Consolidated Water - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 was soft with broad misses versus consensus: revenue $28.41M vs $33.60M est, EPS $0.09 vs $0.26 est, and EBITDA $2.75M vs $6.50M est, reflecting the trough between large construction projects and mix shift toward O&M contracts [Values retrieved from S&P Global]*.
• FY 2024 revenue declined 26% to $134.0M as two major construction projects finished early in the year; O&M recurring revenue rose 51% to $29.3M, retail revenue grew 5% to $31.7M, and manufacturing revenue was stable.
• Strategic catalysts: Cayman Water received a new government concession extending exclusive rights on Grand Cayman, with OfReg license negotiations to follow; West Bay plant expansion (+1M gpd) targeted for completion by end of Q2 2025; Hawaii DBO desalination construction start now “early next year,” pushing construction-phase revenue into 2026–2027.
• Balance sheet remains robust ($99.4M cash, $132.8M working capital, minimal debt), supporting capex ($~10.3M in 2025), manufacturing capacity expansion, and opportunistic M&A.

What Went Well and What Went Wrong

What Went Well

• Retail utility delivered record sales volumes in Grand Cayman (1.01B gallons, +4.5%) on rising connections (+4.3%) and economic growth; CEO: “record volume of water sold to a record number of customers”.
• O&M recurring revenue scaled to $29.3M (+51%), driven by REC Colorado (+$6.1M) and PERC Water contracts; enhances revenue stability and segment margins.
• Manufacturing margins improved on product mix and efficiency; CEO: “Revenues have stabilized and margins have increased… we’re making better margins on these jobs” and facility expansion expected to add capacity in late 2025.

What Went Wrong

• Services (construction) revenue fell sharply to $17.6M (from $77.3M in 2023) as Liberty (AZ) and Red Gate II (Cayman) projects wound down; this was the primary driver of FY revenue decline.
• Bahamas bulk revenue decreased (to $33.7M) due to lower energy pass-through rates, reducing both client charges and costs; mix was partly offset by new Red Gate O&M contract.
• Q4 2024 missed Wall Street estimates across revenue, EPS, and EBITDA, reflecting timing delays and limited construction activity ahead of Hawaii’s construction phase [Values retrieved from S&P Global]*.

Transcript

Operator (participant)

Morning. Thank you for joining us today to discuss the results for Consolidated Water's 2024 Full-Year 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. Following their remarks, we'll open the call to your questions. At any time during the call, you may join the Q&A queue by pressing star, then one on your keypad.

To withdraw yourself from the queue, please press star and then 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 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's CEO, Rick McTaggart. Sir, please go ahead.

Rick McTaggart (CEO)

Thank you, Nick. Good morning, everyone. Our revenue and operating income in 2024 from continuing operations were consistent with our expectations given that two of our major design-build projects were completed early in the year. We also saw improvement in profitability across our retail and manufacturing segments, which we expected.

Our strong retail water sales in our exclusive utility service area on Grand Cayman reflected a record volume of water sold to a record number of customers. This growth was primarily due to the ongoing growth in population and business activity on the island. Our bulk segment revenue and gross profit was relatively consistent from the previous year.

While revenues from our Bahamas business declined due to reduced energy pass-through charges to our client, which also reduced our costs, revenue from our new operations and maintenance contract for the Water Authority's newly constructed Red Gate 2 plant went into effect in May, partially offsetting the Bahamas decline. Our services revenue for the year declined by 48% due to the completion in the second quarter of last year of our Liberty Utilities and Red Gate 2 construction projects.

Construction revenues from these large projects had a major impact on our 2023 revenue. The decline in construction revenue and services was partially offset by a substantial increase in recurring revenue from our operations and maintenance contracts. Most of this increase was generated by our new REC subsidiary in Colorado, which has provided us with a new channel to expand our business, including our design-build business, into water-stressed regions of Colorado.

