Consolidated Water Co. Ltd. (CWCO) Q2 2024 Earnings Report, Transcript and Summary

Good morning, everyone. Thank you for joining us today to discuss the results for Consolidated Water's Second 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 will open the call to questions. [Operator Instructions] 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.

Thank you, Jamie, good morning, everyone. Thank you for joining us today to discuss our financial and operating results for the second quarter of 2024. As you saw in our release issued yesterday, we reported revenue of $32.5 million for the quarter. Our Retail segment revenue benefited from a 10% increase in the volume of water sold to customers in our exclusive utility service area on Grand Cayman, resulting from continued resident population growth and lower rainfall amounts during the quarter. This increased our retail revenue by 8% to $8.2 million for the quarter. Our Bulk and Manufacturing segments both had relatively consistent revenues, compared with last year. Our Services segment was down by about half, due to the anticipated reduction in construction-related revenue as the Grand Cayman and Arizona design-build projects were completed earlier this year. Our construction of the $81 million water treatment plant in Goodyear, Arizona, was substantially completed in the first quarter. We are currently finishing up minor site works and punch list items and expect final completion of this design build contract by the end of the third quarter. Also during the second quarter, we completed the construction and commissioning of the new 2.6 million gallon per day Red Gate desalination plant in Grand Cayman, for the Water Authority of the Cayman Islands. In May, we began operating this facility under a 10-year operations and maintenance agreement, which will fall - revenues from that will fall within our Bulk segment. Meanwhile, development activities continue to ramp up on the $147 million project to design, construct, operate and maintain a seawater desalination plant for the Board of Water Supply in Honolulu, Hawaii, which was announced in June last year. We are currently in the piloting, design and permitting stage, which we expect will lead into the full construction stage late next year. Such efforts now in development have included ongoing site investigations, design, procurement, installation and operation of the piloting systems for the seawater desalination and post-treatment systems, permitting activities and public outreach initiatives. The installation and commissioning of the pilot plant was completed on schedule, and is now gathering essential operational data that will inform the final design and permitting of the full-scale project. The completion of the Hawaii project encompasses the current two-year development phase, which started last year, followed by a two-year construction phase. And then after construction and commissioning is completed, we will operate the plant under a 20-year operations and maintenance contract, which also has two five-year extensions, which are exercisable at the client's discretion. The reduction in construction-related revenue in the second quarter, was partially offset by an increase in the revenue generated from O&M contracts by both PERC and REC in Colorado. We acquired REC last October, to provide a new channel for growth in water-stressed regions of Colorado, and we've been pleased with REC's integration into our company, and the new opportunities we see developing in the Colorado market. Similar to our acquisition of PERC, we anticipate that our greater financial and management resources, will enable REC to pursue larger projects that will accelerate their growth over time. But during the quarter, we also settled our dispute with Mexico that arose as a result of the cancellation of the agreement for the - our desalination project in Playas de Rosarito, Mexico, that was canceled in 2020. We sold the project land and project documentation to the Mexican government, as part of the settlement for net proceeds of approximately US$32 million plus MXN20 million. Now before getting more 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.

