Consolidated Water Co. Ltd.

Good morning, everyone, and welcome. Thank you for joining us to discuss Consolidated Water Company's full year 2023 results. Hosting the call today is Chief Executive Officer of Consolidated Water Company, Rick McTaggart, and the company's Chief Financial Officer, David Tasman. Following the remarks, we'll open the call for your questions. At any time during the call, you may join the question and answer queue by pressing star and one on your keypad. If you would like to withdraw your questions, you may press star and two. 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 will be made available for telecom replay for 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 CEO, Rick McTaggart. Sir, please go ahead.

Thank you, Jamie. Good morning, everyone. Thank you for joining us today to discuss our results for 2023. It's only fitting that 2023, which was our 50th year in business, was also the most successful year in the history of the company. In our press release issued yesterday, we reported revenue of more than 180 million with gross profit of almost 62 million. Revenue was up across all four of our business segments. Our retail water segment benefited from higher numbers of tourist visitors on Grand Cayman compared to 2022, which was lower than historical levels due to the pandemic. Our services segment revenue increased by $69.1 million in 2023, with much of that increase generated by construction of the $81 million water recycling plant for Liberty Utilities in Goodyear, Arizona. We successfully managed cost on this project and delivered it to the client much faster than expected, resulting in improved gross margins in our services segment. On January 12th of this year, we received a substantial completion certificate from the client, which was 18 days ahead of schedule. On March 19th, we received the approval of construction certificate from the county regulator, which was achieved 42 days ahead of schedule. We anticipate generating additional revenue from this project until it is fully completed in June of this year. FERC's strong operating performance and revenue growth continues 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 of this important segment of our business. In our U.S. desalination business, We commenced work in the fourth quarter on site investigations, engineering, permitting, and public outreach in accordance with our contract to design, build, operate, and maintain a 1.7 MGD seawater desalination plant in Oahu, Hawaii. Already this year, we have installed the seawater desalination and post-treatment pilot plants which use feed water from our clients' wells on the site. We are currently commissioning the pilot plant and will operate it for several months to collect detailed operating data that is required for final design and permitting of the full-scale project. This project includes a two-year development phase, two-year construction phase, and 20-year operating phase. with two potential five-year operating phase extensions at the client's option. Our U.S. footprint continued to expand in Q4 with the acquisition of Ramey Environmental Compliance, or REC. 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 its business is very similar to that of PERC's O&M business. Now, before discussing more about recent developments and our outlook for the rest of this year, I'd like to turn the call over to our CFO, David Sassnett, who will take us through the financial details for 2023.

