Consolidated Water Co Ltd

NASDAQ:CWCO

Q1-2025 Earnings Call

[Operator]

Good morning. Thank you for joining us today to discuss Consolidated Water Company's First Quarter 2025 Operating and Financial Results. Hosting the call today is the Chief Executive Officer of Consolidated Water, Rick McTaggart, and the company's Chief Financial Officer, David Sasnett. [Operator Instructions] 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.

Please see the instructions in yesterday's press release that has been posted to the Investor Relations section of the company's website.

Now I'd like to turn the call over to Consolidated Water's CEO, Rick McTaggart, Sir, please go ahead.

[Frederick McTaggart, executive]

Thank you, Mike, and good morning, everyone. Our Services segment revenue and operating income declined in the first quarter of 2025 compared to the year earlier due to completion of 2 major design build projects in the second quarter of last year.

However, we did see improved performance in all 3 other business segments, particularly Retail and Manufacturing. Retail water sales in our exclusive utility service area on Grand Cayman reflected much higher sales volumes compared to a year earlier due to population growth and increased business activity within our service area.

Manufacturing revenues and operating income increased by about 10% and 44%, respectively compared to a year earlier due to higher production activity and a higher-margin product mix. Revenue and gross profit generated in our Caribbean-based Bulk Water segment remained consistent year-over-year, reflecting the long-term stable income-generating nature of these businesses. Revenue from our Services segment declined significantly compared to a year earlier due to completion of the Liberty Utilities and Red Gate II design-build projects in the second quarter of last year. The decline was partially offset by a 9% or $626,000 increase in recurring revenue from our operations and maintenance contracts in the Western U.S. This growth in O&M revenue in dollar terms was about evenly generated by PERC in California and Arizona and REC in Colorado.

On April 28, the Honolulu Board of Water Supply, our client on our multiyear seawater desalination project in Hawaii approved our pilot test reports and recommendations and concluded that the desalinated water we produced during the piloting phase is a reasonable match to their existing water supply and further concluded that the desalinated water from the new plant would not cause any detrimental impact to their distribution pipes or customer assets. This is a key and significant milestone in the project and paves the way to begin construction once all permits have been obtained.

This $204 million project to design, construct, operate and maintain a 1.7 million gallon per day seawater desalination plant for the Honolulu Board of Water Supply commenced in 2023 in June. We expect to begin the construction of this project early next year, once we and the client have obtained the permits that are required and the client issues a notice to proceed with the construction. On a cautionary note, some of these permits are outside of our control and delays in obtaining them could also delay the construction date. The construction phase is expected to generate the largest portion of revenue from this project and be a major growth driver for our Services segment in 2026 and 2027.

We expect to submit our 90% design for the project on schedule early next month for the client's engineer to review. The Hawaii project is a major growth driver for our Services segment. It involves a 2-year development phase, which concludes next month, followed by 2 years of construction. Once completed and commissioned, we have been contracted to operate the plant under a 20-year O&M agreement plus 5-year -- 2, 5-year extensions at the option of the client. It's important to note that, particularly in this environment now economic environment that 80%-- approximately 80% of the construction cost for this project will be adjusted for inflation at the start of construction. This mechanism is expected to protect our gross margin and overall profitability.

Now before getting more into recent developments and our outlook for the year, I would like to turn the call over to our CFO, David Sasnett, who will take us through the financial details for the quarter.

[David Sasnett, executive]

Thank you, Rick. Good morning, everyone. Our revenue was down 15% from the first quarter of 2024 to $33.7 million and this decrease was due to a decrease of $7.3 million in the Services segment, specifically the construction revenue that related to completion of the 2 projects Rick mentioned previously.