Thanks, Rick, and good morning, everyone. In the second quarter of this year, revenues totaled $32.5 million, which is a decrease of 27% from the $44.2 million in revenue we reported for the same quarter of last year. This overall decrease in revenue was almost entirely due to a $16.5 million decrease in construction revenue attributable to PERC's project for Liberty Utilities in Arizona, and the completion of the Red Gate project in Grand Cayman, as Rick has mentioned earlier. Retail revenue increased primarily, due to a 10% increase in the volume of water sold. The volume of water sold for the Retail segment was up, due to a 5.5% increase in the number of customer accounts in our license area, as compared to the second quarter of last year. The retail revenue was also up, due to significantly less rainfall on Grand Cayman in April and May of this year, as compared to the same months of last year. Our marginal decrease in Bulk segment revenue was attributable to lower energy costs, which decreased the energy pass-through component of our Bahamas operations bulk rates. And the decrease in services revenue, as we mentioned earlier, was attributable to a decrease in construction revenue. It's important to note that revenue generated under our operations and maintenance contracts totaled $7.1 million in the second quarter of 2024, an increase of 75%, from the second quarter of last year. Revenue from REC, which we acquired in October of last year, constituted $1.9 million of the increase with the remainder of the increase related to new PERC contracts. Our Manufacturing segment was consistent with last year, with revenue at $3.9 million as compared to $4.1 million, in the second quarter of '23. Our gross profit for the second quarter of this year was $11.6 million or 36% of total revenue, which was down from the $15.5 million or 35% of total revenue in the second quarter of last year, due to the overall decrease in revenue. Net income from continuing operations attributable to our shareholders for the second quarter of this year was $4.2 million or $0.26 per diluted share, compared to net income of $7.5 million or $0.47 per diluted share in the second quarter of '23. We reported income from discontinued operations this quarter of $11.6 million, this resulted from the $12.1 million gain that we recorded on the sale of the project land and the project documentation in connection with our settlement on the arbitration with the Mexico government. Including discontinued operations, our net income attributable to Consolidated Water stockholders for the second quarter of this year was $15.9 million, or $0.99 per diluted share, which was up from the net income of $7.3 million, or $0.46 per diluted share that we reported in the second quarter of last year. Now turning to the balance sheet. Our cash and cash equivalents totaled $96.7 million as of June 30, 2024. Our working capital was $131.2 million and our stockholders' equity was $206.7 million. Our substantial increase in cash and working capital since December 31, 2023, reflects the US$32 million and MXN20 million that we received for the Mexico settlement. We have enhanced and continued to maintain very healthy levels of liquidity and credit capacity, and an extremely solid financial condition. Our projected liquidity requirements for the balance of this year include capital expenditures, for existing operations of approximately $7.1 million, which includes approximately $2.5 million to be incurred for our new West Bay plant and the addition - of additional capacity there and approximately $3.9 million to be incurred for other projects. We paid approximately $1.6 million in dividends in July 24, and our liquidity requirements 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 the call back over to Rick.

Thank you, David. We believe our second quarter results were fairly positive despite the variability in Service segment revenues and earnings, caused by the timing of our large design-build projects in Arizona and Hawaii. As mentioned earlier, the Liberty project in Arizona was completed ahead of schedule in the first quarter of this year, and our Hawaii project is expected to start construction late next year. Revenues from our Retail segment and services O&M business increased meaningfully this past quarter, and have helped to offset the reduced design-build revenues. Our growth strategy continues to be to pursue opportunities in the most water-stressed regions of the United States and the Caribbean, offering a diversified suite of products and services, such as our superefficient desalination solutions, efficient and visually appealing wastewater treatment plants, world-class operation and maintenance expertise, and cost-effective project delivery models, all of which we believe set us apart from our competitors. As David mentioned, we plan to incur $2.5 million in capital expenditures this year to expand our new West Bay desalination plant, to meet the growing demand for water by our customers in our exclusive utility service area in Grand Cayman. The first phase of this new desalination plant was completed less than 12 months ago, and due to increasing retail water demand, we are already doubling the production capacity of this plant, which is also the most energy-efficient plant we have ever designed and built. In the Bahamas, we received a binding letter of acceptance, notice to commence under a new 15-year agreement with the Water and Storage Corporation of the Bahamas to design, build, own, operate and finance two seawater desalination plants on Cat Island in the Bahamas. This will be our first project for the WSC and the family islands of the Bahamas, which have historically been served by our competitors. We are very excited about this opportunity, and hope to use this project as a steppingstone to grow our Bahamas business, beyond currently Nassau. Our newest business in Colorado, REC, contributed $1.9 million in recurring revenue last quarter, and is performing as anticipated. Our business development team is working very closely with the REC team to pursue important projects in the Colorado market, with the greater financial and technical resources that Consolidated Water brings to the table. As mentioned in previous quarters, we are seeing interesting opportunities with potential industrial water treatment, and lithium mining customers that require specialized high-pressure reverse osmosis equipment, to concentrate sourced water whether to extract the minerals in that source water or significantly reduce the volume of contaminated source water. Consequently, we formed a joint venture with two other industry experts in June of last year, to pursue this business. If we successfully develop this equipment business, it could significantly increase revenues and earnings in the coming years, and further diversify the products and services we offer to non-municipal markets. So looking ahead for the remainder of the year and beyond, we're very excited about Consolidated Water's future. Consistent strong water sales growth in Grand Cayman, long-term recurring revenues from our Caribbean-based bulk water business, and U.S.-based O&M business, stabilized manufacturing revenues and earnings that we saw this quarter, and expected revenues and earnings from our $147 million design, build, operate project in Hawaii, altogether provide a very solid base for the company in coming years. Supported by our exceptionally strong balance sheet, we will continue to invest in new long-term projects, such as the desalination plant on Cat Island and the Bahamas, as well as new infrastructure to serve the growing water needs, of our utility customers in the Cayman Islands that will ultimately drive future revenue growth. Our strong balance sheet also gives us the ability to capitalize quickly on any potential acquisition targets that we may identify. In addition, the market for design-build project shows no signs of slowing. And although we are currently in a period between two large projects, we believe that our efficient and aesthetically pleasing plant designs, our cost-efficient project delivery models, and our significant industry experience will help us obtain new projects. We recently signed master design-build service agreements with two major national clients, for a number of projects that they are contemplating, which we believe will positively impact revenue and earnings in future periods. Along with the strong tailwinds from the positive market conditions in our industry, we anticipate these factors will continue to drive our long-term growth, enhance profitability and further strengthen shareholder value. And now, Jamie, I'd like to open up the call for questions.