Thanks, Rick. Good morning, everyone. Our 2023 revenue totaled $180.2 million, and that represents a 92% increase from the revenue we generated in 2022. This increase was driven by revenue increases in all four of our business segments. Our retail segment was up 4.2 million, our bulk segment revenue increased 1.6 million, our services segment posted an increase in revenue of 69.1 million, and our manufacturing segment increased its revenue from last year by 11.2 million. Our retail revenue increased primarily due to a 15% increase in the volume of water we sold during the year, primarily due to increased tourism in Grand Cayman. This is especially encouraging because we didn't see a decrease in rainfall patterns there, so we think this increase bodes well for the future. Our bulk segment revenue increased primarily due to an increase in the price of the energy for CW Bahamas, which increased the energy pass-through component of CW Bahamas rates. The increase in our services segment revenue was due to an increase in plant construction revenue and O&M revenue. We recognized approximately $64.0 million in revenue for the year from the construction of the water treatment plant for Liberty Utilities in Goodyear, Arizona, and we also generated approximately $8.2 million in revenue from the construction of the new plant for the Water Authority in Grand Cayman. The revenue we generated under our operations and maintenance contracts totaled $19.4 million for 2023, which was up 37% from the $14.2 million of O&M revenue we recognized in 2022. Since acquiring PERC, the growth of our O&M business has been a strategic initiative of ours. This revenue is very stable, consistent, doesn't require an outlay of capital expenditures It's something that PERC does, we think, very well. They have a lot of expertise in this area. And we'll continue to focus on growing our O&M revenue as we move into 2024 and thereafter. Our manufacturing segment revenue increased due to increased production activity. Gross profit for the full year of 2023 was $61.9 million, or 34.4% of total revenue. as compared to $30.4 million or 32.3% of total revenue in 2022. The gross profit and gross margin improvement for 2023 reflects higher revenue, more profitable projects, and a focus on cost control. Net income from continuing operations attributable to consolidated water shareholders for the full year of 2023 was $30.7 million, $1.93 per diluted share. This compares to net income of $8.2 million or $0.54 per diluted share for 2022. Net income attributable to consolidated water stockholders for the full year of 2023, which includes the results of our discontinued operations, was $29.6 million or $1.86 per fully diluted share. This represents an increase from the net income of $5.9 million or $0.38 per fully diluted share that we posted for 2022. Now looking at our balance sheet and financial condition, our cash and cash equivalents totaled $42.6 million as of December 31st, 2023, and our working capital reached $88.8 million. Our debt was only $400,000, and our stockholders' equity was $186.8 million. As evidenced by these numbers, we continue to maintain ample levels of liquidity and credit capacity and an extremely solid financial condition. Our projected liquidity requirements for 2024 include capital expenditures for existing operations of approximately $9.5 million. This includes $2.8 million to be incurred in 2024 for our new West Bay plan as we bring additional production capacity online at this recently completed addition to our retail operations in Grand Cayman. We paid approximately $5.5 million in dividends in 2023, and we paid approximately $1.6 million in dividends for the first quarter of 2024. Our future liquidity requirements may also include any future potential dividends declared by our board. This completes our financial summary for the year. I now turn the call back over to Rick. Thank you, David.

During this past year, we were pleased to see tourism recover and water use increase in our Cayman Islands retail and bulk water businesses. Additionally, we recognize revenue from the design and construction of the 2.6 million gallon per day Red Gate seawater desalination plant for the Water Authority of the Cayman Islands, which contributed to the year-over-year increase in our services segment. Construction of this project for a valued client that we've had for more than 30 years is progressing well and is expected to be completed in the next 30 to 45 days. In November, we began operating West Bay 2, our retail water utility's new 1 million gallon per day seawater reverse osmosis plant in Grand Cayman. And as David mentioned, we're actually expanding that plant again this year because of continued demand for water on the island. This new plant is located on the same property as the old decommissioned plant. that was originally built in 1995. The West Bay II facility became fully operational in time for us to meet the higher retail water demand that we typically experience from mid-December through April of every year in Grand Cayman. In our manufacturing segment, we improved our operational efficiency and effectiveness, managing multiple large projects simultaneously. enabling greater throughput and higher profit margin. We also benefited from improved supply chain conditions that have continued into 2024. Over the last few years, we diversified our manufacturing customer base and the types of products we sell, resulting in a stronger base load of work flowing through the manufacturing segment. We believe that these efforts will result in less variability in revenues and profits in future periods. Now turning to the 1.7 MGD seawater plant project in Oahu, Hawaii that we announced last year. This project is proceeding in accordance with the schedule. We are performing initial development activities, including pilot testing, design preparation, and permitting. We anticipate recognizing significantly more revenue from this project beginning next year, 2025, during the second half of that year, but we expect to break ground on construction of the plan. Through PERC, I'm sorry, we fully acquired PERC in January of last year. We got the remaining 39% of that entity, and it's actually been a fantastic acquisition. The sustained, robust operational performance and revenue expansion of PERC have consistently bolstered our top and bottom lines. With a strong operational footprint in the southwestern US, PERC is poised for further expansion and advancement in this pivotal aspect of our business. As I mentioned earlier, we expanded our footprint in the US with the acquisition of REC. In addition to a similar business model, culture, and mission to PERC, REC expands our operational presence to a new growth area in the western U.S. Also similar to PERC, we anticipate that our greater financial resources and additional management expertise will help REC qualify for larger and potentially more complex O&M contracts and its home market of Colorado. The acquisition also creates an important new selling channel for PERC's signature wastewater recycling plant design and highly efficient project delivery model in the growing Colorado market. We are currently pursuing a number of such opportunities, some of which REC would have been unable to pursue in the past without our additional financial and management strength. Our operating results last year benefited from an extraordinary level of design and construction revenue from the Arizona and Cayman design-build projects, both of which are winding down this quarter. Other segments in our business, however, also generated increased revenues, which are expected to continue through 2024. Based on our schedule for the Hawaii project, We expect to complete piloting, design, and permitting, and commence construction of that plant in the third quarter of 2025, at which time we will begin to recognize the majority of the $150 million in design-build revenues from that important project, and that'll be over a two-year construction period. New bidding activity for O&M contracts and design-build projects, particularly in California, where PERC is very strong, has been robust. And we hope to obtain some of this new work. In the Bahamas, the Water and Storage Corporation continues to grow the demand on our Blue Hills plant and our Windsor plants. And we've been running at very high online percentages for more than two years to meet this elevated demand. We believe that there's opportunities in the Bahamas to further grow that business. on an organic basis. Our 2023 results set the bar much higher in terms of future growth. However, our exceptional operational performance over the past several years has also validated our strong belief that consolidated water's highly efficient and aesthetically pleasing treatment plant designs, our world-class operating and maintenance capabilities, and our innovative project delivery models are superior to those of our competitors, and we expect these differentiators to drive continued growth. The challenge continues to be demonstrating to potential U.S.-based clients that we do indeed build a better mousetrap and that we can save them significant time and money over the comfortable but inefficient design-bid-build project delivery model that they have been accustomed to for decades. However, we think that we will be able to overcome these challenges and change the perception of some clients by building on the great successes of this past year. We have the tools and we have the talent and the opportunities to continue growing our business and delivering superior value to clients and shareholders. With that, I'd like to open the call up for questions.

