells on the site. We are currently commissioning the pilot plant and will operate it for several months to collect detailed operating data that is required for final design and permitting of the full-scale project. This project includes a two-year development phase, two-year construction phase, and 20-year operating phase with two potential five-year operating phase extensions at the client's option. Our U.S. footprint continued to expand in Q4 with the acquisition of Ramey Environmental Compliance, or REC. 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. Its business is very similar to that of PERC's O&M business. Now before discussing more about recent developments and our outlook for the rest of this year, I'd like to turn the call over to our CFO, David Sasnett, who will take us through the financial details for 2023.
David Sasnett, CFO
Thanks, Rick. Good morning, everyone. Our 2023 revenue totaled $180.2 million, and that represents a 92% increase from the revenue we generated in 2022. This increase was driven by revenue increases in all four of our business segments. Our Retail segment was up $4.2 million. Our bulk segment revenue increased $1.6 million. Our Services segment posted an increase in revenue of $69.1 million, and our Manufacturing segment increased its revenue from last year by $11.2 million. Our retail revenue increased primarily due to a 15% increase in the volume of water we sold during the year, primarily due to increased tourism in Grand Cayman. This is especially encouraging because we didn't see a decrease in rainfall patterns there, so we think this increase bodes well for the future. Our bulk segment revenue increased primarily due to an increase in the price of the energy for CW-Bahamas, which increased the energy pass-through component of CW-Bahamas rates. The increase in our services segment revenue was due to an increase in plant construction revenue and O&M revenue. We recognized approximately $64.0 million in revenue for the year from the construction of the water treatment plant for Liberty Utilities in Goodyear, Arizona, and we also generated approximately $8.2 million in revenue from the construction of the new plant for the Water Authority in Grand Cayman. The revenue we generated under our operations and maintenance contracts totaled $19.4 million for 2023, which was up 37% from the $14.2 million of the O&M revenue we recognized in 2022. Since acquiring PERC, the growth of our O&M business has been a strategic initiative of ours. This revenue is very stable, consistent, and does not require an outlay of capital expenditures. It's something that PERC does, and we think very well. They have a lot of expertise in this area, and we'll continue to focus on growing our O&M revenue as we move into 2024 and thereafter. Our Manufacturing segment revenue increased due to increased production activity. Gross profit for the full year of 2023 was $61.9 million, or 34.4% of total revenue, as compared to $30.4 million, or 32.3% of total revenue in 2022. The gross profit and gross margin improvement for 2023 reflects higher revenue, more profitable projects, and a focus on cost control. Net income from continuing operations attributable to Consolidated Water shareholders for the full year of 2023 was $30.7 million, or $1.93 per diluted share. This compares to net income of $8.2 million, or $0.54 per diluted share for 2022. Net income attributable to Consolidated Water stockholders for the full year of 2023, which includes the results of our discontinued operations, was $29.6 million, or $1.86 per fully diluted share. This represents an increase from the net income of $5.9 million, or $0.38 per fully diluted share that we posted for 2022. Now looking at our balance sheet and financial condition, our cash and cash equivalents totaled $42.6 million as of December 31, 2023, and our working capital reached $88.8 million. Our debt was only $400,000, and our stockholders' equity was $186.8 million. As evidenced by these numbers, we continue to maintain ample levels of liquidity and credit capacity and an extremely solid financial condition. Our projected liquidity requirements for 2024 include capital expenditures for existing operations of approximately $9.5 million. This includes $2.8 million to be incurred in 2024 for our new West State plant as we bring additional production capacity online at this recently completed addition to our retail operations in Grand Cayman. We paid approximately $5.5 million in dividends in 2023, and we paid approximately $1.6 million in dividends for the first quarter of 2024. Our future liquidity requirements may also include any future potential dividends declared by our Board. And this completes our financial summary for the year. I will now turn the call back over to Rick.