The Service segment revenue decreased was partially offset by revenue increases of $786,000 in our Retail segment, $70,000 in our Bulk segment and $509,000 in the Manufacturing segment. Our Retail revenue was up $786,000 due to a 13% increase in the volume of water sold. Our bulk segment revenue increased slightly to

[Technical Difficulty]

due to the revenues generated by the commencement in May 2024 of the operations and maintenance contract for the new Red Gate II desalination plant on Grand Cayman, which we constructed and the amendment of our company's North Sound contract with the Water Authority Cayman, which also became effective in May of 2024. As I mentioned earlier, the decrease in Services segment revenue was due to plant construction revenue decreasing from $9.2 million in the first quarter of '24 to $2.2 million in the first quarter of this year. And once again, this is the result of the 2 construction projects that were completed in the second quarter of 2024. Our recurring revenue generated under our O&M contracts totaled $7.7 million in the first quarter of 2025 an increase of 9% over the previous year, both PERC and REC our Colorado subsidiary, increased their O&M revenue this first quarter from last year. Our Manufacturing segment revenue increased by $509,000 to $5.8 million for the first quarter of 2025. Gross profit for the first quarter of '25 was $12.3 million, about 37% of total revenue as compared to $13.9 million or around 35% of total revenue in the first quarter of '24.

This decrease was due, as I mentioned earlier, to a decrease in Service segment gross profit of

[Technical Difficulty]

the decrease in construction revenue. This decrease was partially offset by an increase in gross profit for our Retail, Bulk and Manufacturing segments. Net income from continuing operations attributable to Consolidated Water shareholders for the first quarter of '25 was $4.9 million or $0.31 per diluted share. This compares to net income of $6.9 million or $0.43 per diluted share in the first quarter of '24. Including discontinued operations, net income attributable to Consolidated Water stockholders for the first quarter of 2025 was $4.8 million, or $0.30 per diluted share as compared to net income of $6.5 million or $0.40 per diluted share in the same period last year.

Now turning to our balance sheet. Cash and cash equivalents grew to $107.9 million as of March 31, 2025. And our working capital increased to $136.2 million, and our stockholders' equity now totals $213.3 million. Our projected liquidity requirements for 2025 include capital expenditures -- excuse me -- of approximately -- excuse me, our projected liquidity requirements for 2025 include capital expenditures for existing operations of approximately $9.1 million. This includes $800,000 to be incurred in 2025 for new desalination plants to the Bahamas on Cat Island and $1.2 million for the expansion of Aerex manufacturing facility. We paid out approximately $1.8 million in dividends in April. Our liquidity requirements may also include future quarterly dividends if such dividends are declared by our Board. Our executive management and Board are currently evaluating how to best utilize our large cash balance to increase shareholder value, such evaluation includes potentially increasing our quarterly dividend.

This completes our financial summary for the year. And now I'd like to turn the call back over to Rick.

[Frederick McTaggart, executive]

Thanks, David. So in first quarter, we announced that our wholly-owned subsidiary, Cayman Water Company received a new concession from the Cayman Islands government that concession granted at exclusive rights, continued exclusive rights to produce and supply potable water within its service area on Grand Cayman. Due to regulatory changes enacted in 2018, Cayman Water is also required to obtain a new operating license from OfReg, the islands utility regulator.

Late last month, we resumed discussions with OfReg for the new license, which we expect will involve a restructuring of the previous operating terms. Until the new license is issued, our existing operating license will remain in effect. Cayman Water operates 3 seawater reverse desalination plants that produce 4 million gallons of potable water per day for our service areas growing population and businesses. We are in the process of expanding our West Bay seawater desalination plant, so it can generate an additional 1 million gallons per day by this summer. And we're also planning to construct additional water storage tanks over the next 2 years, and this is all being driven by the growth we've experienced post-COVID on the island.

As David mentioned, our manufacturing revenue increased by 10% to $5.8 million in the quarter. This business has stabilized as promised, and we believe we have significantly mitigated revenue and profit variability in this business segment going forward by broadening our product and client base. We are currently constructing an additional 17,500 square feet of manufacturing space for Aerex and expect to complete construction next month. The additional space will allow us to take on more simultaneous projects, thereby increasing our throughput capacity. We are now pursuing additional projects that would utilize the greater floor space with this ultimately driving further manufacturing growth.

REC, our Colorado subsidiary, has provided us a new channel to expand our design build and O&M businesses into the water-stressed regions of Colorado, and we're currently pursuing several O&M and design-build opportunities in Colorado. As I mentioned earlier, our client in Hawaii has agreed that we demonstrated in our pilot test results that we were able to achieve a reasonable match in water quality to their existing natural supplies. This is an important step towards a notice to proceed for construction. We and our clients are now working diligently to complete the final permitting for the project.