Ladies and gentlemen, at this time, we'll begin the question and answer session. Once again, to ask a question, you may press star and then 1 using a touch-tone telephone. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you please pick up your handsets prior to pressing the keys to ensure the best sound quality. Once again, that is star and then 1 to join our question queue.

We'll pause momentarily to assemble the roster. Our first question today comes from Jerry Sweeney from Roth Capital.

Please go ahead with your question.

Good morning, Rick and David. Thanks for taking my call, and happy 50th.

Thanks, Jerry. Thanks, Jerry.

A couple of questions. I'm going to try and organize them the best I can, but I was writing a bunch of things down here. But starting with PERC, Liberty, under budget, and ahead of schedule, right? So great. execution on that front, how much does that project maybe become a poster project for what PERC can do and go after projects of similar size or additional projects? Is there a way you can use that Liberty project to drive additional awareness and market what PERC can do?

Yeah, absolutely, Jerry. In fact, we have a nice little lineup of people that want to take tours of that plant. And, you know, it's actually quite a feat to get coming out of the COVID lockdowns and, you know, supply chain issues to get that done under budget and, you know, ahead of schedule. So there's a lot of people that are interested in learning about that for sure.

I've got a couple of companies you can talk to and maybe teach a couple of things too, but I'll save that for later. But, um, But also on the PERC side, how much of PERC is, I mean, when with the PERC model, you're not bidding for projects or are you clients coming to you with an issue and then PERC designs it and it's a negotiated process? Can you describe what goes on there?

So, you know, our sort of flagship model sales product is our customized design report, which we get ahead of any sort of public bidding or anything on these projects, and we provide the client with a – well, he pays a modest fee for approximately a 20 percent design of a plant that would meet his needs, and we give a maximum price at that point design and construct the plant. If that client is so inclined, he can then proceed to negotiate agreements with us to do the design and construction. We also participate in tenders. There are some opportunities for the CDR, the Customized Design Report, but we also pursue publicly bid jobs. For both O&M and Designville.

