Q3 2024 Consolidated Water Co Ltd Earnings Call - Q&A
Speaker Change: Good morning. Thank you for joining us today to discuss the results for Consolidated Water's third 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'll open the call to your questions.
Speaker Change: At any time during the call, you may join the question and answer session by pressing the star key, followed by the number 1. To withdraw your question, please press the star key, followed by the number 2.
Speaker Change: Before we conclude today's call, I'll provide some important cautions regarding the forward-looking statements made by management during the call.
Speaker Change: I'd like to remind everyone that today's call is being recorded and it will be made available for telecom replay or the instructions in yesterday's press release.
Speaker Change: 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: As you saw in our press release issued yesterday, we reported revenue of $33.4 million and net income from continuing operations of $5 million or $0.31 per diluted share for this past quarter.
Rick Mctaggart: These results were consistent with our expectations given the completion of two large design-build projects earlier this year.
Rick Mctaggart: We were pleased to see the continuing trend of increasing retail water sales in our exclusive utility service area on Grand Cayman, which was due to business and population growth on the island.
Rick Mctaggart: Our bulk segment had relatively consistent revenue compared to last year, however we saw an increase in gross margin due to the operations and maintenance contract for the new Red Gate II plant for the Water Authority in Grand Cayman.
which became effective May 1st of this year.
Rick Mctaggart: of our plants to our clients in this type of contract, which gives the client certainty of costs. Our margins are typically better early in the contract lifecycle when the equipment, particularly the RO membranes, are new.
Rick Mctaggart: Looking at services revenues, they declined by about half due to our anticipated reduction in construction revenue related to the conclusion of our Liberty Utilities and Red Gate II construction projects.
Rick Mctaggart: These projects had a major impact on 2023 revenue, but were completed prior to the start of the third quarter of this year.
Rick Mctaggart: The decline in construction revenue was partially offset by a $2.5 million increase in O&M revenue, recurring revenue.
Rick Mctaggart: This increase included $2.1 million from our REC subsidiary in Colorado, which we acquired in October of last year.
Rick Mctaggart: REC provides us with a new channel for expansion of our design, build, and O&M businesses into water stress regions of Colorado.
Rick Mctaggart: The balance of the increased recurring revenue resulted from incremental O&M contracts with our Perk Water subsidiary.
Rick Mctaggart: We continue to advance our development activities on the $147 million project to design, construct, operate, and maintain a seawater desalination plant for the Board of Water Supply in Honolulu, Hawaii.
Rick Mctaggart: Since we announced the project in June of last year, we have been advancing through the piloting, design, and permitting stage.
Rick Mctaggart: We plan to begin the construction phase late next year, which represents the largest portion of revenue
We expect to generate from this project.
Rick Mctaggart: We continue to gather essential operational data from the seawater desalination and post-treatment pilot systems that will inform the final design and permitting of the full-scale project.
Rick Mctaggart: At present, we are close to completing the first phase of the pilot testing.
Rick Mctaggart: and are nearing 60% completion of the final design for the project.
Rick Mctaggart: In all, the Hawaii project is comprised of a two-year development phase, followed by a two-year construction phase, and after construction and commissioning, we expect to operate the plan under a 20-year O&M agreement.
Rick Mctaggart: and there are two additional five-year extensions to that O&M agreement that are exercisable at the client's option.
Speaker Change: So now before getting 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. David.
Thanks Rick. Good morning everyone.
David Sasnett: Our revenue for the third quarter totaled $33.4 million. This was a 33% decrease from the same quarter of last year. And this decrease is almost entirely due to a $20.6 million decrease in construction revenue.
David Sasnett: SPERC's Project for Liberty Utilities in Arizona and our Red Gate 2 construction project, Grand Cayman, were both completed before the start of the third quarter this year.
David Sasnett: Our retail revenue increased due to a 4.2% increase in the volume of water sold and this reflects a 4.8% increase.
and the number of customer connections in our license area.
over the last year.
David Sasnett: revenue for the third quarter typically is very solid for us. I would just want to point out to people who follow our company
David Sasnett: The increase in bulk segwit revenue was due to the commencement of operating and maintenance contracts.