As we've communicated previously, we are expecting -- we are experiencing an expected decline in this year in design build work compared to 2023 and 2024. However, we anticipate design build revenues to improve in the second half of this year as 3 smaller projects currently under contract or nearing final contract stage are set to begin construction. The combined value of these 3 projects is expected to be approximately $20 million. One of these projects is the construction of a wastewater scalping plant, which will provide high-quality recycled water to irrigated golf course in California, and this is certainly a great fit for PERC's capabilities. While these projects are smaller in scale than past projects, they reflect continued demand for our products and services in the Western U.S.

We and our local partners are pursuing a sizable wastewater design build project in the Southern Caribbean. And if our bid is successful, would mark our first international wastewater treatment plant project. Similar to the Hawaii project, this new wastewater opportunity further demonstrates how PERC is being leveraged to grow our business across product lines, desalination and wastewater as well as into new geographical markets. We're also looking further out into 2026 and beyond with the growing pipeline of long-term projects. We see the Arizona market, in particular, providing strong opportunities for future design build activity, and our team is actively involved in several early-stage discussions.

We are currently preparing 4 customized design reports or CDRs for clients. And similar to the Liberty Utilities project in Arizona, we hope that these CDRs ultimately lead to design build contract for these important wastewater treatment facilities. Looking ahead, we remain confident in our ability to deliver steady, long-term growth in revenue and profit to our shareholders. Key drivers include strong retail water sales growth in Grand Cayman, the stability of long-term recurring revenue from our Caribbean bulk water operations, our design build business, and particularly the Hawaii project and other smaller projects currently underway, and continued positive momentum in our Manufacturing segment.

Now with that, I'd like to open the call for questions.

[Operator]

[Operator Instructions] And your first question comes from Gerry Sweeney with ROTH Capital.

[Gerard Sweeney, analyst]

I've got a couple or a few questions, but I'm going to start with Hawaii. Two questions there. $204 million is, I think, the price tag for construction and O&M. How does the construction revenue sort of flow through? It sounds like a 2-year build beginning sort of ramp up then higher spend and then a quarter or 2 ramp down? Is that the way we should look at it? And will you get any revenue over the next quarter or 2 as you're still working on...

[Frederick McTaggart, executive]

So we had to file that contract back in 2023. So -- and that has the full draw schedule and if you want to actually take a look at that. I mean it's -- that will give you a very precise cash flow from the project.

[David Sasnett, executive]

Yes, but that hasn't necessarily tied on revenue, Gerry, you understand how that works, right. So out of the [ $204 million ] contract, $147 million initially was designated as the design and construction revenue. Now $27 million of that is fixed. In other words, the revenue is fixed, it can't be adjusted, but the other $120 million out of the $147 million is subject to an inflation adjustment. So we recognize that $147 million, which will be adjusted over the 2-year design and 2-year construction period. And to date, we haven't recognized -- I guess we'll disclose in the next quarter exactly how much revenue we've recognized, but we haven't even recognized 10% of the revenue under the construction contract yet because the revenue recognition is dependent upon cost incurred for the project under the input method, what the cost we've incurred is relatively small at this point in time.

[Gerard Sweeney, analyst]

Yes, when you equipment...

[David Sasnett, executive]

Yes, the pilot plant testing, the upfront costs for the bonds and for the insurers and things like that, and the development work doesn't constitute a huge portion of the construction costs. Most of those costs are still be incurred. You'll see a tremendous ramping up of revenue as soon as the costs start going into the construction. And what we're seeing right now, we think the structure period was going to last about 2 years. Our best guess now is going to start in the first quarter of 2026. Hopefully, it will happen sooner, but it's dependent upon the permitting.

[Gerard Sweeney, analyst]

Okay. Two questions. I suspect you're not going to let me know how much the gross margins on that construction side of the business are?

[David Sasnett, executive]

No, we'll not.

[Frederick McTaggart, executive]

We can't do that.

