Consolidated Water Q2 2024 Earnings Call Transcript

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August 15, 2024

Key Takeaways

  • We reported $32.5 million in Q2 revenue, down 27% year-over-year due to the completion of large design-build projects.
  • Retail segment revenue increased 8% to $8.2 million, driven by a 10% rise in water volumes from population growth and lower rainfall.
  • The new 2.6 mgd Red Gate desalination plant was commissioned under a 10-year O&M contract and the ~US$81 million Goodyear, Arizona plant is on track for completion by end of Q3.
  • Settlement of the canceled Mexico project generated ~$32 million in net cash proceeds, boosting cash and equivalents to $96.7 million and strengthening liquidity.
  • O&M revenues rose 75% to $7.1 million, including $1.9 million from the REC acquisition, accelerating growth in water-stressed Colorado markets.
AI Generated. May Contain Errors.
Earnings Conference Call
Consolidated Water Q2 2024
00:00 / 00:00

There are 4 speakers on the call.

Operator

Good morning, everyone. Thank you for joining us today to discuss the results for Consolidated Water's Q2 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 Sassemott. Following their remarks, we will open the call to questions. Before we conclude today's call, I'll provide some important cautions regarding the forward looking statements made by management during the call.

Operator

I'd like to remind everyone that today's call is being recorded and will be made available for a 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 floor over to Consolidated Water Company's CEO, Rick McTaggart. Sir, please go ahead.

Speaker 1

Thank you, Jamie, and good morning, everyone. Thank you for joining us today to discuss our financial and operating results for the Q2 of 2024. As you saw in our release issued yesterday, we reported revenue of $32,500,000 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 $8,200,000 for the quarter.

Speaker 1

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 $81,000,000 water treatment plant in Goodyear, Arizona was substantially completed in the Q1. 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 Q3. Also during the Q2, we completed the construction and commissioning of the new 2,600,000 gallon per day Red Gate desalination plant in Grand Cayman for the Water Authority of the Cayman Islands.

Speaker 1

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 $147,000,000 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.

Speaker 1

The completion of the Hawaii project encompasses the current 2 year development phase, which started last year, followed by a 2 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 2 5 year extensions, which are exercisable at the client's discretion. The reduction in construction related revenue in the Q2 was partially offset by an increase in the revenue generated from O and 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 Perk, we anticipate that our greater financial and management resources will enable REC to pursue larger projects that will accelerate their growth over time.

Speaker 1

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 and 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 US32 $1,000,000 plus US20 $1,000,000 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.

Speaker 2

Thanks, Rick, and good morning, everyone. In the Q2 of this year, revenues totaled 32,500,000, which is a decrease of 27 percent from the 44,200,000 in revenue we reported for the same quarter last year. This overall decrease in revenue is almost entirely due to a $16,500,000 decrease in construction revenue attributable to PERC's project for Liberty Utilities in Arizona and the completion of the Redgate project in Grand Cayman as Rick has mentioned earlier. Retail revenue increased primarily due to a 10% increase in the volume of orders sold. The volume of orders 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 Q2 of last year and the retail revenue was also up due to significantly less rainfall on Grand Cayman in April May of this year as compared to the same months of last year.

Speaker 2

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 7,100,000 in the Q2 of 2024, an increase of 75% from the Q2 of last year. Revenue from REC which we acquired in October of last year constitute 1.9 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 $3,900,000 as compared to $4,100,000 in the Q2 of 'twenty 3.

Speaker 2

Our gross profit for the Q2 of this year was $11,600,000 or 36 percent of total revenue, which was down from the $15,500,000 or 35% of total revenue in the Q2 of last year due to the overall decrease in revenue. Net income from continuing operations attributable to our shareholders for the Q2 of this year was $4,200,000 or $0.26 per diluted share compared to net income of $7,500,000 or $0.47 per diluted share in the Q2 of 'twenty 3. We reported income from discontinued operations this quarter of $11,600,000 This resulted from the $12,100,000,000 gain that we recorded on the sale of the project land and the project documentation in connection with our settlement for the arbitration with the Mexico government. Including discontinued operations, our net income attributable to consolidated water stockholders for the Q2 of this year was 15,900,000 or $0.99 per diluted share, which was up from the net income of $7,300,000 or $0.46 per diluted share that we reported in the Q2 of last year. Now turning to the balance sheet, our cash and cash equivalents totaled $96,700,000 as of June 30, 2024.

Speaker 2

Our working capital was $131,200,000 and our stockholders' equity was 206,700,000 dollars Our substantial increase in cash and working capital since December 31, 2023, reflects the $32,000,000 and 20,000,000 that we received for the Mexico settlement. We have enhanced and continue to maintain very healthy levels of liquidity and credit capacity and in extremely solid financial condition. Our projected liquidity requirements for the balance of this year include capital expenditures for existing operations of approximately $7,100,000 which includes approximately $2,500,000 to be incurred for our new West Bay plant and the addition of additional capacity there and approximately $3,900,000 to be incurred for other projects. We paid approximately $1,600,000 in dividends in July 24 and our liquidity requirements may also include future quarterly dividends as such dividends are declared by our Board. This completes our financial summary for the quarter.

Speaker 2

Now, I'd like to turn the call back over to Rick.

Speaker 1

Thank you, David. We believe our 2nd 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 Q1 of this year and our Hawaii project is expected to start construction late next year. Revenues from our retail segment and services O and 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 super efficient 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.

Speaker 1

As David mentioned, we plan to incur $2,500,000 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 Sewerage Corporation of the Bahamas to design, build, own, operate and finance 2 seawater desalination plants on Cat Island in the Bahamas. This will be our first project for the WSC in 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 stepping stone to grow our Bahamas business beyond currently NASDAQ.