O&M contracts managed by our PERC Water subsidiary also contributed meaningfully to the increase. Our multi-year seawater desalination project underway in Hawaii continued to advance through the development stage. Its $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 June of 2023 and has been steadily advancing through the pilot design and permitting stage.

Due to delays to the project not caused by us, we now expect to begin construction of this project early next year. The construction phase will generate the largest portion of revenue from the project and is expected to favorably impact our revenue and earnings in 2026 and 2027. We completed the pilot testing for the Hawaii project and have prepared and submitted the required enhanced pilot testing report to the client for review.

The client must determine before the end of April whether or not we demonstrated in our piloting that we were able to achieve a reasonable water quality match to their existing natural water supplies. Positive determination is a very important milestone in the development phase of the project as it will enable us to advance closer to the commencement of construction.

We also reached the 60% design point for the project late last year and have submitted our design report to the client's engineers for review and comment. In all, the Hawaii project is comprised of a two-year development phase, which we are currently in, followed by a two-year construction phase, and then after construction and commissioning, we will operate the plant under a 20-year O&M agreement with the opportunity to obtain two five-year extensions as a client's option.

It's also important to note that about 80% of the plant's construction cost is subject to adjustments for inflation from the date the contract was executed until the date construction begins. This will help preserve our gross margin and profitability against the continued high rate of inflation.

Now, before getting more into recent developments in 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 last year.

David Sasnett (CFO)

Thank you, Rick, and good morning, everyone. Our revenue totaled $134 million in 2024 as compared to $180 million in 2023. As Rick mentioned earlier, this decrease is attributable to a decrease in the service segment revenue of $47 million, arising from the completion in 2024 both of PERC's construction contract with Liberty Utilities for their new wastewater facility in Arizona and Ocean Conversion's construction contract with the Water Authority Cayman for their new Red Gate plant.

Our retail revenue increased almost $1.6 million to $31.7 million for the year due to a 4.5% increase in the volume of water sold. We believe this greater volume of water sold reflects a 4.3% increase in the number of customer accounts we experienced during the year.

Our bulk segment revenue declined slightly from $34.6 million in 2023 to $33.7 million in 2024 as lower energy prices for CW Bahamas decreased the energy pass-through component of CW Bahamas rates. As I mentioned earlier, the decrease in services revenue was due to plant construction revenue, which decreased from $77.3 million in 2023 to $17.6 million in 2024, and that's strictly due to the completion of the two contracts I mentioned earlier.

Recurring revenue under our O&M contracts for the services segment totaled $29.3 million in 2024, which represents an increase of 51% over the previous year of 2023. Our new REC subsidiary, which we acquired in October 2023, contributed $6.1 million of the increase with a balance generated by PERC in its new contract they signed. Our manufacturing segment revenue increased slightly to $17.6 million for the year.

Gross profit in 2024 totaled $45.6 million, or 30% of total revenue, excuse me, 34% of total revenue, compared to $61.9 million, or 34% of total revenue in 2023. Net income from continuing operations attributable to Consolidated Water shareholders in 2024 was $17.9 million, or $1.12 per diluted share.

This compares to net income of $30.7 million, or $1.93 per diluted share in 2023. Including discontinued operations, net income attributable to Consolidated Water shareholders in 2024 was $28.2 million, or $1.77 per diluted share, as compared to net income of $29.6 million, or $1.86 per diluted share for 2023.

Now, turning to our balance sheet and liquidity, our cash equivalents increased by $57 million during the year to a total of $99.4 million. This reflects primarily $36.5 million of cash generated from operations.

Our working capital was up $44 million to $132.8 million at the end of the year, and our stockholders' equity was $210 million. As we talked earlier, we have practically no debt on our balance sheet. Our projected liquidity requirements for 2025 include capital expenditures for existing operations of approximately $10.3 million, and this includes $926,000 to be incurred in 2025 for our new West Bay plant and $1.8 million for the expansion of Aerex Manufacturing's facility.