[Gerard Sweeney, analyst]

I don't think so. On the permitting side, who's responsible for the permitting? Is that your subsidiary? Or is the one of the local government of Hawaii also part of it or responsible for it?

[Frederick McTaggart, executive]

Well, it's shared, again, there's a pretty detailed breakdown to that in the contract we filed. I mean some of the permits related to archeological studies on the site and that sort of thing are with the client. Obviously, all the building permits and that sort of thing are with us. I mean we're jointly working together on everything. I mean we have to provide a lot of information for the client to submit for his permitting. So I mean there are some contractual responsibilities that are detailed out, but then it's more of a collaborative effort to try to get this all wrapped up.

[Gerard Sweeney, analyst]

Got it. Switching gears to Retail. Obviously, a nice uptick in volumes and revenue there. And you mentioned higher population and business activity. Two things here. You're expanding your 1 facility the West Bay facility by 1 million gallons. But that expansion that you're seeing, I would suspect that -- I know you're the -- Q1 is part of the high season, I guess. So -- but you should see sort of a permanent lift in volumes because of just permanent population growth as well as more businesses, et cetera. Is that a fair way of looking at it?

[David Sasnett, executive]

Yes.

[Frederick McTaggart, executive]

Yes. I mean, there's a new hospital in our service area. It was constructed, obviously, a big water user the Kaimana Bay development, which is right smack in the center of our service area. I mean they continue to build office buildings and expand schools. Yes. I mean it's...

[David Sasnett, executive]

There's a lot of investment going into Grand Cayman right now. I mean we're very happy about it, obviously.

[Frederick McTaggart, executive]

Yes. This isn't a seasonal increase. I mean I think it's firmly rooted and population growth in the service area and business growth. I mean there are always going to be some seasonal variations but this is pretty solid.

[David Sasnett, executive]

I guess, you're saying our base water sales have increased, Gerry, and flora is higher than it used to be for us there.

[Gerard Sweeney, analyst]

Exactly. Yes. How long will it take that -- or you're adding 1 million gallons, 25% expansion. What are you running at utilization today? And maybe do you know how long it will take to sort of absorb that...

[Frederick McTaggart, executive]

Do we disclose the sales volumes? I mean we have -- we disclosed the growth numbers, but I mean, not as a percentage of production capacity. I mean, we're looking ahead for next year with this expansion because I mean you have to design for peak demand. So we've always had our peak demands in the first 3 months of the year that starts mid-December and goes through until April. So I mean we're looking forward to make sure that we have sufficient capacity and then obviously sufficient storage capacity to meet future demand.

[Gerard Sweeney, analyst]

Got it. And then the 3 contracts you referenced, the $20 million, how long will it take to execute on this project? It sounds like they're a little bit smaller. And roughly when would they start -- potentially start?

[Frederick McTaggart, executive]

Yes. I mean, two of them are under contract. The third one, we hope will be under contract in the next couple of months. They're smaller jobs. I think they're probably look at it over maybe a 12-month time frame or something that will be realizing revenues from those projects.

[David Sasnett, executive]

Yes, probably the second half of this year and the first part -- first 6 months of 2026, Gerry would be a reasonable time frame.

[Gerard Sweeney, analyst]

And it sounds like the overall project pipeline is, I guess, rebounding for lack of a better word. It was a little slow, but you had these projects plus it sounds like you have line of sight to some other opportunities across the board.

[Frederick McTaggart, executive]

Yes. I mean we did -- we're not -- we don't have a giant project that we could announce, but there's definitely a good pipeline of smaller jobs that we're pursuing or that we have, as I mentioned, under contract. The guys will be kept certainly busy.

[Operator]

[Operator Instructions] Your next question comes from John Bair with Ascend Wealth Advisors, LLC.

[John Bair, analyst]

A couple of questions. You -- regarding -- in your comments, you mentioned that some of the permitting was out of your control. And I was just kind of wondering, I'm guessing probably environmentally related ones. You did just an answering Gerry about archeological permits and so forth. Can you elaborate a little bit more on that? What -- are there 1 or 2 or 5 types of permits that might fall under that, that could get hung up?