Speaker 1

Our newest business in Colorado, REC contributed $1,900,000 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 source 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 2 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.

Speaker 1

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 and M business, stabilized manufacturing revenues and earnings that we saw this quarter and expected revenues and earnings from our $147,000,000 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 plants on Cat Island in 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.

Speaker 1

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 projects shows no signs of slowing. And although we are currently in a period between 2 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 2 major national clients for a number of projects that they are contemplating, and 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.

Speaker 1

And now, Jamie, I'd like to open up the call for questions.

Operator

Our first question today comes from Gerry Sweeney from Roth Capital. Please go ahead with your question.

Speaker 3

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

Speaker 2

Hey, Gerry. Good morning.

Speaker 3

Rick, 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 have some stimulus dollars coming through. Our channel checks suggest that a lot of money is just starting to hit the front end engineering companies with projects coming behind it behind that money 12 to 18 months. I'm just curious as to what you're seeing out there and maybe a little bit of qualitative description of the pipeline.

Speaker 1

The Cat Island project and these are this is non U. S. Obviously I know you're interested in the U. S. Market.

Speaker 1

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.

Speaker 1

I mean that's a project that's going to run through this year and probably part of next year on the construction. And then we go into a 15 year operating agreement with them. So 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 a because of the lack of fresh water and identifiable new natural sources, I mean we're seeing less pricing sensitivity I think to new drinking water sources.

Speaker 1

So I mean that's in very specific markets Jerry. So 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 where you got to fall back on. So we are seeing less price sensitivity in some markets.

Speaker 3

Yes, sorry. Go ahead.

Speaker 1

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

Speaker 2

There are a lot of projects that we are pursuing that haven't actually gone to the point where we would submit a formal proposal yet.

Speaker 3

We are

Speaker 2

having preliminary discussions with the client to understand their needs and when we do all these things seem to come in bunches for us. So there is 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.

Speaker 3

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

Speaker 1

I think it's similar. It's definitely not abating at all, but there is a lot of clients that need help. And we are talking to people that for example, we're going down the road of a sort of traditional design bid build project delivery model and we've been able to get a lot of traction with our CDRs, customized design reports and our not take seed 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.

Speaker 1

So as David mentioned, we're talking to people. And you know, I mean we're not going to I mean we don't have anything specific to disclose other than what I talked about earlier.

Speaker 2

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

Speaker 3

Yes. That's essentially what I scanned. 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're taking a little bit longer to get through the sort of the bid process to it's taking longer to get to the bid process per se, but it's just like 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 plant in the outlying islands?

Speaker 1

Well, they're much smaller than what we're doing in Nassau. I mean, right now, we have, what is it, like 14000000, 15000000 gallons per day of production capacity just on Nassau, which is the most populated island. These plants are a lot smaller, 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 NASDAQ.

Speaker 1

I think you're going to see some meaningful revenues from these projects over time, certainly from the Cat Island project.

Speaker 2

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.

Speaker 3

Got you. And then one or two more quick follow ups. RECs at $1,900,000 recurring revenue in the quarter. I think you

Speaker 2

mentioned PERC, but I didn't catch it. I'm sitting on an airport basis. Could you have that number? If not,

Speaker 3

I can follow-up with you.

Speaker 1

So, the increase was Dave was mentioning 75%

Speaker 3

year over year, right.

Speaker 1

Yes. So what we said was revenue generated under O and M totaled $7,100,000 for the Q2, dollars 1,900,000 of that was the REC increase. And then you just have to look at last year's segment. I think that's in there.

Speaker 2

Well, our O and M revenue was $14,200,000 for the first half of this year, Jerry, compared to $7,700,000 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 detailed exactly how much the O and M revenue was for both the Q1 and Q2 and the increase from last year.

Speaker 3

Okay. Well, I have 1,000,000 1,900,000 was right, I just subtracted and that should be correct.

Speaker 2

Yes. So as we just mentioned our O and M revenue for the Q2 was 7,100,000 which is up 75% in total for the same quarter of last year. And out of that we didn't have REC for the Q2 of last year. So $1,900,000 of the 75% increase is related to REC. So I could we could do the math real quick here.

Speaker 2

But you could Sure. Real quick on your capital. I was

Speaker 3

a history major, Rick.

Speaker 1

What's that?

Speaker 3

I said I was a history major. Don't trust my math. 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 serious if there's been any discussions on sort of capital allocation.

Speaker 3

Obviously, you're looking at acquisitions, but dividends, buybacks, I don't know if actually

Speaker 2

you can buy back shares, but just curious.

Speaker 1

Yes, I mean, I could pretty much tell you that buying back shares would not be considered just because of our challenges with our articles. We're not going to get that. 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.

Speaker 1

So I'm sure it will be discussed.

Speaker 3

Got it. Okay. I appreciate your guys' time. I'll jump back a lot.

Speaker 2

Okay. Thank you.

Operator

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.

Speaker 1

Thanks, Jamie. Just wanted to thank everybody again for joining on the call. We look forward to talking with you again in November when we release our Q3 results. I hope everybody has a great rest of the summer. Thanks.

Operator

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.

Operator

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. 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, please refer to the management's Discussion and Analysis of Financial Conditions or Results of Operations and Risk Factors section of the company's SEC filings, including but not limited to, annual report on the Form 10 ks and quarterly reports from Form 10 Q. Any forward looking statements made during the conference call speaks as of today's date.

Operator

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 atwww.cwco.com. We thank you for attending today's presentation. This concludes the conference call.

Operator

You may now disconnect your lines.

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