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Edited Transcript of WAAS.N earnings conference call or presentation 7-Aug-19 12:00pm GMT

Q2 2019 AquaVenture Holdings Ltd Earnings Call

TORTOLA Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of AquaVenture Holdings Ltd earnings conference call or presentation Wednesday, August 7, 2019 at 12:00:00pm 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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* Chip Moore

Canaccord Genuity Corp., Research Division - Senior Associate

* Deane Michael Dray

RBC Capital Markets, LLC, Research Division - Analyst

* Jeffrey Wallin Van Sinderen

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

* Joseph Amil Osha

JMP Securities LLC, Research Division - MD & Senior Research 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

* Vladimir Benjamin Bystricky

Citigroup Inc, Research Division - VP

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Presentation

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Operator [1]

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Good morning and welcome to the AquaVenture Holdings' Second 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. Thank you. 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 may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, beliefs, intentions, goals, strategies, plans or prospects, including, without limitation, statements relating to AquaVenture's strategic focus; our forecast of full year 2019 financial results; our ability to produce positive operating cash flows; expectations regarding future business development and acquisition activities; expectations regarding performance, growth, cash flows and margins from recently completed and pending acquisitions; the impacts on operating results of the timing, size integration and accounting treatment of acquisitions and other business development activities; and AquaVenture's ability to successfully integrate and operate the acquired businesses or assets and to achieve the expected financial contributions, including EBITDA from them.

Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2019, and in our subsequent filings with the Securities and Exchange Commission. We do not undertake any duty to update 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 our overall performance during the second 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. And finally, Doug, Lee and I will take your questions.

Starting on Slide 3. AquaVenture had another impressive quarter with revenues of $51.4 million, representing a 49.2% year-over-year increase. This increase was comprised of 10.3% organic growth and 38.9% inorganic growth, reflecting our continued strong organic performance and the successful integration of our strategic acquisitions in late 2018.

We reported adjusted EBITDA of $18.7 million during the second quarter of 2019, a 66.4% increase over the prior year period and an adjusted EBITDA margin of 36.4%, which reflects a margin expansion of 380 basis points. Adjusted EBITDA plus principal collected was $20 million for the second quarter, a 60.7% year-over-year increase, marking another record quarter for the company.

In addition, we completed our first follow-on offering in July, issuing over 4.7 million ordinary shares for net proceeds of approximately $75 million. After deploying over $200 million on acquisitions in 2018, we are, once again, well positioned to execute our growth strategy.

Moving to Slide 4. After taking the first part of the year to focus on the integration of the December 2018 acquisition of PHSI, Quench completed 2 acquisitions, Aguaman in South Florida and Carolina Pure Water Systems in the Raleigh-Durham, North Carolina area. Both companies were part of our indirect dealer network, which continues to benefit from our ability to provide them with attractive exit opportunities. In addition, both of these acquisitions added meaningfully to Quench's customer base in those markets, which will drive increased lead generation, improved service levels and margin expansion as we continue to gain leverage from the platform.

These acquisitions were completed for approximately $8.8 million in aggregate consideration at less than 5x adjusted EBITDA. They added approximately 3,100 customers and 4,600 rental units to our installed base, which, together with organic expansion, brings Quench's total installed asset base to approximately 150,000 company-owned units.

Importantly, both acquisitions were integrated into the Quench direct rental business immediately upon closing. That means we ingested the data for all customers and units and on-boarded all personnel as of the day after closing. This seamless integration enables us to immediately capture synergies and to deliver high levels of service to our new customers with minimal delay or disruption. We believe this should be unique and differentiated in our industry.

In addition, on August 1, we completed the final integration activities of our PHSI acquisition. You may recall that we fully integrated the PHSI direct rental base and team as of February 1, less than 45 days after the acquisition. Last week, we completed the final stage of integrating the back-office operations of our PHSI, Wellsys and Bluline indirect businesses.

In the Seven Seas Water segment on August 1, we completed the major components of our integration activities for the AUC business. This included the completion of the final steps to bring AUC onto our existing ERP system and the integration of certain back-office functions. The completion of these integration steps will enable our team to focus on continuing to grow the business.

We are very pleased with how this business has been performing since the acquisition, and its ability to develop a strong pipeline and new business at a healthy pace. The active lease portfolio has grown from 83 plants at the time of the acquisition to 97 plants as of June 30, 2019. In addition, our strong pipeline of signed, but not filled leases gives us confidence that we will meet our growth expectations.

Before I turn the call over to Lee, I'd like to talk about the announcement we released in early July regarding our customer in Curacao. In early July this year, a customer -- Curacao Refinery Utilities or CRU gave us notice that it is exercising its right to purchase the desalination facilities at the end of the existing water supply agreement, which is currently December 31, 2019. To provide some background, our relationship with crew and the refinery owner, RDK, began in 2009.

Like other Seven Seas Water contracts, this agreement has been amended several times, resulting in production expansion and contract extensions. The refinery is operated by Petróleos de Venezuela or PDVSA, under a contract that also expires at the end of this year. In recent years, the refinery has faced significant geopolitical turbulence because of the situation in Venezuela and has generally operated at less than full capacity. It has also been reported in the press that RDK is considering proposals from other parties to replace PDVSA as the operator.

If PDVSA's contract with RDK is extended to December 31, 2022, our contract will be also extended to the same date. However, if RDK replaces PDVSA as the operator of the refinery, we will remain open to constructively engaging with the new operator of the refinery to continue providing our water services.

