Consolidated Water Co. Ltd. (NASDAQ:CWCO) Q3 2023 Earnings Call Transcript

Consolidated Water Co. Ltd. (NASDAQ:CWCO) Q3 2023 Earnings Call Transcript November 10, 2023

Consolidated Water Co. Ltd. beats earnings expectations. Reported EPS is $0.55, expectations were $0.39.

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. Following their remarks, we will open the call to your 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 it will be made available for telecom replay per 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.

Frederick McTaggart: 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 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, is made on 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 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: 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 will be 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 were not using the hotels and increased our water volume increased significantly in the third quarter of this year, as compared to last year as the lingering effects of the pandemic have disappeared, and 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 decreased the energy pass-through component of CW-Bahamas rates. The decrease in Bulk segment revenue was due to the energy was partially offset by a 6% increase in CW-Bahamas volume of water sold. I can say that we’re producing as better as much waters we can produce 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.

And our – 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%, as compared to $3.4 million in the third quarter of 2022, and 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, as 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 up 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, ’23 with working capital at $83.1 million, debt of just $200,000 and stockholders’ equity totaling $178 million. And 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 additionally approximately $4.7 million in material raw material purchase commitments that, were 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.

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Frederick McTaggart: 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, such as those provided by PERC in the Southwestern U.S. 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 utilities 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 we’ll be fully operational in time for us to meet the higher retail water demand that, we typically experience from mid-December through April every year in Grand Cayman. Humans post pandemic travel rebound continues, as David mentioned. And 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 at the beginning in December.

Also Southwest Airlines, who currently flies from Fort Lauderdale to the island is moving that flight up to Orlando, Florida, that’s 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 improve results and provide greater consistency in future Manufacturing segment performance.

We also saw this year return from our historically — return of business from our historically largest manufacturing customer and this was 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 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 border 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 a note 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 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’ve also, through our PERC subsidiaries assistance obtained the 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’re 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, 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. In addition to the synergies of our culture and mission, the acquisition of REC immediately expands our operational presence into a new growth area of the Western U.S. PERC and CWCO greater financial capacity and incremental management expertise will help REC to 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 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, which 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 Instructions] And our first question here will come from Gerry Sweeney with ROTH Capital. Please go ahead.

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Q&A Session

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

Frederick McTaggart: Hi Gerry.

David Sasnett: Good morning, Gerry.

Gerry Sweeney: 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 good year, but Edwards Air Force Base, Catalina. Could you either qualitatively or quantitatively give us a little bit of view to the pipeline that you’re seeing out there with potential projects over the short and medium term?

Frederick McTaggart: So right now, we’re focused on some opportunities, some O&M opportunities. Obviously, they’re longer term deals. They’re competitive – they are going be or being 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, you will – we are looking at other opportunities that potentially could develop into next year, toward the end of next year we are also – well, this is a two part, but we can talk about that on another question.

David Sasnett: I guess you’re looking, Gerry, for some type of quantification.

Gerry Sweeney: Yes just. I mean, is the pipeline as big as it’s been bigger, there’s a lot of dollars coming in because of like the JOBS Act?

David Sasnett: I would say it’s bigger than it’s ever been. In terms of number of projects and opportunities is very robust. It’s difficult to quantify some of these things, we will pursue some of these things we don’t pursue, Gerry, 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. And we recently had a strategic meeting along those lines. 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 only PERC. Because it seems like the situation in the Western United States gets worse day-by-day. So really, it’s just – it’s a very….

Frederick McTaggart: 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 really was one of the key parameters of our decision to acquire that company.

David Sasnett: Colorado is very similar to Arizona and California, they’ve got water issues.

Frederick McTaggart: And this is – and they’re growing pretty much twice the national average population wise. So it’s – a growing market there.

David Sasnett: And REC was a great opportunity for us, because they are a very well-respected company, great capabilities, but similar to PERC. It didn’t have the capital. And so – and they – once we bring them into the fold with us, and we can apply PERC’s qualifications and CWC’s qualifications to the business that REC – us doing, we think we can be a significant player in Colorado and the amount of cost of $4.2 million to get into this market, it’s a great deal for us, because if we get 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 there. So, we’re pretty excited about the acquisition of Ramey.