Consolidated Water Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 11, 2023

There are 3 speakers on the call.

Operator

Good morning. Thank you for joining us today to discuss Consolidated Water Company's 3rd Quarter of 2023 Results. Hosting the call today is the Chief Executive Officer of Consolidated Water Company, Ricky Taggart and the company's Chief Financial Officer, David Dressman. Following their remarks, we'll open the call to your questions. Before we conclude today's call, I'll provide some important cautions regarding forward looking statements made by management during the call.

Operator

I'd like to remind everyone that today's call is being recorded and it will be made available for telecom replay for the instructions and useful 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, Richard Taggart. Sir, please go ahead.

Speaker 1

Thank you, Joe, and good morning, everyone. Thanks for joining us today to discuss our results for the Q2 of 2023. It's extremely gratifying for me to mark the company's 15th anniversary this month by reporting record quarterly revenues and earnings. As you saw in our release issued yesterday, we reported 110% increase in revenues to $44,200,000 with revenue up across all 4 of our business segments. Our top line results reflect increased activity and output by all of our business segments.

Speaker 1

Our retail water segment benefited from a 14% increase in the volume of water source in Grand Cayman. We attribute the sales increase to improved tourist activity on Grand Cayman as tourism on the island last year was lower than historical levels due to the lingering impact of the pandemic. Our services segment revenue increased by $19,000,000 In the Q2, we're $17,600,000 in revenue from our progress on the construction of The $82,000,000 advanced water treatment plant in Quiggy, Arizona that we announced in May of last year. Construction on that project is progressing as planned and we anticipate generating significant additional revenue Until its construction, commissioning and start up is completed in mid-twenty 24. First, we continued strong operating performance, revenue growth and synergies with other areas of our business Have significantly improved our top and bottom line.

Speaker 1

Its strong operational presence in the Southwestern U. S, A region that urgently needs new fresh water sources due to unprecedented drought conditions has positioned us Further growth in this important segment of our business. In June, we entered into the U. S. Desalination market for the first time With the $204,000,000 20 year contract to design, build, operate and maintain a seawater defalination plant In Oahu, Hawaii, in all we secured more than $350,000,000 in major multiyear projects Over the last 18 months, which we expect will have a positive impact on earnings over the coming quarters.

Speaker 1

Now before discussing more about these projects and our outlook for the rest of the year, I'd like to turn the call over to David, He will take us through the financial details for the quarter. David?

Speaker 2

Thanks, Rick, and good morning, everyone. As we mentioned, revenue for the Q2 this year totaled $44,200,000 which is up 110% when compared to the same quarter last year. This increase was driven by revenue increases of $1,000,000 in our Retail segment, $19,000,000 in our Services segment and $3,000,000 in our Manufacturing segment. Retail Revenue increased primarily due to a 14% increase in the volume of water we sold during the quarter. Our retail revenue also increased as a result of higher energy costs and increased the energy pass through component

Operator

of our water rates. The increase in

Speaker 2

our services segment revenue was due to an increase in plant design and construction revenue. As Rick mentioned, We recognized approximately $17,600,000 in revenue in the Q2 of 2023 for the construction of the water treatment plant we It's important to note that our segment results benefited this quarter from Positive variance in actual construction costs for our design build projects. These construction projects are originally estimated at Certain level of costs and what we've seen over the 1st year or so of the Liberty Utilities contract and other contracts is that Our actual construction costs are coming in a little bit less than our estimates, which allowed us to increase our profit recognition. We got a nice thought This quarter and the fact that we're doing better than expected, I think that's a tribute to the quality of the people to our company that These projects have been actually constructed and they've done a great job at lowering costs on the level that's

Speaker 1

A little bit lower than

Speaker 2

what we thought we would incur for these projects. The revenue generated under our operations and maintenance contracts totaled $3,900,000 in the 2nd quarter of this year, that's up 11% from the $3,500,000 we recognized on O and M contracts in the Q2 of 2022. We had an increase from our manufacturing segment revenue that was due to increased production

Speaker 1

activity.