Rick McTaggart, CEO
Thank you, David. During this past year, we were pleased to see tourism recover and water use increase in our Cayman Islands retail and bulk water businesses. Additionally, we recognized revenue from the design and construction of the 2.6 million gallon per day Red Gate Seawater Desalination Plant for the Water Authority of the Cayman Islands, which contributed to the year-over-year increase in our Services segment. Construction of this project for a valued client that we've had for more than 30 years is progressing well and is expected to be completed in the next 30 to 45 days. In November, we began operating West Bay 2, our retail water utilities' new one million-gallon per day seawater reverse osmosis plant in Grand Cayman. And as David mentioned, we're actually expanding that plant again this year because of continued demand for water on the island. This new plant is located on the same property as the old decommissioned plant that was originally built in 1995. The West Bay 2 facility became fully operational in time for us to meet the higher retail water demand that we typically experience from mid-December through April of every year in Grand Cayman. In our Manufacturing segment, we improved our operational efficiency and effectiveness, managing multiple large projects simultaneously, enabling greater throughput and higher profit margins. We also benefited from improved supply chain conditions that have continued into 2024. Over the last few years, we diversified our manufacturing customer base and the types of products we sell, resulting in a stronger base load of work flowing through the manufacturing segment. We believe that these efforts will result in less variability in revenues and profits in future periods. Now turning to the 1.7 MGD seawater plant project in Oahu, Hawaii, that we announced last year, this project is proceeding in accordance with the schedule. We are performing initial development activities, including pilot testing, design, preparation, and permitting. We anticipate recognizing significantly more revenue from this project beginning in 2025 during the second half of that year, but we expect to break ground on construction of the plant. We fully acquired PERC in January of last year. We got the remaining 39% of that entity, and it's actually been a fantastic acquisition. The sustained robust operational performance and revenue expansion of PERC have consistently bolstered our top and bottom lines. With a strong operational footprint in the Southwestern U.S., PERC is poised for further expansion and advancement in this pivotal aspect of our business. As I mentioned earlier, we expanded our footprint in the U.S. with the acquisition of REC. In addition to a similar business model, culture, and mission to PERC, REC expands our operational presence to a new growth area in the Western U.S. Similar to PERC, we anticipate that our greater financial resources and additional management expertise will help REC qualify for larger and potentially more complex O&M contracts in its home market of Colorado. The acquisition also creates an important new selling channel for PERC's signature wastewater recycling plant design and highly efficient project delivery model in the growing Colorado market. We are currently pursuing a number of such opportunities, some of which REC would have been unable to pursue in the past without our additional financial and management strength. Our operating results last year benefited from an extraordinary level of design and construction revenue from the Arizona and Cayman design build projects, both of which are winding down this quarter. Other segments in our business, however, also generated increased revenues, which are expected to continue through 2024. Based on our schedule for the Hawaii project, we expect to complete piloting, design, and permitting, and commence construction of that plant in the third quarter of 2025, at which time we will begin to recognize the majority of the $150 million in design build revenues from that important project, which will be over a two-year construction period. New bidding activity for O&M contracts and design build projects, particularly in California, where PERC is very strong, has been robust, and we hope to obtain some of this new work. In the Bahamas, the Water and Sewerage Corporation continues to grow the demand on our Blue Hills plant and our Windsor plants, and we've been running at very high online percentages for more than two years to meet this elevated demand. We believe that there are opportunities in the Bahamas to further grow that business on an organic basis. Our 2023 results set the bar much higher in terms of future growth. However, our exceptional operational performance over the past several years has also validated our strong belief that Consolidated Water's highly efficient and aesthetically pleasing treatment plant designs, our world-class operating and maintenance capabilities, and our innovative project delivery models are superior to those of our competitors, and we expect these differentiators to drive continued growth. The challenge continues to be demonstrating to potential U.S.-based clients that we indeed build a better mousetrap and that we can save them significant time and money over the comfortable but inefficient design, bid, build project delivery model that they have been accustomed to for decades. However, we think that we will be able to overcome these challenges and change the perception of some clients by building on the great successes of this past year. We have the tools, the talent, and the opportunities to continue growing our business and delivering superior value to clients and shareholders. With that, I'd like to open the call up for questions.