We paid out approximately $6.3 million in dividends to our common and preferred shareholders this year. Our liquidity requirements may also include future quarterly dividends, as such dividends are declared by our board. This completes our financial summary. With that, I'll turn the call back over to Rick.

Rick McTaggart (CEO)

Thanks, Dave. We announced last month that our fully-owned subsidiary, Cayman Water Company, received a new concession from the Cayman Islands government, granting it continued exclusive rights to produce and supply potable water within our service area on Grand Cayman. Due to regulatory changes enacted in 2018, Cayman Water is also required to obtain a new operating license from the island's utility regulator, OfReg.

Discussions with OfReg for the new license, which we expect will involve a restructuring of the previous operating terms, are expected to begin soon. Until the new license is received, however, the existing operating license will remain in effect. Cayman Water operates three seawater reverse osmosis desalination plants that produce about 4 million gallons of potable water per day for the island's growing population and businesses.

We are also in the process of expanding our West Bay plant by a further 1 million gallons per day. As David mentioned, we are incurring some capital expenditures for that this year. This expansion should be completed by the end of the second quarter of this year. Looking ahead, we remain excited about the future of Consolidated Water for many reasons.

This includes the continued growth in water sales in Grand Cayman, the long-term stable recurring revenue from our Caribbean-based bulk water business, and the growth potential of our US-based manufacturing, design-build, and O&M businesses. Our O&M business grew nicely in 2024 with the addition of REC in Colorado, and we see opportunities for further growth of this recurring revenue stream both in Colorado and California.

As anticipated, our construction revenue declined in 2024, and we expect it to remain below 2023 until we commence construction of our seawater desalination project in Hawaii. However, we see this major construction phase substantially adding to our revenue and earnings in 2026 and 2027.

We are currently constructing or negotiating contracts for three construction projects with a total value of approximately $20 million. We expect this to positively impact revenue and profit over the remainder of this year and into early 2026.

Our manufacturing business is performing very well. Revenues have stabilized and margins have increased due to improved production efficiency and a product mix that rewards Aerex for its unique fabrication and quality assurance capabilities. In other words, we're making better margins on these jobs. We are very pleased with this positive trend, and we expect that to continue in 2025 and beyond.

In fact, as David mentioned, we are currently expanding our manufacturing facility to provide additional assembly and product storage space. We expect this additional building space to come online late this year when it will greatly enhance the capacity of our manufacturing business and allow us to run more jobs simultaneously.

Supported by an exceptionally strong balance sheet, we will continue to invest in new infrastructure. This includes the expansion of our West Bay plant for serving the growing water needs of our utility customers in Grand Cayman, which we expect to ultimately drive future retail revenue growth.

Our strong balance sheet also enables us to move quickly and strategically on any potential acquisitions. As we progress through 2025, we anticipate that these positive factors will continue to support long-term growth, enhance profitability, and strengthen shareholder value over the long term.

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

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two.

At this time, we'll pause momentarily to assemble our roster. Again, if you have a question, please press star and then one. Please stand by as we pull for questions. All right. At this time, this concludes our question-and-answer session. I'd like now to turn the call back over to Mr. McTaggart. Sir, please go ahead.

Rick McTaggart (CEO)

Thanks, Nick. I'd just like to thank everybody again for joining us today to discuss our results for last year. We look forward to talking with you again soon and presenting our first quarter 2025 results in May. Thank you, Nick. We can end the call.

Operator (participant)

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 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 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 or other customers we serve, regulatory matters, including resolutions 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, included, 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 speaks, as of today's date, the company expressly disclaims any obligations or undertakings to update or revise any forward-looking statements made during the conference call to reflect any changes in its expectations with regard thereto or any changes in its events, conditions, or circumstances of which forward-looking statements 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.cwco.com. Thank you for attending today's presentation. This concludes the conference call. You may now disconnect.