Speaker 2

Somewhat normalized in the supply chain there and we're able to increase productivity of the segment. We're not having as many issues with canning raw materials and still have some and there's still some product delivery delays, but overall, pit conditions have improved for our manufacturing segment. Our gross profit for the Q2 of 2023 was $15,500,000 and 30% of total revenue was up 107% from the $7,500,000 or 35.5 percent of total revenue that we recognized in the Q2 of last year. Net income from continuing operations attributable to stockholders for the Q2 of 2023 to 7 point $5,000,000 or $0.47 per diluted share and this compares to

Speaker 1

net income of $2,700,000

Speaker 2

or $0.18 per diluted share for the Q2 of 2022. Net income attributable to consolidated water stockholders for the Q2 of 2003, which includes the results of discontinued operations of $4,300,000 or $0.46 per fully diluted share. This was up from net income of $2,300,000 or $0.15 per diluted share for the same period of last year. With respect to our balance sheet and our liquidity, we're still in excellent financial condition, very little debt. We have more than ample cash and liquidity.

Speaker 2

As a matter of fact, cash and cash equivalents totaled $47,700,000 at the end of June of this year. Our working capital was $75,500,000 We had debt of only $300,000 And our stockholders' equity Total is, I think, very impressive, dollars 170,300,000 As of June 30, our projected liquidity requirements 2,003 includes capital expenditures for existing operations of approximately $7,600,000 This includes $600,000 that we expect to incur We placed our West Bay desalination water plant at approximately $4,300,000 for construction of the new Red Gate desalination plant on Grand Canyon. We paid approximately $6,000,000 in dividends for the 1st 6 months of 2023. And CoreSight's future liquidity requirements may also include any potential future dividends that are deferred by our Board. And with that, I'd like to turn the call back over to Rick.

Speaker 1

Thanks, David. We believe that our second Quarter results affirm our growth strategy, which is the focus on the most water stressed areas in the United States and the Caribbean We provide not only desalination solutions, but also advanced wastewater treatment and recycling solutions such as those provided by PERC in the U. S. Looking at our Caribbean seawater business, the revenue we recognized from the design construction of the 2,600,000 gallon per day Red Gate desalination plant for the water authority in the Cayman Islands contributed to the year over year increase in services segment revenue. Construction of this project remains on track and is expected to be completed in early 2024.

Speaker 1

Cayman Water's new 1,000,000 gallon per day West Pays desalination plant, which replaces a 30 year old plant and supplements Production capacity for our retail water business in Grand Canyon is expected to go online next month In time to meet the higher retail water demand that we typically experience in Grand Cayman from mid December through April of every year. In July, Perk began providing services under 2 new contracts in Southern California. The first is with the Department of Defense to operate and maintain wastewater treatment plants at Edwards Air Force Base in Kern County, And this was one true competitive tender. The second is with the City of Avalon to operate and maintain The wastewater system on Catalina Island in California, which includes the wastewater treatment plant, the wastewater collection system and the saltwater flushing supply system in the city. The Edwards Air Force Base contract began on July 1st.

Speaker 1

It continues for 1 year with 41 year extensions exercisable at the option of the client. We expect Perks revenue in the 1st year of this contract to total about $1,300,000 from that contract. The Catalina Island contract also started on July 1st, will continue for 18 months with extensions exercised both the City's option And we estimate Perks revenues for the 1st 18 months from that contract will be about 2,100,000 We believe these wins highlight the world class operational and asset management services that Perk provides and they support our plans to further grow our business in the Western U. S. The engagement at Edwards is our 2nd contract to operate Wastewater plants for military installation and represents another potential growth area for our business as the Department of Defense continues to focus on improving water security and efficiency.

Speaker 1

We believe the growth potential is very high for PERC. We are currently pursuing a number of design build and O and M contract opportunities in the Western U. S. As well as new markets. Looking at our manufacturing business, during the quarter we saw continued relief from supply chain constraints and challenging economic conditions allowing us to advance more of our order backlog through the manufacturing and billing process.

Speaker 1

Over the last couple of years, we have diversified our manufacturing customer base in terms of customer concentration and types of products. We believe that this diversification will continue to improve our results and provide greater consistency and future manufacturing segment results. This past quarter, we also saw more business return from our historically largest Manufacturing customer business that had been suspended over the past several years. Looking ahead, we expect more Consistent results for our manufacturing business and we see continued growth opportunities with our now much more diversified customer base. From our beginning, Consolidated Water has pursued a mission to provide state of the art water services To areas of the world where water supply is scarce, our dedicated team of engineers, builders and operators Have long recognized that fresh water is the most precious resource in the world.

