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Edited Transcript of WAAS.N earnings conference call or presentation 6-Nov-19 1:00pm GMT

Full Year 2019 AquaVenture Holdings Ltd Earnings Call

TORTOLA Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of AquaVenture Holdings Ltd earnings conference call or presentation Wednesday, November 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony A. Ibargüen

AquaVenture Holdings Limited - CEO, President & Director

* Courtney Denihan

AquaVenture Holdings Limited - IR Officer

* Douglas R. Brown

AquaVenture Holdings Limited - Founder & Chairman

* Lee S. Muller

AquaVenture Holdings Limited - CFO, Senior VP, Treasurer & Assistant Secretary

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Conference Call Participants

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* Andrew Alec Kaplowitz

Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head

* Chip Moore

Canaccord Genuity Corp., Research Division - Senior Associate

* Deane Michael Dray

RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment

* Jeffrey Wallin Van Sinderen

B. Riley FBR, Inc., Research Division - Senior Analyst

* Pavel S. Molchanov

Raymond James & Associates, Inc., Research Division - Energy Analyst

* Robert Duncan Brown

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the AquaVenture Holdings Third Quarter 2019 Earnings Conference Call. Today's call is being recorded, and we have allocated time for prepared remarks and Q&A.

At this time, I would like to turn the conference over to Courtney Denihan, Investor Relations at AquaVenture. Please go ahead.

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Courtney Denihan, AquaVenture Holdings Limited - IR Officer [2]

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Thank you, operator. Good morning, everyone. We released our earnings press release this morning and posted a slide presentation to the Investor Relations section of our website at investors.aquaventure.com. We will be referencing the slides during this call.

Present on today's call are Tony Ibargüen, Chief Executive Officer; Lee Muller, Chief Financial Officer; and Doug Brown, Chairman of the Board.

Before we begin, let me remind everyone that this call will contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. There are many risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such forward-looking statements. Please refer to our SEC filings for a discussion of such risks, uncertainties and other factors. We do not undertake any duty to update any such forward-looking statements.

In addition, during today's call, we will discuss non-GAAP measures and other key metrics, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of the non-GAAP measures to the most comparable GAAP measure can be found in our earnings release.

I would now like to turn the call over to our Chief Executive Officer, Tony Ibargüen.

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [3]

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Good morning, and thank you for joining us on today's call. I'd like to start today's call by commenting on AquaVenture's overall performance in the third quarter of 2019, including both financial and operating highlights. Lee will then walk you through our financial results in more detail, and I'll return to provide an update on our outlook for 2019 and some closing remarks. Finally, Doug, Lee and I would be happy to take your questions.

Starting on Slide 3. AquaVenture had another excellent quarter with total revenues of $52.9 million, representing a 43.8% year-over-year increase. This increase was comprised of 10.5% organic growth and 33.3% inorganic growth, reflecting our continued strong organic performance and the successful integration of our strategic acquisitions over the past year. We reported adjusted EBITDA of $20.4 million during the third quarter of 2019, a 60.5% increase over the prior year period, and adjusted EBITDA margin of 38.4%, a 400 basis point improvement. Adjusted EBITDA plus principal collected was $21.7 million for the third quarter, a 55.9% increase year-over-year.

Moving to Slide 4. We recently announced 2 acquisitions on October 1: Mirex AquaPure Solutions based in Houston, Texas; and Flowline Canada, based in Edmonton, Canada. Mirex was an early adopter of cross-selling ice dispensers into current bottle-less water cooler accounts and delivers high-quality service at above-average rental rates. It was in business for over 20 years and built up a loyal customer base in a top 5 U.S. metro area.

Flowline, which was a Bluline dealer, expands our presence in a top 10 Canadian market and once again demonstrates the value of providing our indirect dealer network with attractive exit opportunities. Both of these acquisitions increased our customer density in important markets, enabling margin expansion and improved customer service.

We've now completed and integrated 4 acquisitions in 2019, including Aguaman and Carolina Pure Water Systems, which we discussed on our last earnings call. These 4 acquisitions were completed for approximately $21.3 million in aggregate consideration and approximately 5.4x adjusted EBITDA and added approximately 7,600 rental units to Quench's install base, which brings Quench's total installed asset base to more than 155,000 company-owned rental units.

Lastly, we want to highlight Quench's recent announcement of Quench Water Plus, a branded electrolyte and mineral-infused water produced by state-of-the-art proprietary filtration technology to remove contaminants and bad taste while adding alkalinity to create amazing tasting water. Quench Water Plus is available across the U.S. and Canada in Quench Q Series water dispensers and we believe will further differentiate our offerings from the competition.