[Operator Instructions] Our first question today comes from Gerry Sweeney from ROTH Capital. Please go ahead with your question.

Yes, good morning. Rick and David, thanks for taking my call.

Hi Gerry.

I was wondering if you could give us a little bit more detail maybe on the pipeline on the projects. Obviously, water projects, there's a lot percolating out there. You had stimulus dollars coming through. Our channel check suggests that a lot of money is just starting to hit the front end engineering companies, with projects coming behind that money 12 to 18 months. So I'm just curious as to what you're seeing out there and maybe a little bit of qualitative description of the pipeline?

Well, I mean, hard pipeline stuff. Obviously, the Hawaii project that you're well aware of, the Cat Island project, and these are - this is non-U.S., obviously, I know you're interested in the U.S. market. Cat Island project really, I think, is, I wouldn't say a game changer, but it's definitely a catalyst to help us to expand our desalination business beyond just one island in the Bahamas. I mean they're obviously very impressed with what we've done for Nassau. And now they've recognized what we can do for some of the other islands there in the Bahamas, and there's quite a number of islands that are having water issues at the present time. If you check the press, it's pretty much in the press daily in the Bahamas. So, we're excited about that. I mean that's a project that's going to run through this year, probably part of next year on the construction. And then, we go into a 15-year operating agreement with them. Other things that we're seeing, I mean, there's - I mentioned these master service agreements, I mean, there's some smaller projects that the water treatment projects, wastewater treatment projects that we're discussing with these clients, nothing that we can speak about in detail at this point. But it's possible that at least one of these will impact our revenues this year. We're seeing in certain markets, there's - because of the lack of freshwater and identifiable new natural sources, I mean we're seeing less pricing sensitivity, I think, to new drinking water sources. So I mean that's in very specific markets, Gerry, I think in the Texas market, you're starting to see that. So that's good because desalination is not a cheap alternative, but when you don't have anything else, I mean people are starting to recognize that that's the way you've got to fall back on. So, we are seeing less price sensitivity in some markets.

Yes, sorry, go ahead.

That's all I got for you right now, Gerry.

There are a lot of projects that we're pursuing that haven't actually gone to the point where we would submit a formal proposal yet. We're in the preliminary dispatches with the client to understand their needs. And when we do all those things seem to come in bunches for us. So there's a lot of conversations underway in the marketplace, but we don't have firm projects yet. Customer hasn't decided exactly what they want and when they want it So.

Is it fair to say that your - there's more conversations this year on potential projects than this time last year?

I think it's similar. It's definitely not abating at all, but there's a lot of clients that need help. And we're talking to people that, for example, we're going down the road of a sort of traditional design-build project delivery model, and we've been able to get a lot of traction with our CDRs, customized design reports, and our not-to-exceed pricing on these design-build projects. So I mean what we try to do there is disrupt, some of these traditional project delivery model projects and offer an alternative to the client. And in some cases, we have a lot of interest. So as David mentioned, we're talking to people. And I mean, we're not going to - I mean, we don't have anything specific to disclose other than what I talked about earlier.

But I will say this, Gerry, our sales department remains very active. They have a lot to do these days.