Operator, Operator
Our first question today comes from Gerry Sweeney from ROTH Capital. Please proceed with your question.
Gerry Sweeney, Analyst
Good morning, Rick and David. Thanks for taking my call and happy 50th.
Rick McTaggart, CEO
Thanks, Gerry.
David Sasnett, CFO
Thanks, Gerry.
Gerry Sweeney, Analyst
A couple of questions - I've got to try and organize them the best I can, but I was writing a bunch of things down here. But starting with PERC, Liberty under budget and ahead of schedule, right? So great execution on that front. How much does that project maybe become a poster project for what PERC can do and go after projects of similar size or additional projects? How - is there a way you can use that Liberty project to drive additional awareness and market what PERC can do?
Rick McTaggart, CEO
Yes. Absolutely, Gerry. In fact, we have a nice sort of lineup of people that want to take tours of that plant. And it's actually quite a feat to get coming out of the COVID lockdowns and supply chain issues to get that done under budget and ahead of schedule. So there are a lot of people that are interested in learning about that for sure.
Gerry Sweeney, Analyst
I've got a couple of companies you can talk to and maybe teach a couple of things, too, but I'll save that for later. But also on the PERC side, how much of PERC is - I mean with the PERC model, you're not bidding for projects? Or are you - clients coming to you with an issue and then PERC designs it, and it's a negotiated process? Can you describe what goes on there?
Rick McTaggart, CEO
So our sort of flagship sales product is our customized design report, which we get ahead of any sort of public bidding or anything on these projects, and we provide the client with a - well, they pay a modest fee for approximately a 20% design of a plant that would meet their needs. We give a maximum price at that point to design and construct the plant. So if that client is so inclined, they can then proceed to negotiate agreements with us to do the design and construction. We also participate in tenders. There are some opportunities for the CDR, the Customized Design Report, but we also pursue publicly bid jobs for both O&M and design-build.
David Sasnett, CFO
Gerry, the Liberty Utilities project was a perfect example of where our CDR process was employed. That project did not go to tender. We were able to sell to the Liberty Utilities management the advantages of our CDR model, and they went directly with us. And I think, honestly, we saved them a lot of money from what they would have incurred had they taken the project to tender. Then Hawaii for example, where we responded to a bid, and we were the winning bidder. So we try to approach - we'd like to get people to hire us to do a CDR. But if we don't, we'll go ahead and bid on the project, and we think we're very competitive in either case.
Gerry Sweeney, Analyst
Can you use the CDR program to help you bid? If that makes sense.
Rick McTaggart, CEO
Well, all the same components go into both. I mean, it's just the way it's presented. I mean, we are very - I mean it's just - I mean typically, and with the Serval project, we presented a CDR, it took about three years to decide that that was the best way to go. They did other cost estimates for going to public tender with it, and we were much more cost-effective, and we could deliver the project within the required timeframe. So that's - it's really a lot of this stuff turns on how fast you can deliver the project. When you go with the traditional design-bid-build model, it takes a lot more time for the engineering company to design the project, get all the approvals, and bid the project to construction companies. I mean, it's just a much longer process. With us, it's much quicker, and it's one point of responsibility for the client. It's not multiple points, engineering companies, consultants, construction companies, subcontractors, that sort of thing. It's just we take full responsibility for performance-based contract awards.
David Sasnett, CFO
And a lot of the peripheral costs that the client would incur are eliminated if they go directly with us. So it's less expensive for them. I mean, it's really - I mean, as we said in the comments or in Rick's opening remarks, we just need to convince the customers of the advantages of this because they are substantial.