David Sasnett: for the new Red Gate contract for the War Authority of Cayman and an amendment of our North Sound contract with the War Authority of Cayman. Both the new Red Gate contract and the North Sound contract amendment became effective on May the 1st of this year.
David Sasnett: Revenue generated under our operations and maintenance contracts totaled $7.5 billion in the third quarter, which represents a 49% increase for the same quarter of 2023.
David Sasnett: REC contributed $2.1 million to the increase and the remainder related to incremental PERC contracts.
David Sasnett: Our manufacturing segment decreased by $362,000 to $4.4 million in the third quarter, but despite this slight decline in revenue, our manufacturing gross profit grew by 84%, reaching $1.6 million
David Sasnett: with this due to our focus on our part of higher margin products.
David Sasnett: Our consolidated gross profit for the quarter was $11.6 million or 34.8% of total revenue as compared to $16.6 million or 33% of total revenue for the third quarter of 2023.
David Sasnett: Net income from continuing operations attributable to our shareholders for the quarter was $5 million or $0.31 per diluted share. This compares to net income of $8.8 million or $0.55 per diluted share the third quarter of last year.
David Sasnett: We reported a net loss in discontinued operations of $503,000 for the third quarter as compared to a loss of $233,000 for the third quarter of 2023. We anticipate completing the formal dissolution of our Mexico subsidiaries and thus eliminating these losses from our discontinued operations.
David Sasnett: and our overall operations by the end of Q1 of next year.
David Sasnett: Including discontinued operations, net income attributable to consolidated water shareholders for the quarter was $4.5 million or $0.28 per diluted share. This compares to net income of $8.6 million or $0.54 per diluted share for last year.
David Sasnett: Turning to our balance sheet, at the end of the quarter, September 30th, 2024, we had $104.9 million in cash and cash equivalents.
David Sasnett: Our working capital was $133.9 million, our debt was only approximately $200,000, and our stockholders' equity totaled $209.8 million.
David Sasnett: In all, we continue to maintain a very healthy level of liquidity and credit capacity in an extremely solid financial condition.
David Sasnett: Our projected liquidity requirements for the remainder of the year include capital expenditures for existing operations of approximately $3.8 million.
David Sasnett: This includes approximately $872,000 to be incurred for our new West Bay plant and approximately $3.1 million for a project in the Mahonimas, the Cat Island project.
We paid approximately 1.8 million dividends.
David Sasnett: in October and our liquidity requirements obviously may also include future quarterly dividends if such dividends are declared by our board.
Speaker Change: So this completes our financial summary for the quarter. Now I'd like to turn things back over to Rick.
Thanks, David.
Now, for more operational details across our business segments,
Speaker Change: Fortunately, Grand Cayman did not see any significant or lasting damage from the hurricanes that impacted the island earlier this year.
Speaker Change: Although the total rainfall during those storms this past quarter was higher than this same quarter last year,
Speaker Change: The rainfall was concentrated over just a few days and ultimately it did not adversely impact our water sales on the island.
Speaker Change: Bulk revenue and gross profit margin increased because of the start of the new Red Gate II operating and maintenance contract, which commenced in the second quarter of this year.
Speaker Change: This additional O&M contract revenue offset revenue declines in our Bahamas business that resulted from lower energy costs, which in turn reduced the energy costs passed through charges to our customer.
also during the second quarter.
Speaker Change: We secured a 29-month extension of the North Sound plant operating and maintenance contract in Grand Cayman with only a minor reduction in fees to the client.
focus on maximizing production efficiency for the business
Speaker Change: Based on the opportunities we see ahead, we believe that this improving trend in our manufacturing segment will continue and operating results of this business segment will remain stable and profitable.
Speaker Change: REC has integrated well and has opened, as expected, important new opportunities in Colorado.
We're especially optimistic.
Speaker Change: about the synergies between REC and PERC sales teams. REC has become a natural extension of PERC, enabling us to replicate the success
Speaker Change: PERC has achieved over the past five years in a new market.
Colorado recent statutory changes to treated wastewater discharge requirements
Speaker Change: created several opportunities for us to support municipalities in need of upgrades.
Speaker Change: This regulatory change positions REC and PERC to capitalize on a number of smaller design-build project opportunities in the state.