In our Seven Seas Water segment, we're pleased to report that our AUC wastewater treatment lease portfolio and pipeline of signed but not billing leases continues to grow according to plan, with an active lease portfolio as of September 30 of 102 plants, up 23% from the 83 plants at the time of the acquisition 1 year ago and up from 97 plants as of June 30, 2019. We're really excited about the upside potential of this business and its leadership team's ability to develop new business at a healthy pace.

Within our desalination business, as previously announced, we were happy to close a 9-year extension and amendment of our agreement with the Emerald Bay development in Great Exuma in the Bahamas. Our relationship with this valued customer, whom we have served since 2009, will now be extended through at least 2028. This is the second contract extension we've completed this year. You may recall that in March, we extended our agreement with Limetree Bay Terminals in the U.S. Virgin Islands by an incremental 3 years to 2024 and also secured a contract to increase our water production capacity by an additional 1 million gallons per day using both existing and new equipment, and we're pleased to announce today that we've completed that capacity expansion as of November 1.

In addition, we also recently completed an expansion of our Anguilla operations. As a reminder, when we first entered into this agreement late last year, it was to supply 500,000 gallons of water per day with the ability to expand up to 1 million gallons per day upon request of the customer. We are excited to announce that we are currently supplying water at the 1 million gallons per day rate and are happy to be an even more significant part of the water supply for the people of Anguilla.

Lastly, with respect to our contract in Curacao, not much has changed since our last discussion. The local press has reported that the owner of the refinery is engaged with certain parties to potentially take over refinery operations from the current operator, PDVSA. If another party is selected, we would look to engage with them as a potential water provider. At this time, however, we intend to continue to deliver our customary high levels of service for the duration of our contract and potentially beyond, if requested by the refinery.

With that, I'll turn it over to Lee to talk about our financial highlights in more detail.

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Lee S. Muller, AquaVenture Holdings Limited - CFO, Senior VP, Treasurer & Assistant Secretary [4]

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Thanks, Tony. As Tony mentioned, we are pleased to report another strong quarter with significant year-over-year revenue and adjusted EBITDA growth in both segments.

On Slide 5, Seven Seas Water reported revenues of $22.2 million during the third quarter of 2019, a 42.5% increase over the prior year. The increase was primarily driven by our inorganic activities, including the acquisition of the AUC operations and the commencement of our water contract in Anguilla.

Gross margin of 51.5% decline compared to 56.6% in the prior year period, primarily driven by the inclusion of our AUC Operations, which has an overall lower gross margin profile than the rest of Seven Seas Water. However, further impacting the gross margin of our wastewater treatment operations in the third quarter was $700,000 of additional depreciation expense on property, plant and equipment related to the finalization of purchase accounting for the acquisition.

On a year-to-date basis, Seven Seas Water's gross margin was 54.3%, which we believe is more indicative of the normalized margin given the timing of repairs and maintenance activities that can impact individual quarters and the previously mentioned valuation adjustment. Adjusted EBITDA of $11.9 million for the third quarter of 2019 increased 54.7% over Q3 2018, and adjusted EBITDA margin of 53.4% reflected an increase of 420 basis points over the prior year. Finally, adjusted EBITDA plus principal collected increased 48.3% to $13.2 million in the third quarter.

Turning to Quench results on Slide 6. Quench reported revenues of $30.7 million in the third quarter, a 44.7% increase over Q3 2018. This increase included organic growth of 18.2% in the third quarter, which was driven by strong performance in both the direct rental and indirect businesses. Inorganic growth was 26.5% over the prior year period, bolstered by the PHSI and Bluline acquisitions in December 2018 and the more recent Aguaman and Carolina Pure acquisitions in 2019. Quench's gross margin of 48.9% decreased from 51% in the prior year period, largely due to elevated depreciation and amortization expense related to higher rental revenues. However, if you exclude depreciation and amortization expense from the cost of revenues, our rental gross margin increased for Q3 2019 compared to the prior year quarter. Product sales gross margin of 39.5% continues to show improvement over the prior year.

Adjusted EBITDA of $9.4 million for Q3 2019 was a 63.8% increase over the prior year. And adjusted EBITDA margin of 30.6% reflected margin expansion of 360 basis points. This margin expansion is supported by the further leveraging of our platform as we increase customer density and grow revenues without commensurately increasing our costs. Further demonstration of this increased operating leverage is the 710 basis point decrease in SG&A cost as a percentage of revenue when compared to the prior year period.