Jerry, the Liberty Utilities project was a perfect example of where our CDR process was employed. That project did not go to tender. We were able to sell to the Liberty Utilities management the advantages of our CDR model, and they went directly with us. I think, honestly, we saved them a lot of money from what had been incurred had they taken the thing to tender. Then Hawaii is the first example where we responded to a bid, and we were the winning bidder. We'd like to get people to hire us to do a CDR, but if we don't, we'll go ahead and bid on the project, and we think we're very competitive in either case.

Can you use the CDR program to help you bid, if that makes sense?

Well, all the same... components go into both. I mean, it's just the way it's presented. I mean, we are very, yeah, I mean, it's just, I mean, typically, and with the, you know, this Cerevol project, we presented a CDR, took them about three years to decide that, you know, that was the best way to go. They did other cost estimates for going to public tender with it, and we were much more cost-effective and we could deliver the project within the time period that they needed. A lot of this stuff turns on how fast you can deliver the project. When you go with a traditional design-bid-build model, it takes a lot more time for the engineering company to design the project, get all the approvals, then bid the project to construction companies. It's just a much longer process. And with us, it's much quicker and it's one point of responsibility for the client. It's not multiple points, you know, engineering companies, consultants, construction companies, subcontractors, that sort of thing. It's just we take full responsibility for a performance-based contract award.

And a lot of the peripheral costs that the client would incur are eliminated if they go directly with us. So it's less expensive for them. I mean, it's really a I mean, as we said in the comments or in Rick's opening remarks, we just need to convince the customers of the advantages of this because they are substantial.

Yeah, that's sort of what I was getting at. I mean, some people have to do bids, but other – I mean, the Liberty Utility Project, I think, underscores what you can do. Right. Switching gears a little bit. Staying with PERC, but, you know – a lot of stimulus dollars in the United States, IIJA, then some regulation changes even in California, direct portable reuse was approved recently. How do these items impact the market in California for PERC and in terms of projects pipeline and what you're seeing?

Well, on the IPR or DPR, We're currently operating the Santa Monica water recycling plant, which we designed. I think Santa Monica has their eye on being the first entity to actually implement correct local reuse. The plant's operating. It's producing tremendous product water there. I think it's a million gallons per day that they're treating. I was there just last week, actually, after the Roth Conference. And we have a great operating team there running the plant. And it's a beautiful plant. Congratulations to the city for building that. I think they'll probably be one of the first entities to do the direct potable reuse.

I'm sorry, the other part of the question was – Well, it was really – my understanding is you have stimulus dollars coming into play, but then you also have direct potable reuse, TPR. Sounds and feels as though – and the read we're getting is more projects coming down the pike, driven by both those sort of –

Yeah, the stimulus dollars, just a quick comment. The only project that we're involved in that is getting money from the federal government is the Hawaii project. They're getting grants, so we are aware of that, but we're not involved in anything else.

Terry, it's no secret that desalination has been a challenge in California.

That's my point on the DPR, right? I heard that.

Yeah, they also, but everybody... Everyone knows they need a lot more water, and you can only recycle so much. So I think DPR is another opportunity for us. I think a lot of potential clients will take that approach, just they can't build a desal facility, and it would be a source of potable water for them. So I think it's very positive for us.

That's what I'm hopeful for. And then final question. I don't want to monopolize it. Sounds like retail came in. Are you back at 100%, or is there still – some opportunity for the pickup from post COVID or, and or expansion or growth in the region. And then I'll, I'll jump back in line. Thank you.

We were beyond, uh, in sales volumes where we were before COVID. So we've already exceeded that. I mean, I hadn't seen that there's no sort of recent population estimates for Grand Cayman, but I mean, it, it really feels like there's a lot more people on the Island. It's not just tourists. I think, um, The population has grown there. I was reluctant to say anything in the speech there, but it really feels like when they get the new population data, it'll show some pretty substantial growth there.