Speaker Change: In the Bahamas, we are progressing as anticipated on the new $7 million, 15-year agreement with Water and Sewer Corporation to design, build, own, operate, and finance two seawater desalination plants on Cat Island in the Bahamas.
Speaker Change: construction will, or it is including, installation of two 250,000 gallon
storage tanks, along with supply and disposal wells.
Speaker Change: and backup generators. Each facility will be designed to produce 90,000 imperial gallons of desalinated water daily, and they are expected to provide potable and reliable water supply to more than 1,100 homes on the island.
Speaker Change: Looking forward, we remain excited about the future for many reasons.
Speaker Change: At the macro level, flowing water scarcity continues to build interest in advanced treatment and desalination solutions for impaired water sources.
Speaker Change: Specific positive factors include the strong water sales growth in Grand Cayman and long-term recurring revenue from our Caribbean-based bulk water businesses.
and our U.S.-based O&M business.
Speaker Change: Our manufacturing business continues its positive trend and we expect our desalination plant project in Hawaii to significantly enhance revenue and earnings over the coming years.
Speaker Change: Both of these things will ultimately drive future bulk and retail revenue growth.
Speaker Change: Our strong balance sheet also enables us to move quickly in any potential opportunistic acquisitions.
Speaker Change: Well, we are currently in a period between large construction projects. We believe that our award-winning plant designs, our cost-efficient project delivery models, and our unmatched industry experience will help us secure new projects we are pursuing.
Speaker Change: The courts we started for the company several years ago, which involved diversifying our product offerings and marked areas beyond seawater desalination in the Caribbean, has continued to prove successful and lays the path for strong growth ahead.
Speaker Change: As we complete 2024 and prepare for the new year, we anticipate that all of these positive factors will continue to support our long-term growth and its future profitability and further strengthen shareholder value.
Speaker Change: With that, I'd like to open the call up for questions.
Thank you.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2 Our first question comes from Jerry Sweeney with Roth Capital. Please go ahead
Good morning, Rick and David. Thanks for taking my call.
Jerry Sweeney: I have a couple of questions. I'm going to start with the Hawaii DESAL project. This is a little bit more about details. Obviously, I think you said there's a pilot design permitting construction phase.
Jerry Sweeney: Do you have an idea when the construction phase is at least planned to start and could you remind us?
Jerry Sweeney: what how much of the tender is allocated to the or cost is allocated to the construction phase
Speaker Change: Yeah, so we expect it to, I mean the plant has to start in the fourth quarter of next year.
I think about the...
Speaker Change: The development phase is about $27 million, and the balance of the $147 million is the construction costs.
Okay.
Speaker Change: Let me clarify something, Jerry. So, we're allowed to draw $27 million.
Speaker Change: in the design phase, but the amount of revenue that we recognize in the design phase will not be $27 million. It will be based upon the actual cost we incur. These projects typically are funded ahead of time so that we don't get into a cash flow challenge. And then after...
Speaker Change: When we start construction, the actual construction price will be recalculated because the contract we signed had clauses in it that allow for increases in the price.
Speaker Change: of construction based upon changes in materials and labor costs from the date that we sign the contract to the date that construction starts.
I hope that clarifies things for you.
available. Okay. Yes, that's correct.
Speaker Change: The construction phase is the chunkier part of the revenue side, and we should start seeing that.
Speaker Change: That's correct. That's the majority. That's about 80% of the revenue. I think it's somewhere in that range.
Speaker Change: And two years construction time, would it be sort of equally allocated?
No, it's going to be sort of a curve.
I got you.
Speaker Change: And, you know, obviously, if we can do it faster, that works for everybody, but...
Speaker Change: The maximum amount of time that we have is about two years to build the plant.
Got it.
Speaker Change: Switching gears to PERC, REC, U.S., what does the project backlog look like? Obviously, lots of talk about
Thank you. Bye-bye.
Speaker Change: heavy civil water infrastructure United States a long-term opportunity there I'm just curious as to what you're seeing and in the project RFP pipeline etc
I mean, without getting specific, I mean, we are...
Speaker Change: pursuing jobs. I mean, there's probably six or seven that come to mind in our current market area there in Arizona and California.