On Slide 7, I'd like to provide a brief update on select balance sheet and cash flow items. As of September 30, 2019, cash, cash equivalents and restricted cash was $113.8 million, and our total debt was $317.6 million, resulting in net debt of $203.8 million. This includes the net cash proceeds of approximately $75 million from the completion of our first follow-on offering in July, issuing 4.7 million ordinary shares, including the exercise of the underwriters' option. Our current net debt leverage ratio was down approximately 2.7x on a trailing 12-month basis. Through the first 9 months of 2019, we generated operating cash flow of $20.2 million as compared to $22 million in the prior year period. This decrease is largely due to higher working capital needs to fund our substantial growth, specifically the 15.3% year-to-date organic growth at Quench, higher cash interest expense related to the $150 million flex of our corporate credit facility late last year and the adoption of the new lease accounting standard, which recategorized certain costs from investing activities to operating activities for new leases entered into in 2019. Capital expenditures of $28.6 million for the 9 months ended September 30, 2019, were $15.7 million higher than the prior year period, which was primarily due to supporting the growth of our wastewater treatment business as well as the growth-related activities within the Desalination business mentioned earlier related to volume capacity expansion. Please keep in mind that our capital expenditures are primarily growth related, which, in turn, are expected to generate incremental revenue, adjusted EBITDA and operating cash flow for the company in future periods.

I will now turn it over to Tony to discuss our outlook and provide closing remarks.

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [5]

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Thanks, Lee. Turning to Slide 8. Our robust organic performance and the effective integration of acquired businesses has driven consistently strong results throughout 2019, so we are increasing our guidance expectations for the full year of 2019. We now anticipate that total revenues will be in a range of $197 million to $201 million, adjusted EBITDA will be $72 million to $75 million and adjusted EBITDA plus principal collected will be $77 million to $80 million. As a reminder, this outlook includes all completed acquisitions to date, including the 2 Quench acquisitions announced on October 1, but excludes the impact of any future projected acquisitions.

In closing, our strong performance throughout the first 3 quarters of 2019 has continued to exceed expectations. Our strong and growing company-owned water purification assets portfolio produces consistent results based on the contractually recurring nature of the revenue it generates. We look forward to seeing this trend continue into deploying the proceeds from our follow-on offering into our active pipeline of growth opportunities across both segments.

On behalf of our executive team and Board of Directors, we'd like to thank our dedicated employees across the world. And on behalf of all of them, we thank you for your continued interest and support as we remain committed to our mission of delivering solid results for our shareholders and creating clean water solutions for customers around the world.

With that, operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Andrew Kaplowitz of Citi.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [2]

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Tony, you've become a little reticent to declare that organic growth at Quench could sustain double-digit growth moving forward, but organic growth has continued to accelerate here over the last few quarters, now up high teens. It seems like your indirect business-related sales and your specialty sales, sparkling ice, have been the main drivers of the solid core growth, but how sustainable are these drivers? And are you ready to say that Quench could grow double digit organically in 2020?

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [3]

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Yes. Great question, Andy. I know it's starting to strain credibility here, and the gang here is accusing me of being (inaudible). Well, listen, here's the thing. Our rental business, really the core business, continues to be -- it was in the 9s this quarter, so it's growing dynamically. The team is really doing a great job of cross-selling and up-selling customers and gaining new customers out there. So we're really doing a great job. But it's the indirect business that is not as predictable. It's not contractually recurring. We have great dealers out there who are killing it and doing a great job. But we're still reluctant to call that as a consistent double-digit grower. It is probably going to continue in the fourth quarter in that direction. But for 2020, we're not quite ready to do that. And I still think the rental business is one that is best called as a mid- to high single digits, maybe a little bit more on the higher side of that as we're seeing the market really move in our direction.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [4]

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Got it. That's helpful, Tony. And then maybe just building off that, thinking about 2020, I know it's early to give guidance. We just talked about Quench. But you've got PHSI and AUC that's going to become more organic here as you go into 2020. Seven Seas looks pretty stable ex Curacao. So when you think about 2020 at this point, can you still grow EBITDA even if your Curacao contract doesn't renew.

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [5]

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That would be the plan. That would be the plan. I think we see Quench continuing to look at that mid- to maybe higher single-digit number consistently. AUC, as you heard, has been pretty much spot on with the acquisition model and plan from a year ago. And we continue to see great opportunities. The team there is really hitting on all cylinders.