Gerry Sweeney, Analyst
Yes. That's sort of what I was getting at. I mean, some people have to do bids, but other - I mean, the Liberty Utility project, I think, underscores what you can do. So switching gears a little bit, staying with PERC, but a lot of stimulus dollars in the United States, IIJA, then some regulation changes even in California, direct potable reuse was approved recently. How do these items impact the market in California for PERC and in terms of projects pipeline and what you're seeing?
Rick McTaggart, CEO
Well, on the IPR DPR, we're currently operating the Santa Monica water recycling plant, which we designed, and I think Santa Monica has their eye on being the first entity to actually implement direct reuse. So the plant is operating. It's creating - producing tremendous product water there. I think it's one million gallons per day that they're treating. I was there just last week, actually after the ROTH conference, and we have a great operating team there running the plant, and it's a beautiful plant. Congratulations to the city for building that. But I think they'll probably be one of the first entities to do the direct potable reuse. I'm sorry, the other part of the question was...
Gerry Sweeney, Analyst
Well, it was really - my understanding is you have stimulus dollars coming into play, but then you also have direct potable reuse DPR. Sounds and feels as though, and the read we're getting is more projects coming down the pike, driven by both those sort of opportunities.
Rick McTaggart, CEO
Yes. The stimulus dollars, just a quick comment. The only project that we're involved in that is getting money from the federal government is the Hawaii project. They're getting grants. So we are aware of that, but we're not involved in anything else.
David Sasnett, CFO
Gerry, it's no secret that desalination has been a challenge in California...
Gerry Sweeney, Analyst
That's my point on DPR, right. I heard the...
David Sasnett, CFO
Yes, they also - everyone knows they need a lot more water, and you can only recycle so much. I think DPR is another opportunity for us. I think a lot of potential clients will take that approach as they can't build a desal facility. I think it would be a source of potable water for - so I think it's very positive for us.
Gerry Sweeney, Analyst
That's what I'm hopeful for. And then final question. I don't want to monopolize it. It sounds like retail payments, are you back at 100%? Or is there still some opportunity for the pickup from post COVID and/or expansion for growth in the region? And then I'll jump back in line. Thank you.
Rick McTaggart, CEO
We're beyond the sales volumes where we were before COVID. So we've already exceeded that. I mean, I hadn't seen that there's no sort of recent population estimates for Grand Cayman. But I mean, it really feels like there are a lot more people on the island. It's not just tourists. I think the population has grown there.
David Sasnett, CFO
If you visit Grand Cayman, if you - just the last three or four years, the amount of construction activity taking place on the island is substantial. And there's still construction underway there. So I think overall activity on the island has increased. And I think, in part as Rick said, it's probably driven by a population increase. But tourism is back. It's very healthy there. It's evidenced by the fact that if you try to get a hotel room in Grand Cayman in the month of February or March, the rates have gone through the roof, which tells you there's nothing available there.
Gerry Sweeney, Analyst
Okay. Thanks, guys. I appreciate you taking so many questions.
Operator, Operator
Our next question comes from an unidentified analyst. Please proceed with your question.
Richard Serasa, Analyst
Yes, hello, can you hear me?
Rick McTaggart, CEO
We can.
Richard Serasa, Analyst
Yes. I'm just curious if you could update us on the status of the Mexico situation?
Rick McTaggart, CEO
Richard, thanks for asking. We are still trying to resolve that through arbitration. We've had discussions with the Mexican officials. I mean, there's nothing more that we can say about that at this point. It's an ongoing legal matter.
Richard Serasa, Analyst
Yes. Okay. Thank you. And congrats on a great quarter.
Rick McTaggart, CEO
Thanks.
Operator, Operator
Our next question comes from John Bair from Ascend Wealth Advisors. Please go ahead with your question.
John Bair, Analyst
Thanks. Good morning, gentlemen. And congratulations on a great year, a great way to celebrate the 50th anniversary. And also, I would like to say I really got a chuckle out of Rick's closing comments, almost a paraphrase of a line in Ghostbusters. We have a - and we have - I got a good chuckle out of that one. So anyways...