Yes. That's essentially what I was getting at. I mean it feels like there's a lot of activity out there, and we do see a lot of projects and we do know they take a little bit longer to get through the sort of the bid process. It's taking longer to get to the bid process per se, but suffice to say there's a lot of activity out there. On the Cat Island side, what's the size of those desal plants? And are we - should we think of that more as a stepping stone for - are they larger, or should we look at that as a stepping stone so you're going to do a bunch of smaller plants in the outlying islands?

Well, they're much smaller than what we're doing in Nassau. I mean right now, we have, what is it, like 14, 15 million gallons per day of production capacity just on Nassau, which is the most populated island. These plants are a lot smaller. You're talking about islands that have populations of typically less than 5,000 people. But they're more challenging because they're remote. So, the price of water is typically higher than - what we charge in Nassau. I think you're going to see some meaningful revenues from these projects over time, certainly from the Cat Island project.

Yes. We think we have a really good relationship with the Bahamian government. So we're hopeful that we can help them meet what's going to be a growing need for water in the Bahamas, not just in Nassau, but elsewhere in the country so.

Got you. And then I wanted 2 more quick follow-ups. REC had $1.9 million of recurring revenue in the quarter. I think you mentioned PERC, but I didn't catch it. Could you - do you have that number? And if not, I can follow-up with you?

So the increase was mentioned...

75% year-over-year, right?

Yes. So what we said was revenue generated under O&M totaled $7.1 million for the second quarter, $1.9 million of that was the REC increase. And then, you just have to look at - you just have to look at last year's segment, just - I think that's in there...

Well, our O&M revenue was $14.2 million for the first half of this year, Gerry, compared to $7.7 million for the first half of last year. And if you look in the 10-Q, and I don't have it in front of me, we detail exactly how much the O&M revenue was for both the first quarter and second quarter, and the increase from last year. Well, matter of fact, I have it here...

Yes, $1.9 million was revenue...

Yes. So as we just mentioned, our O&M revenue for the second quarter was $7.1 million, which is up 75% in total for the same quarter of last year. And out of that, we didn't have REC for the second quarter of last year so $1.9 million of the 75% increase is related to REC. So I could - we could do the math real quick here, but you could do real quick on your calculator...

I was a history major.

What's that?

I said I was a history major, don't trust my math. I probably shouldn't say that on a conference call. But last question. Obviously, very - with the Mexico settlement, lots of cash on the balance sheet. And I get that this is probably a Board decision, but just curious if there's been any discussions on sort of capital allocation. Obviously, you're looking at acquisitions, but dividends, buybacks, I don't know if actually you can buy back shares. But just curious...?

Yes. I mean, I could pretty much tell you that buying back shares would not be considered just because of our - the challenges with our articles and - obviously, looking at the dividend rate and that sort of thing. And it's really up to the Board. I mean, we're meeting again next week. So I'm sure it will be discussed.

Got it. Okay. I appreciate your time. I'll check back in a while.

Okay. Thank you.

[Operator Instructions] And ladies and gentlemen, at this time, we'll conclude our question-and-answer session. I'd like to turn the floor back over to Mr. McTaggart. Sir, please go ahead.

Thanks, Jamie. Just wanted to thank everybody again for joining on the call. I look forward to talking with you again in November when we release our third quarter results. I hope everybody has a great rest of the summer. Thanks.

Thank you. Before we conclude today's call, I would like to provide the company's Safe Harbor statement that includes cautions regarding forward-looking statements made during today's call. The information that we have provided in this conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, but not limited to, statements regarding the company's future revenue, future plans, objectives, expectations and events, assumptions and estimates. Forward-looking statements can be identified by the use of words or phrases usually containing the words believe, estimate, project, intend, expect, should, will or similar expressions. Statements that are not historical facts are based on the company's current expectations, beliefs, assumptions, estimates, forecasts and projections for its business and the industry and markets related to its business. Any forward-looking 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, we 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, but not limited to, annual report on the Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements made during the conference call speaks as of today's date. The company expressly disclaims any obligations or undertaking to update or revise any forward-looking statements made during the conference call to reflect any changes in its expectations with regard thereto or any changes in its events, conditions or circumstances, of which any forward-looking statement is based, except as required by law. I would like to remind everyone that this call will be available for replay starting later this evening. Please refer to yesterday's earnings release for dial-in replay instructions available via the company's website at www.cwco.com. Thank you for attending today's presentation. This concludes the conference call. You may now disconnect your lines.