[Frederick McTaggart, executive]

Yes. I mean, again, you can see them in the filed contract. There's like a table, and it sets out which permits our responsibility, and which permits are the client's responsibility. I mean, things related to the site, which was provided by the client are typically their responsibility. The building permits, construction permits, that sort of thing. We have to get approval from the Department of Health for the water quality studies and that sort of thing. I mean those are typically on us. I mean, you should -- if you want a lot of detail, it's there. It's in the filed contract.

[David Sasnett, executive]

Yes. When it's beyond our control, I guess, we should clarify indeed it's the client's responsibility to get those permits. For certain our responsibility. But I mean...

[Frederick McTaggart, executive]

I mean it's more the -- there's -- I'll tell you, John, there's nothing that I'm concerned about except for the timing because some of these agencies move very slow. I mean I don't think that -- I don't feel at this time that there's anything that would be detrimental to the project that's out there. It's just a matter of getting these permits. I mean some of them take a really long time, particularly the -- the one that comes to mind is the archeological permit. I mean, that just...

[David Sasnett, executive]

It's taken much longer than we expected and much longer than the client expected. These are government agencies, there's only so much you can push them.

[John Bair, analyst]

Are they under the EPA or what area of the government would they be?

[Frederick McTaggart, executive]

State agencies, Hawaii State agencies.

[John Bair, analyst]

All right. And then the other kind of a broad question, and you did somewhat touch on this with your outlook of potential wastewater facility in Barbados and kind of expanding geographically. So I'm wondering if the success with winning the Hawaii contract could potentially open up other opportunities for you in the Asia Pacific region, the Philippines or Japan or somewhere in that region. Of course, forgetting about the Bali situation a number of years back. But nonetheless, things have perhaps changed some. So wondering how that might play in?

[Frederick McTaggart, executive]

Yes. I mean, first of all, I didn't mention anything in Barbados. There's a -- we have an international project that we're pursuing on the wastewater side, but I didn't...

[David Sasnett, executive]

Not Barbados.

[Frederick McTaggart, executive]

Yes, I didn't mention.

[John Bair, analyst]

Okay. Then I misheard that then, and I apologize for that.

[Frederick McTaggart, executive]

From the standpoint of looking farther east, I mean we're not pursuing anything in that region at this time. There's sufficient opportunities, I think, closer to home that we want to focus on. And there's actually a lot of opportunities in Florida right now that we potentially could be involved in -- I mean, the growth of population here in the state has facilitated new treatment plants for both water and wastewater and our Aerex manufacturing business is nicely positioned to capitalize on that growth, and we've been making business relationships and partnerships with companies here in Florida that I think will be bearing fruit in the next few years as well.

[John Bair, analyst]

That kind of somewhat answers one of my next questions was a general outlook with projects domestically whatever, given recent administration change and policy initiatives and all that kind of thing, probably sick to death of hearing questions about tariffs, but nonetheless. Just wondering if that opportunity outlook number of bid, number of projects that are potential bidding opportunities for you. Does that look fairly stable? Is it expanding? Just a little more color on that. It sounds like you had a lot of stuff going on here.

[Frederick McTaggart, executive]

Yes. There's certainly a lot of opportunities. We have obviously very detailed reviews on a weekly basis of projects that we're pursuing. And I sit in on those for the Western United States and I really haven't seen it slowing down. I mean the size of the projects has changed. But I mean, the number of projects that we're pursuing and potentially could get, I think, is quite encouraging for me.

[Operator]

[Operator Instructions] All right. At this time, this concludes our question-and-answer session. I'd like to now turn the call back over to Mr. McTaggart. Sir, please go ahead.

[Frederick McTaggart, executive]

Thank you, everybody, for joining us today. It's always a pleasure to be able to communicate with the shareholders. And I look forward to speaking with you again in August when we announce our Q2 results. Take care.

[Operator]

Thank you. Before we conclude today's call, I would like to provide the company's safe harbor statements 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 statement 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 expected 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 sections of the company's SEC filings including, but not limited to, its annual report on the Form 10-K and quarterly reports for Form 10-Q.

Any forward-looking statements made during the conference call speak as of today's date. The company expressly disclaims any obligation 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 cwco.com.

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