And then across-the-board at Seven Seas, we see these opportunities here and there for smaller extensions, expansions, and hope that, that will continue next year. What's unpredictable, of course, is volume and tourism and things like that. And the pipeline of M&A is looking good, but we can't call that either. So there's certainly the potential with Curacao if it does drop out for us to have to work a little bit harder to get back to positive, but that's our expectation at the moment. And again, we wouldn't give guidance until our Q4 call. But I think it's reasonable to assume that that's what we're shooting for.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [6]

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And then just one more on AUC. It seems like you're making good progress as you just talked about, your active leases are up. You gave guidance, I think, earlier this year of the $13 million to $15 million of adjusted EBITDA and then mid-teens growth in 2020 off that EBITDA. Is that business still on track for that guidance?

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [7]

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Andy, it's Doug. That guidance is still -- we're still sticking with that.

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Operator [8]

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The next question comes from Deane Dray of RBC Capital Markets.

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Deane Michael Dray, RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment [9]

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I'm not sure you disclosed the terms of the Bahamas extension. But any time we've seen these in the past, you typically have a modest price concession for increase in volume, it ends up being a win-win for everyone. Is -- was that pattern here evident in the Bahamas expansion, too?

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [10]

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Yes, a small price concession, but it doesn't really have a meaningful impact for us. But we get the extra 9 years.

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Deane Michael Dray, RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment [11]

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Good. And just remind us what in order of near-term where there are extensions coming up.

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [12]

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Probably the nearest is in 2024 at Limetree, we've got 2025 in St. Maarten. Those are the 2 on the short-term horizon. Our expectation in Limetree, for sure, is that if they only wanted to sign a 5-year contract, but that plant is going to stay there, there's no transfer of equipment at the end of that contract. So we have a full expectation that, that gets rolled over at the end of 5 years. And we have a history of getting extensions in St. Maarten as volumes increase, so we're pretty confident that we'll be able to roll that, too.

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Deane Michael Dray, RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment [13]

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Good to hear. And then on the Anguilla extension, it was uncertain at the time what the natural demand would be for water since they had been rationed for so long. So at 1 million gallons, are you at that level yet? Do you think the natural demand is higher? And what can the capacity be at that plant?

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [14]

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So that plant at 1 million gallons a day is at its pretty much designed max. We still believe there's additional demand on the island. There are additional conversations that we're having to find ways to meet that additional demand.

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Deane Michael Dray, RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment [15]

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Got it. And then just last one for me on AUC. It's been great to see the continued lease growth there. I'm still watching for any signs that there might be some product extensions using membranes and that would be for the wastewater side. Is there -- is that being looked at? Any pilot programs? What might the time frame be?

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [16]

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But we already have, not through AUC, but through our own Seven Seas business, we have a wastewater plant that incorporates membrane bioreactors. We obviously are working with AUC, looking at more membrane-intensive applications or opportunities and -- and so we've got a number that are out there that we're working on, but we haven't -- through AUC, we haven't signed any yet, so it's more conventional wastewater treatment. But we're looking at that opportunity. Certainly, when you get into wastewater reuse -- when you get into wastewater reuse [steam], there's more probable -- a higher probability that membranes will be required.

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Operator [17]

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The next question comes from Rob Brown of Lake Street Capital Markets.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [18]

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Sticking with AUC, could you maybe give some color on some of the growth drivers and what's really driving that market and how you see that playing out over the next few years. Is that -- should that continue?

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [19]

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Yes. The residential market in and around Houston has been the core historically for the growth of AUC. That continues to be the primary driver. And housing starts continue to be strong in that area as sort of an indicator of continued potential growth into 2020 and beyond. But we've increasingly turned attention and focus to other markets in Texas as well as other markets that have comparable economic and housing growth potential and circumstances in the Southwest and Southeast. We have also the bypass service, a modular, temporary bypass solution built using the same fundamental technology that we use for our modular wastewater treatment plants. And that's been quite popular as well, and is also a great way of diversifying the revenue there. So generally speaking, that has -- the drivers have been consistent and predictable. And we don't see anything on the horizon right now that will interrupt that going forward.

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [20]

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I'd add, Rob, that the constant -- urban sprawl is a thing that really leads you to decentralized wastewater plants because as these developments get farther and farther away from city centers, it's harder and harder to pipe the sewage to a centralized wastewater treatment plant, and that encourages the use of these decentralized plants. And so I think that there is a -- in general, if you look at the market as a whole, decentralized plants is becoming -- taking a bigger and bigger percentage of the wastewater treatment plants.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [21]

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Okay. Great. And maybe on the CapEx expectations for this year and the kind of growth, sort of what are your CapEx expectations?