If you visit Grand Cayman, just the last three or four years, the amount of construction activities taking place on the island is substantial. There's still construction underway there. I think overall activity on the island has increased. In part, as Rick said, it's probably driven by a population increase. But tourism is back. It's very healthy there. It's evidenced by the fact that if you try to get a hotel room in Grand Cayman in the months of February or March, the rates have gone through the roof, which tells you there's nothing available there. Okay.

Thanks, guys. I appreciate you taking so many questions.

Thanks, Jerry. Thanks. Our next question comes from Richard Saracusa. Please go ahead with your question.

Hello. Can you hear me? Yeah, I'm just curious if you could update us on the status of the Mexico situation.

Richard, thanks for asking. We are still trying to resolve that through an arbitration, and we've had discussions with the Mexican officials. I mean, there's nothing more that we can say about that at this point. legal matter.

Yeah. Okay. Thank you. And congrats on a great quarter. Thank you. Thanks.

Once again, if you would like to ask a question, please press star and then one. Our next question comes from John Bear from Ascend Wealth Advisors. Please go ahead with your question.

Thanks. Good morning, gentlemen, and congratulations on a great year, a great way to celebrate 50th anniversary. And also, I would like to say I really got a chuckle out of Rick's closing comments, almost a paraphrase of a line in the Ghostbusters, we have the tools and we have the talent. I got a good chuckle out of that one.

So anyways, my question... I said that was intentional, sorry.

Oh, good, good, good, good. I'm glad I picked it up. So my question is regarding, you know, you said a lot of strong bid activity and so forth. What's sort of the timeline? I know they all vary based on the size of the projects and so forth, but do you have a feel for, you know, what kind of flow you may have on contract awards that you have bids out for?

Well, there's two. at least one that comes to mind that is an O&M contract. And we bid that several months ago. It's being evaluated. So it's really up to the client on the timeline. I would expect that we would hear something back this year. It's a meaningful contract. From the standpoint of design-build projects, the things that we're pursuing now would probably not come to fruition this year. So, you know, they take, you know, from the time you hear about these projects until they qualify, you know, through the bidding process, it typically takes about a year. So that's why we, you know, we are certain that, as certain as we can be, that the Hawaii project, which is $150 million, which is almost twice the size of Cerevol in terms of dollars will start recognizing revenues from that in the third quarter of next year. So that's about as much as we could tell you right now, John.

Yeah. I was just trying to get a sense of the balance between some of these larger type projects that are no take longer to come to fruition versus maybe some shorter term, smaller projects.

I don't know if that… We have clients that we do O&M work for that from time to time require upgrades to their plants and replacements, but those are sort of in the $3 million to $5 million range. The more meaningful projects, $30 million, $40 million and up, they typically take about a year to cycle through. And if we're successful, then we would obviously get moving on those sometimes next year.

And do you think that there's any slowdown or any, excuse me, with the interest rates being up, has that slowed the process down at all? or not so much the process, but the projects coming out looking to be bid because of higher cost.

Yeah, I mean, I really can't answer that one. I hadn't heard that that's causing any delays on the client side. I mean, typically, by the time we hear about the project, it's already fully, you know, the decision to proceed is has been fully made.

John, in a lot of these situations, clients have deferred this work already, so they need to go ahead and proceed regardless of what the interest costs may be. Right.

Okay. Very good. Well, thanks for taking my questions, and congratulations again.

Thanks, John. Thank you.

And once again, if you would like to ask a question, please press star and then 1. To withdraw your questions, you may press star and two. And ladies and gentlemen, at this time, in showing no additional questions, we'll conclude today's question and answer session and today's conference call, but before we conclude, 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, reject, 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 statement made during the 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 in 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 sections of the company's SEC filings, including, but not limited to, its annual report on the Form 10-K and quarterly reports Form 10-Q. Any forward-looking statements made during the conference call speak 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.