Speaker 1

Today, we produce more than 25,000,000 gallons of potable water daily from our 11 seawater desalination plants and we operate 27 wastewater treatment facilities. In the Q2, we expanded our desalination footprint to the United States with the award of the $204,000,000 contract to design, that we have constructed worldwide. As our first desalination plant in the U. S, which is also under our longest term contract, This milestone win represents a significant affirmation of the world class design, construction and operational services that Consolidated Water provides. We believe winning this contract is due to our 50 years of experience, designing, building and operating some of the world's most energy efficient Seawater desalination plants as well as the exceptional project track record that our team was able to demonstrate to our client, the Board of Water Supply in Honolulu.

Speaker 1

We also believe that this entrance into the U. S. Desalination plant market positions us well for other opportunities we are pursuing in the Western U. S. We see opportunities similar to Hawaii to grow our desalination business In the United States, for example, the South Coast Water District in Dana Point, California just last week Invited interested parties to qualify to take for a 15 year design build, operate and maintain contract 5,000,000 gallon per day water plant for the district in Dana Point.

Speaker 1

On the strategic front, We are presently pursuing 2 opportunities. If completed, the first would expand Park's Water business, Our waters business into a new and rapidly growing market in the Western U. S. Also, we recently formed a partnership For the development and manufacture of membrane process technologies for use in industrial and mining water treatment applications. And we're currently pursuing opportunities in that sector.

Speaker 1

Our 2nd quarter results demonstrate how we have effectively applied our financial Management expertise to grow Perk's business exponentially. We believe that our success with Perk can be replicated with these two We remain very optimistic about our growth in the future for numerous reasons. This includes the recovery of tourism in Grand Cayman And our construction projects underway there and in the U. S. As well as the increased project bidding activity we're seeing in the U.

Speaker 1

S. We also anticipate that the more than $350,000,000 in major multiyear projects that we secured over the last 18 months We'll have an increasing positive impact on our earnings in future quarters. We believe that our recent activities and successes And the current market trends represent strong drivers for continued growth, increasing profitability And further strengthening the shareholder value. And I'd now like to open up the call for questions, Joe.

Operator

We will now begin the question and answer session. At this time, we will take our first question which will come from Gerry Sweeney with ROTH Capital.

Speaker 1

Please go ahead. Good morning, Rick and David. Thanks for taking my call. I got a few questions, but I'll limit it to a couple initially. But on the strategic, On the strategic side, you talked

Operator

about pursuing potential acquisitions at Sunflakes, and one

Speaker 2

of them was the strength in Perch. Is that more of

Operator

a acquisition to broaden the customer base or is there other technology, other services What's that may bring to the table?

Speaker 1

It's similar services to Perk, just the broader Market, market in the Western U. S.

Speaker 2

Got it. And same

Speaker 1

with Perk, obviously, This is Pamela Lafferty. It's been a great acquisition for you. Could you maybe talk a little bit more about the pipeline looks like? Has it Have it grown

Operator

on a year over year basis? And what's the general activity and sort of RFP

Speaker 2

activity that's taking place?

Speaker 1

I mean without getting too detailed, I mean we're seeing The project is going to bid just about every month now, Jerry. I mean, there's design build projects The wastewater treatment clients that are out to bid now that we're pursuing. There's O and M contracts That are being led either already or major contracts that are coming up in the next few months. There's the obviously the data point project that just came out with the RFQ. I mean that's been expected for a number of years.

Speaker 1

That's right in Kirk's backyard. So a lot of that work Certainly, the bidding work and that sort of thing would be conducted through parks. So, yes, honestly, I think Things sort of broke loose after COVID dissipated and there's a lot of pent up work in this business in the Western

Speaker 2

Got you.

Speaker 1

Super helpful. And then maybe one or two multiple questions. So on the Clear Project,

Operator

the $82,000,000 project,

Speaker 1

it sounds as though you sort of You

Operator

hit a potential completion milestone. Can you give us a little bit more detail

Speaker 1

on how much of that contract

Operator

will remain Of that ATC still remain to be a bit slower or recognized? And what would

Speaker 1

be sort of the cadence that would be recognized for the next couple of years?

Speaker 2

I'll take that, Rick. Jerry, we've recognized you can summarize exactly how much of the $82,000,000 is recognized. If you go back to last year's filings, actually the 10 ks, then look at what we disclosed the 1st 2 quarters of this year. I think we're about a little over 40% of the contract recognized in terms of revenue. The majority of the remaining revenue will be recognized in the 3rd and 4th quarters of this year.

