Consolidated Water Co. Ltd.

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 Sassnett. Following their remarks, we'll open the call to your questions. At any time during the call, you may join the question queue by pressing the star key followed by one on your telephone keypad. If you would like to withdraw a question, please press star, then two. and should you need any operator assistance, you may press star then zero. 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 CEO, Rick McTaggart. Sir, please go ahead.

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 of 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 has 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 its construction, commissioning, and startup is completed at the end of the second quarter of next year. PERC continued strong operating performance and revenue growth, continued 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 options. 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 Sassnett, who will take us through the financial details for the quarter.

Thanks, Rick, and good morning, everyone. As Rick mentioned, 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 we sold during the quarter. This was due to increased tourism on Grand Cayman. The number of tourists arriving by air, those of the tourists that stayed 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 passenger 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 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 about as much water as we can produce in the Bahamas for the Water and Sewage Corporation. Operations there are very favorable to our company. The increase in services segment revenue is 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. The retail generated under operations and maintenance contracts in our services segment also increased. It totaled $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 both to 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. where 33% of total revenue is compared to $6.8 million, or 27% of total revenue for the same quarter of 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 54 cents per fully diluted share. This was up from net income of 300,000 or two cents per basic and fully diluted share for the third quarter of 2022. Now turning to our balance sheet and financial condition. Cash equivalents totaled 48.8 million as of September 30th, 2023. This compares to $47.7 million as of June 30, 2023, 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 of Cayman. We had additionally approximately $4.7 million in 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. 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 US. Looking at our Caribbean seawater desalination business, the revenue we recognize from the design and construction of the 2.6 million gallon 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 utility's new 1 million gallon per day west-based seawater desalination plant, which replaced the 30-year-old plant and provides additional capacity to supplement our retail water business in Grand Cayman is currently being commissioned and will 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. Cayman's 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 set to begin 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 improved results and provide greater consistency in future manufacturing segment performance. We also saw this year return of business from our historically largest manufacturing customer, and this was 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 US. 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's significant experience working with municipal clients and regulators in the US, will ensure that this project is successful and will exceed the expectations of our client, the Board 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 US, 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 US. 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 PERF 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's 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's business exponentially. We believe that our success with PERC can be replicated with this strategic acquisition as well as with future opportunities. 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.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. And if you would like to withdraw a question for any reason, please press star, then 2.

At this time, we will take a moment to assemble our roster. And our first question here will come from Jerry Sweeney with Roth Capital.

Please go ahead.

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

Hey, Jerry. Good morning, Jerry.

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 Goodyear, 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?

So right now, you know, we're focused on some opportunities, some O&M opportunities. Obviously, you know, they're longer-term deals. They're competitive. They're going to be, well, they're being competitively bid. So, you know, 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 and build business, You will, you know, we are looking at other opportunities that potentially could develop into next year, toward the end of next year. You know, we are also, well, this isn't through PERC, but we can talk about that on another question.

We don't...

Yes, I guess you're looking, Jerry, for some type of quantification.

Yeah, just, you know, I mean, is the pipeline, you know, as big as it's been, bigger? You know, there's a lot of dollars coming in because of, like, the Jobs Act.

I would say it's bigger than it's ever been in terms of number of projects and opportunities. It's very robust. It's difficult to quantify. Some of these things we will pursue. Some of these things we don't pursue, Jerry. Yeah. 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 and 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 sufficient margin to justify investments in pursuing that business. But it's a very good time for us to be owning PERC Because it seems like the situation in the western United States gets worse day by day. So really, it's a very tough time.

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.

Colorado has been very similar to Arizona and California. They've got water issues.

And they're growing pretty much twice the national average population-wise. So it's a growing market there.

And RAC was a great opportunity for us because they are a very well-respected company, great capabilities, but similar to PERC. They didn't have the capital to grow.

Yeah.

And so, and they, you know, once we bring them into the fold with us and we can apply Perkins' qualifications and CWCO's qualifications to the business that REC's pursuing, we think we can be a significant player in Colorado. And the amount of cost, you know, $4.2 million to get into this market, it's a great deal for us because if we had started the company ourselves, I certainly think we would spend 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 and pursue business there. So we're pretty excited about the acquisition of Ramey. We think, not initially, not in the first six months of the year, but once we establish things there and start pursuing business using the PERC team to help them, I think we've got a chance of very significant growth in Colorado.