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Lee S. Muller, AquaVenture Holdings Limited - CFO, Senior VP, Treasurer & Assistant Secretary [22]

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Yes. So we -- remember, most of our CapEx, if not all of our CapEx, is growth related. And we've had a lot of growth CapEx spent this year. Our expectation is around -- to finish the year at around $30 million of CapEx, maybe a little bit higher, maybe a little bit higher, like around $35 million, $37 million of CapEx spent.

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [23]

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Typically, 80% -- typically, 80% of that or so is new growth assets, right? So these are new AUC wastewater plants or new Quench water coolers that are put in -- or now or this year, in a couple of cases, new Seven Seas plant capacity. So that's good CapEx that will drive revenue and EBITDA in future years, and then the balance tends to be more on the maintenance side.

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Operator [24]

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The next question comes from Chip Moore of Canaccord Genuity.

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Chip Moore, Canaccord Genuity Corp., Research Division - Senior Associate [25]

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Congrats on the strong results. Wondering if you can drill in. [It's already] a bit on Quench, some phenomenal SG&A leverage, maybe you can talk about anything specific you're doing or learning there and how you think about the trajectory of leverage for that business.

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [26]

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Yes. Thanks. No, that was always the plan, and this happened to be one of those quarters where, given the dynamic growth, both organic and the acquisitions we're able to start to see some of that trickle all the way through. That should continue. That is the operating leverage that we've always loved about this business between the sticky contractual revenue and the fact that we've invested in building scale in this business for the better part of the last decade to be able to be the one consistent, fully integrated national provider of these services, but that has required significant build-out of centralized and decentralized support infrastructure. There are still opportunities for us to get even more leverage as we look forward. Right now, we're in the middle of putting in place a revamp of our national distribution infrastructure. But on the corporate back office, on the G&A side, in particular, given the implementation of some new cloud-based IT systems over the past several years, we're starting to see that really come through. So I would say we, at the beginning -- at the end of last year, we were running in the mid-20s, and EBITDA margins now, this quarter, were at 30. And that might float a little bit quarter-to-quarter into the high 29s, low 30s, but we would expect that to continue to grow as the top line grows.

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Chip Moore, Canaccord Genuity Corp., Research Division - Senior Associate [27]

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That's great. You talked about some of the newer products, the Quench Water Plus, can you just talk about early receptivity and thoughts on ASPs over time as you roll out some of these new products?

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [28]

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Yes, that is the key. That will be the measure. It's a little bit early. We just launched it, but met with great enthusiasm. It is a differentiator. We're starting to, having now established a national footprint and gained access to more and more, larger national accounts are starting to leverage branding. John Whalen, our Head of Sales; Lisa Guillaume, Head of Marketing, have done a great job of starting to get creative and innovate so that we're not just the next me-too cooler provider. And being able to provide consistent water around the country that we know has an incredible taste and is a really clean, alkaline pH balanced water is something the whole team is very excited about. And the early reception has been very strong. Ultimately, the measure will be the ASP, as you said. And yes, we would expect that we'll be able to get a very high return for a small incremental cost in the filtration equipment. We'll be getting rents that will be significantly higher than units without this kind of filtration.

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Chip Moore, Canaccord Genuity Corp., Research Division - Senior Associate [29]

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Great. And maybe one last one for me. Maybe you can expand on the pipeline across the portfolio here at 2.7x maybe into next year, whether that's Quench bolt-on from your dealer network or assets for Seven Seas.

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [30]

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Yes. I'll cover Quench and then maybe Doug can comment a little bit on the Seven Seas pipeline. The Quench pipeline continues to be strong, 4 deals so far this year. We have a pretty steady drumbeat. This is no different than you would have heard me say in any prior quarter. At any point in time, there are a handful of entrepreneurs who are considering the possibility of doing something else or joining our team or taking some chips off the table. We, as you know, are quite opportunistic about this. We certainly have targeted strategic conversations with certain of our dealers and others that participate as competitors in the market, but we're also -- we welcome doing this on their timetable. We're at over 275 dealers now. And so at any point in time, there's always a series of conversations happening. That gives us great confidence that we can continue, at least at the pace that we're on, if not a bit faster as we go forward. So more to come on that, I think.