Speaker 2

It won't be until mid next year that we're totally completed with the project. But most of the revenue, most of the work will be finished in quarters 3 and 4 this year. So you should see significant revenue recognition in those quarters. And then the revenue is starting to decline in the 1st to second quarters of next year. So that's pretty and so And I mentioned earlier, both with the utilities contract and with another construction contract that we have underway, Our cost to date has been a little bit less to our estimates.

Speaker 2

So that's an advantage to the older do a catch up adjustment. They don't do percentage of completion anymore. It's actually called the incident method. But the way it works is if you Just your estimates and based on the revised estimates, you have a cumulative catch at the testament. So we had a bit of that testing this quarter.

Speaker 2

But it's positive news because what we've seen today is that we've done a really good job of controlling cost. And even in an inflationary environment where labor is very tight, We changed the holding cost for these 2 construction projects at or below our estimates. So we're very encouraged by that.

Operator

Yes. That actually leads to my follow-up question.

Speaker 2

What was the impact that I'm assuming I'm going to use the term maybe as

Operator

What was the impact on the profitability through post COGS and sales, whatever?

Speaker 2

Yes, disclosed in our 10 Q, but I believe the number is a little over $1,700,000 about 1,750,000 The incremental gross profit and revenue, it had the impact of about $0.11 on our EPS for this quarter So, but even after you factor that out, you'll see that we had a very solid quarter And our services segment performed very well. So that would have got additional benefit. And I want to thank We were constructing our plan and our operations are doing a very good job on both maintaining bids and controlling costs on those projects.

Operator

All right. At this time, this concludes our question and answer session. I'd like to now turn the call back over to Houston Stadtner. Sir, please go ahead.

Speaker 1

Thanks, Joe. So on a final note, I'd like to invite everyone to watch us ring the NASDAQ opening bell on this Monday, 14th August In celebration of our 50th anniversary, as well as our 28th year trading on NASDAQ, We'll be celebrating how we've grown from a small water utility in Grand Cayman to a multinational company with operations across the Continental U. S, Hawaii and the Caribbean. It's an exciting event for our team who will be joining our Chairman, Will Pergandy And we just direct you to the press release we issued earlier this week for the webcast information. Thanks everybody for dialing in and look forward to speaking with you again in November.

Speaker 1

Joe, please go ahead and wrap up the call. Thank you. Ladies and gentlemen,

Operator

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 provide in this conference call includes forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are 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 from its business and the industry and markets related to its business.

Operator

Handy 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. Actual outcomes and results may differ materially from what is expressed in such forward looking statements. Factors that would cause or contribute Such differences include, but are not limited to, tourism and weather conditions in 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 to the customers we serve. Regulatory matters, including resolution of the negotiations for the renewal of our retail On Grand Cayman, our ability to successfully enter new markets and various other risks are detailed in the company's periodic filings with the Securities and Exchange Commission.

Operator

For more information about risks and uncertainties associated with the company's business, Please refer to the management's discussion and analysis of financial condition or results of operations and risk factors section of the company's SEC filings, Incoding, but not limited to, its annual report on Form 10 ks and quarterly reports for Form 10 Q. Any forward looking statements made during the conference As of today's date, the company expressly disclaims any obligation or undertakings 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. Before we end today's conference call, I would now like to remind everyone that this call will be available for replay starting later this evening. Please refer to yesterday's earnings release for Xylem replay instructions available via the company's website at www. Cwco.com.

Operator

Thank you for attending today's presentation. This concludes the conference call. You may now disconnect your lines.

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Key Takeaways

  • Reported a 110% increase in revenues to $44.2 million, marking a record quarter with growth across all four business segments.
  • Services segment revenue jumped by $19 million, including $17.6 million from construction of the $82 million advanced water treatment plant in Quiggy, Arizona, which remains on track for mid-2024 completion.
  • Entered the U.S. desalination market with a $204 million, 20-year contract for a seawater plant in Oahu and secured over $350 million in multiyear projects over 18 months, positioning future earnings growth.
  • Achieved net income from continuing operations of $7.5 million (EPS $0.47) versus $2.7 million (EPS $0.18) a year ago, while gross profit rose 107% to $15.5 million.
  • Maintains a strong balance sheet—$47.7 million in cash, minimal debt, and $75.5 million in working capital—supporting $7.6 million in capital expenditures, dividend payments, and continued expansion in manufacturing and O&M pipelines.
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Earnings Conference Call
Consolidated Water Q2 2023
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