Fair to say PERC brings technology, reference accounts, Ramey, as well as Consolidated Water. Ramey brings 100-plus customers and customer relationships, and it sounds as though the growth of Colorado is going to drive either upgraded or enhanced wastewater and water recycling and other facilities. Is that a fair way of looking at it?

Yeah, I think there's needs there that are being unmet right now. in the market and we're going to go in and try to meet those needs, particularly upgrading facilities. There's needs to upgrade facilities to meet the tighter nutrient removal requirements that were enacted I think about a year and a half, two years ago. And then Colorado has also recently enacted direct potable reuse legislation, which opens up a whole new opportunity there for PERC because they're experts in that sort of level of treatment of wastewater.

Got it. Staying with PERC for a second, you know, Goodyear, I think he did 20 million and recorded 20 million in revenue in a quarter from the project. Back in the envelope, I have something like 45 or 46 million. So that leaves just over 40 million left or maybe just under $40 million because it's 82. Am I roughly in the ballpark with that?

Yes, you are. I mean, we've been very transparent in how much revenue we've recognized on this project. Yes, you have been. Literally from the date that we started construction. So if you go back and just simply add the numbers from last year, as reported in our 10-K, and then add in this nine months for this year, you'll have what percentage of the $82 million we've recognized to date. And the remaining revenue, Jerry, will be recognized in the fourth quarter of this year and in the first two quarters of next year. Then after that, the project will essentially be done.

Am I correct that a large portion of the project is scheduled to be completed this year with, you know, I don't want to say tag ends, but with the remainder next year?

Yeah, I think that's a – I don't have the exact construction schedule in front of me as we speak. But there will still be a lot of progress made in the fourth quarter this year. Got it.

And I know this may be a little forward-looking. It sounds like you've been executing very well. Margins are above trend. As far as you can tell, do you think that can continue?

No, I don't think it's going to continue. I think I would be surprised if there is a significant amount of further progress I think we've got a really good handle on the cost necessary to complete the project. I don't think there'll be any cumulative type adjustments of any significance going forward. That's what you're asking.

I just wasn't sure if it would stay. I think it came in around 30%. I wasn't sure if it would trend down. I'm not sure if you had a good run. things were ahead of schedule or ahead of margin and maybe they kind of revert back down to more previously projected levels is what I'm really asking.

No, the accounting doesn't work that way unless we have missed our cost estimate. The margin should be pretty steady going forward. We're a lot more comfortable with the cost estimates now than we were during the first six months of construction. When we proposed this project, it was a very scary kind of environment. I mean, there was a very tight labor market in the Arizona area, and raw material prices were going through the roof, so our initial margins were lower because of the uncertainty and the anticipated additional cost. The people at PERC have done a fantastic job, both in efficiency, construction efficiency, and addressing the labor shortage issues that most of the other construction companies are having out there in Arizona. done a good job of controlling cost. So they, you know, I have to say again, they've done a great job on the ShareBall project today, the LBD Tilties project.

Got it. Super helpful. That's it for me. I'll jump back in line. So thanks, guys, and congrats on a great quarter.

Thanks, Jerry. Again, if you have a question, you may press star then one.

Our next question will come from John Baer with Ascend Wealth Advisors. Please go ahead.

Thank you and good morning. Congratulations on a great quarter and really a very solid momentum that you have. Wanted to ask about the opportunities that you might see with having won the water treatment contract on the military base, if there's other opportunities like that in the country that you might be able to address or pick up?

Yeah, I think there are. I mean, I think we probably haven't mentioned it too much in the calls and stuff. I mean, we've been operating the Camp Pendleton wastewater system for the Marine Corps for several years now. We added the Edwards Air Force Base contract this summer. Those types of contracts go out to bid pretty regularly, so we anticipate continuing to pursue those types of agreements.

And those extensions on the annual basis, does those go out for an annual bid? In other words, is it competitive or do you have to continue to... offer a bid against others for them to decide whether to extend the contract or not?

Well, it's at the client's discretion to extend, but those prices are already included in the bid that we put in for the initial one-year term. So you bid out the five years basically in your bid submission. So it's really up to the client to decide what they want to do the following year, but Typically, our experience has been that they renew them through the life of the contract.

Yeah, we've had very good experience there, John. I mean, it's no guarantee they'll renew them.