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [31]

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And on the Seven Seas side, we still -- we've been expanding our pipeline. We feel like it's in better shape than it's been in the past. These deals do take longer, they're bigger, and they're typically talking about $5 million to $10 million of EBITDA for an acquisition so they do take a bit longer. And when we get into markets that are outside the U.S., which a lot of these are, it's not only due diligence and negotiation of your purchase agreements, but then we have to deal with IFRS, restatement of accounts to fit with our accounting and reporting requirements, and that just serves to drag things out a little bit longer. But we're very confident we're getting very close and looking forward to the new year.

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Operator [32]

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The next question comes from Pavel Molchanov of Raymond James.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [33]

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Just a bit of housekeeping on the guidance. If I plug in the updated revenue and EBITDA ranges, it looks like Q4 will be down from Q3 on both revenue and EBITDA. Is that an accurate statement?

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Lee S. Muller, AquaVenture Holdings Limited - CFO, Senior VP, Treasurer & Assistant Secretary [34]

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That is an accurate statement.

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [35]

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That is correct, yes.

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Lee S. Muller, AquaVenture Holdings Limited - CFO, Senior VP, Treasurer & Assistant Secretary [36]

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And this -- some parts of our business has some variability. Q4 can be softer. And so we thought these would be a fair update to the ranges that we have provided previously. And obviously, it would be our hope and expectation to exceed them by the time it's all said and done.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [37]

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Understood. That's good to hear. Let me ask kind of a broader question on desal. We've talked a lot over the past year and earlier about M&A opportunities for you to buy existing desal plants. I'm curious, are you seeing any new build opportunities, which years ago, before the company was even public, I think was a pretty central part of your -- of the Seven Seas growth strategy, creating new build desal plants, but we haven't really seen that in recent years.

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Lee S. Muller, AquaVenture Holdings Limited - CFO, Senior VP, Treasurer & Assistant Secretary [38]

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There are still new builds. We refer to them as greenfields in our pipeline. I'll be honest, if you look at our pipeline, it's probably 25% to 30% greenfield and 70% to 75% brownfield acquisitions. And that's just because the population of existing desal plants far exceeds the number of open RFPs outstanding for greenfield projects. So there's just a bigger universe to pick from on the brownfield side. And -- but we still do have greenfields that we look at and pursue, although we think our strategic advantage and our competitive advantage is greater in the brownfield side.

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Operator [39]

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The next question comes from Jeff Van Sinderen of B. Riley.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [40]

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Just a follow-up on the pipeline. I understand it's tough to kind of predict acquisitions, but relative to the acquisition pipeline, understanding every deal is different. You seem to be pretty much crushing it on the Quench side. Just looking on the Seven Seas side, putting aside Ghana, does it seem to be getting generally easier or tougher to find and consummate attractive deals? Or would you say it's pretty much status quo?

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [41]

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If I look at the pipeline and the development of the pipeline, we're seeing more opportunities. We closed the AUC acquisition in November of last year. We feel like we're very close on a couple of items, which we haven't and can't talk about until they're done. I think historically, we've said probably on the Seven Seas side, it's better to think of maybe 1 significant deal every 12 to 18 months and then maybe 1 smaller deal every 12 to 18 months, whereas Quench has a much more active pipeline with all of their dealer networks -- their dealer network. So I wouldn't say it's getting any easier. I don't think it's getting harder. I'd say we're just -- we've got more resources focused on it and so we're able to process more opportunities.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [42]

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Okay. And then -- that's fair, enough. And then on the AUC business, just wondering, I mean, that business has been trending really well for you. Any thoughts on the gross margin outlook there? Are you seeing opportunities? Or do you think it's pretty much steady state?

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [43]

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As the lease portfolio increases, the gross margin should be increasing because the lease portfolio has an almost 100% margin. There's some billing and collection costs associated with those leases, but that's -- there is no operating cost associated with them. So as that lease portfolio increases, the margins should continue to increase.

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [44]

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And that generally is our plan, right? That lease portfolio should grow. The -- we certainly are responding to and still deliver on plant sales if and when that is the best solution for our developer customer. But that business tends to grow a little bit slower than we would expect the lease business to grow. So yes, you'll see that gross margin go up.

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Operator [45]

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This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Tony Ibargüen for any closing remarks.

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [46]

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Thank you. Thanks, everyone, for your time and attention this morning. Again, we're really thrilled with the results that we're able to deliver for our shareholders. And once again, I want to thank all of our great employees and partners around the world without whom we could not deliver these results. So thanks, and we'll talk to you next quarter.

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Operator [47]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.