We have lost some jobs over the last year.
that you're probably aware of in the press.
I think the overhaul
Speaker Change: Overall, the Kennedy universe there is getting stronger, I mean there's just...
There's no
Speaker Change: You know, bid teams are quite busy pretty much all the time, and you've got proposals.
Shalom.
Speaker Change: When one of these meaningful ones hits, I mean, we have gotten a couple of smaller jobs that are in the sub-10 million dollar range over the last...
Everybody know.
Speaker Change: Got it. But the key message here is that market's strong and has gotten stronger over the past year per se.
Speaker Change: In all honesty, it's attracting a lot of attention from competitors, so we're adapting to be more competitive.
Speaker Change: you know to sell the client and the types of project delivery models and things that we do best.
and then board requests for the client as well.
Speaker Change: And then, just one last question for me. The Cat Islands, the family islands, how big of an opportunity can that be?
How many potential projects or...
Maybe 10 minutes before background.
Speaker Change: I mean, they told us informally, you know, in the Bahamas that there's probably another three islands that
Speaker Change: Cat Island is a 180,000 imperial gallon a day total capacity. You know, our Nassau plants produce 14 million gallons a day or something. But, you know, the size and the scale
requires that we charge more for the water.
and that's just the way it is so
Speaker Change: These projects could generate a million dollars a year in incremental revenues fairly easily in over a 15-year period, 20-year period, whatever.
The contract turns on itself.
Speaker Change: Got it. But I mean, you have cation additive, um, you know, I mean, Nafol.
Speaker Change: is, you know, close the capacity and demand it. There may be some opportunity there. Is that fair as well?
Speaker Change: Yeah, we're hoping that at some point they ask us to increase our capacity there. I mean it is, last year we were running in the high 90% online range there.
which obviously is...
Speaker Change: quite amazing for this type of equipment. We'd really like them to...
Speaker Change: to expand that plant there to give us a little bit more breathing room and to give them breathing room.
Speaker Change: We're really well above the guaranteed amounts that we're providing from those claims.
Speaker Change: Got it. So Cat, Island, Nassau and then obviously you know the Caymans are continuing to grow so you have a nice little growth trajectory on their core desal business or historical or legacy desal business.
Yeah
Speaker Change: Okay. All right, that's it for me. I appreciate it. Thanks.
Speaker Change: At this time, we are showing no further questions. This concludes our question and answer session. I'd now like to turn the call back over to Mr. McTaggart.
Sir, please go ahead.
Rick Mctaggart: Thank you. I'd just like to say thank you to everybody for joining today and wish everybody happy holidays. And our next earnings call will be in March of next year when we discuss our full year 2024 results. So, thank you and take care.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: including, but not limited to, statements regarding the company's future revenue, future plans, objectives, expectations, and events, assumptions, and estimates.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Any forward-looking statements made during this conference call are not guarantees of future performance and involve
Certain risks, uncertainties, and assumptions which are difficult to predict.
Speaker Change: Factors that would cause or contribute to such differences include, but are not limited to, tourism and weather conditions in the area we serve, the economic, political, and social conditions of each country in which we conduct or plan to conduct business.
Speaker Change: Our relationships with the government, entities, and other customers we serve.
Speaker Change: Regulatory matters including resolution of the negotiations for the renewal of our retail license on Grand Canyon. Our ability to successfully enter new markets.
Speaker Change: and various other risks as detailed in the company's periodic report filings with the Security and Exchange Commission, SEC.
Speaker Change: For other information about risks and uncertainties associated with the company's business, please refer to the Management's Discussion and Analysis of Financial Conditions or Results of Operations and Risk Factors.
Speaker Change: section of the company's FCC filing, including but not limited to its annual report on the Form 10-K and quarterly reports for Form 10-Q. Any forward-looking statements
made during this conference call.
Speaker Change: speaks as of today's date. The company expressly disclaims any obligation or undertaking
Speaker Change: to update or revise any forward-looking statements made during the conference call to reflect any change 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.
Speaker Change: I would like to remind everyone that this call will be made available for replay starting later this evening.
Speaker Change: Please refer to yesterday's earnings release for dial-in replay instructions available via the company's website at www.cwco.com