And that follows on that you have experience with a couple of them that you sort of become a preferred operator for other facilities. That's kind of where I was driving it, the opportunities throughout the U.S. base. U.S. base.

Yeah, Camp Pendleton and Edwards Air Force Base gives us a lot of credibility. And that counts for a lot when you're bidding on new contracts. So, you know, the momentum feeds itself, John. Hopefully we can continue.

Yep. Right. And then turning to the Hawaii contract, in your release that, you know, you're moving on in the first phase. So at what point do you... start receiving revenue on that project. And I guess it's going to be like some of these other ones where it's, as you move forward, that's when you, you know, receive revenues against the overall contract win.

Yeah. I mean, this is sort of more in David's alley, but we're booking the revenues for that project. based on costs that we incur to date. What do you call that? It's called the input method. Input method, yeah. So, I mean, although we have had some substantial payments from the client up front for mobilization and various insurances and that sort of thing that were required for the project, we're in the development phase right now, so we're not incurring a lot of costs relative to the size of the contract. that would allow us to book any meaningful revenues on that project yet. I mean, I think we're in the process of designing the piloting study and doing, you know, public outreach and that sort of thing. You know, by this time next year, I think we'll be, you know, it'll be a different picture and we'll be booking some meaningful revenues from the development phase, which that totaled about $11.2 million. 5 million or something out of the contract. The construction revenues are still probably a year and a half away. Then we start booking the balance of that, which is about 138 million bucks.

The construction revenue itself is subject to adjustment because the contract has inflation clauses in it. When we finish the design phase, development phase, and we've had the final design for and the cost will be adjusted based upon, you know, CPI and things like that so that we're not hit for inflation over the design period. But the big impact from Hawaii will have an impact in 2024, but it really starts when construction starts towards the end of 2024, early 2025. 25, yeah. Yeah.

That's good. You've elaborated a lot on, you know, Mike, what I was thinking on this, you know, when construction starts and so forth. So that's very positive. Another question, you alluded to a pretty full pipeline of bid opportunities and so forth. Do you think that is as much a function of the federal, you know, the supposed inflation-reducing act and federal monies flowing into that, or do you think it's more or just as much just the absolute need to develop new water resources capabilities.

The only project that we're aware of, or that I'm aware of personally, that's receiving those types of funds from the federal government is the Hawaii project. Presumably that wouldn't have moved forward if they weren't able to get those sorts of commitments for the funding. But these other opportunities that we're seeing or either with private clients or projects that are just sort of in the normal course of business. I mean, it's not that I know of that they're getting any supplemental funding from those federal sources.

Yeah, we haven't heard anything from our prospective clients that any federal money is involved in this. It's really just projects that are driven by the need, not necessarily by extra funding available.

That's interesting. That's very interesting. My last question is, you got a nice chunk of cash there. How do you have that positioned? Are you in short-term treasuries? How are you addressing that?

Well, for the U.S. funds, I mean, we have cash in several different locations, John. Significant cash balance was historically in the Bahamas, in Grand Cayman, and in the U.S., We don't move money around between countries that often, especially not between the U.S. and our foreign subsidiaries because of tax considerations. We're sort of limited as to how much we can earn on our money in the Grand Caymans. The banks there aren't paying what they are in the U.S. But we earn a nice return, money market returns on the monies we have in the Bahamas. We're also opening up interest-bearing accounts in the U.S. because PERC's generating a lot of cash right now and we'll be starting you'll see us reporting more interest income going forward as we invest this balance in short-term, very secure type of money market accounts.

Sure. Very good. Well, thank you very much for taking my questions. Congratulations again on really strong momentum and very positive outlook.

Thank you. Thanks, John.

Worthwhile being patient.

That's what I say, yes. At this time, we will conclude our question and answer session. I'd like to now turn the call back over to Mr. McTaggart. Sir, please go ahead.

Thanks, Joe. I'd just like to thank everybody once again for joining us today. And I'm looking forward, David and I are looking forward to talking with you again when we present our year-end results, I guess, in March of next year. So take care and hope everybody stays safe.

Thanks, Joe.

Before we conclude today's call, I would like to provide the company 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 statements made during this conference call are not guarantees of future performance and involve certain risks and 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 negotiate 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 factor section of the company's SEC filings, including but not limited to its annual report on 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.cdc.gov.