Rick McTaggart, CEO
That was on purpose...
John Bair, Analyst
What's that?
Rick McTaggart, CEO
I said that was intentional.
John Bair, Analyst
Good, good, good. I'm glad I picked it up. So my question is regarding - you said a lot of bid - strong bid activity and so forth. What's sort of the timeline? I know they all vary based on the size of the projects and so forth. But do you have a feel for what kind of flow you may have on contract awards that you have bids out for?
Rick McTaggart, CEO
Well, there's at least one that comes to mind that is an O&M contract, and we bid that several months ago. It's being evaluated. So it's really up to the client on the timeline. I would expect that we would hear something back this year. It's a meaningful contract. From the standpoint of design-build projects, I mean, the things that we're pursuing now would probably not come to fruition this year. So they take - from the time you hear about these projects, they typically take about a year to cycle through the bidding process, which is why we are certain, as certain as we can be, that the Hawaii project, which is $150 million, will start recognizing revenues from that in the third quarter of next year. So that's about as much as we could tell you right now, John.
John Bair, Analyst
Yes. I was just trying to get a sense of the balance between some of these larger type projects that now take longer to come to fruition versus maybe some shorter-term smaller projects? I don't know if that...
Rick McTaggart, CEO
We have clients that we do O&M work for that from time to time require upgrades to their plants and replacements. But I mean, those are sort of in the $3 million to $5 million range. The more meaningful projects, $30 million, $40 million, and they typically take about a year to cycle through. If we're successful, then we would obviously get moving on those sometime next year.
John Bair, Analyst
And do you think that there's any slowdown or any - excuse me, with the interest rates being up, has that slowed the process down at all? Or not so much the process but the projects coming out looking to be bid because of higher costs?
Rick McTaggart, CEO
Yes. I mean I really can't answer that one. I haven't heard that it's causing any delays on the client side. I mean, typically we, by the time we hear about the project, the decision to proceed has been fully made.
David Sasnett, CFO
So, John, a lot of these situations, clients have deferred this work already. So they need to go ahead and proceed regardless of what the interest cost may be.
John Bair, Analyst
All right. Okay. Very good. Well, thanks for taking my questions and congratulations again.
David Sasnett, CFO
Thanks, John.
Rick McTaggart, CEO
Thank you.
Operator, Operator
And ladies and gentlemen, at this time, with no additional questions, we will conclude today's question-and-answer session and today's conference call. Before we wrap up, I would like to share the company's safe harbor statement, which includes cautions regarding forward-looking statements made during this call. The information provided includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements may concern the company's future revenue, plans, objectives, expectations, assumptions, and estimates. You can identify forward-looking statements by words or phrases such as believe, estimate, project, intend, expect, should, will, or similar expressions. Statements that are not historical facts are based on current expectations, beliefs, assumptions, estimates, forecasts, and projections for the business and its related industry and markets. Any forward-looking statements mentioned today are not guarantees of future performance and involve risks, uncertainties, and assumptions that are hard to predict. Actual results may differ materially from what is expressed in these statements. Factors contributing to such differences include, but are not limited to, tourism and weather conditions in the areas we serve, economic and social conditions of each country where we do business, our relationships with governmental entities and customers, regulatory matters including the renewal of our retail license on Grand Cayman, our ability to enter new markets, and various other risks detailed in the company's filings with the Securities and Exchange Commission. For more information about these risks, please refer to the management's Discussion and Analysis of Financial Conditions or Results of Operations and Risk Factors sections of the company's SEC filings, including the annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements made during this call reflect the situation as of today. The company expressly disclaims any obligation to update or revise any forward-looking statements based on changes in expectations or circumstances, except as required by law. I want to remind everyone that this call will be available for replay starting later this evening. Please refer to yesterday's earnings release for replay instructions available on the company's website at www.cwco.com. Thank you for attending today's presentation. This concludes the conference call. You may now disconnect your lines.