The contractual buyout right requires payment to be made at the contract expiration date. If consummated, the buyout will be either $3.5 million at the end of this year or if PDVSA's contract is extended, $2.5 million.

We intend to continue to deliver our customary high levels of service for the duration of our contract and look forward to continuing our discussions with the customer. In our experience, we've been typically able to negotiate contract extensions during the contract term, usually in connection with expansions in water production associated with increased demand.

As an example of this, we announced, earlier this year, the expansion of the water supply and extension of our water agreement with Limetree Bay Terminals in the U.S. Virgin Islands to 2024. And last year, you may recall, we successfully negotiated the extension of our relationship with our customer in St. Maarten until 2025. Excluding Curacao, the revenue-weighted average remaining contract life for our water supply agreements is currently approximately 11 years.

With that, I'll now 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 $22.9 million during the second quarter of 2019, a 48.7% 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. We supplemented this growth with strong organic growth of 4.8%, primarily from increased production volumes in the U.S. Virgin Islands and St Maarten and higher water rates in the British Virgin Islands compared to the prior year period.

Gross margin of 55.3% reflected an 80 basis point decrease over the prior year, which was primarily driven by the lower average gross margin on the AUC equipment sales partially offset by an increase in the bulk water gross margin. Adjusted EBITDA of $11.6 million for the second quarter of 2019 increased 58.3% over Q2 2018 and adjusted EBITDA margin of 50.8% reflected an increase of 310 basis points over the prior year. Finally, adjusted EBITDA plus collected principal increased 51.2% to $12.9 million in the second quarter.

Turning to Quench results on Slide 6. Quench reported revenues of $28.5 million in the second quarter, a 49.6% increase over Q2 2018. The prior year period included $1.1 million of revenue from Atlas High Purity Solutions, which was divested in October 2018. Excluding this revenue in the prior year, the year-over-year growth would have been $10.6 million or 58.9%.

Direct rental and product revenue showed significant year-over-year increases that were bolstered by inorganic activities in conjunction with strong organic growth. In addition, the indirect business had another great quarter, contributing to Quench's 15% year-over-year total organic growth. Quench's gross margin of 48.8% for the quarter was 140 basis points lower than the prior year quarter, which was primarily due to a decrease in rental gross margin, which is largely attributable to an increase in depreciation and amortization. This decrease was partially offset by an increase in product sales gross margin with the inclusion of the higher-margin indirect PHSI equipment sale.

Adjusted EBITDA of $8 million for the second quarter of 2019 was a solid 71.6% increase over the prior year, and adjusted EBITDA margin of 28% 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. SG&A costs as a percentage of revenue were 50.5% for the second quarter of 2019, a decrease from 58.7% in the prior year quarter demonstrating this incremental leverage.

On Slide 7, I'd like to provide a brief update on select balance sheet and cash flow items. As of June 30, 2019, cash and cash equivalents were $41.3 million, and our total debt was $318.2 million, resulting in net debt of $276.9 million. As Tony mentioned earlier, we completed a follow-on offering of 4.7 million ordinary shares, including the exercise of the underwriter's option.

The net cash proceeds generated from this offering were approximately $75 million, which would result in a cash balance of approximately $116 million and a net debt of approximately $202 million, assuming the inclusion of these gross proceeds to the June 30 cash balances. On a trailing 12-month basis, which only has a partial contribution from our 2 large acquisitions, this capital raise also had the effect of reducing our net debt leverage ratio from approximately 4.1x pre offering to approximately 3x post offering, and this would be even lower on a fully annualized basis.

For the first half of the year, we generated operating cash flow of $6.5 million as compared to $13.8 million in the prior year period. We have been experiencing higher-working capital needs in our Quench segment during the first 6 months of 2019 as compared to 2018. This increase is driven by the substantial growth in the business as accounts receivable, inventory and sales origination costs scale with higher sales volumes in our direct and indirect businesses.

Additionally, cash usage was impacted by cash interest expense related to the $150 million flex of our corporate credit facility late last year and the prospective adoption of the new lease accounting standard, which recategorized certain costs from investing activities to operating activities for new leases entered into in 2019, also impacting cash flow in the first half of 2019 for professional fees and other transaction-related payments connected to our acquisitions in late 2018.

Capital expenditures of $16.9 million for the 6 months ended June 30, 2019, increased $9.7 million over the prior year period. This increase was primarily due to supporting the growth of AUC. Our high level of growth along with its attendant working capital and capital expenditure needs are expected to generate incremental revenue, adjusted EBITDA and operating cash flow for the company.

On Slide 8, you will see a reminder of the unit economics of an incremental Quench unit, which show that each incremental asset deployed requires up-front capital and expenses related to the cost of the unit, lead generation, sales commissions and installation costs. These incremental investments create meaningful future value, but because the costs are front-loaded, it results in short-term negative operating cash flow.

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. Given the strong financial performance that we reported for the first half of the year plus the anticipated impacts of the completed acquisitions, we expect to end this year on the upper end of our previously reported outlook for 2019. As a result, you will see on Slide 9 that we are now raising the floor of our previously provided guidance and currently are targeting annual revenues between $192 million and $197 million, adjusted EBITDA between $69 million and $72 million and adjusted EBITDA plus between $74 million and $77 million. As a reminder, this outlook excludes the impact of any future acquisitions.

In summary, we're very happy with our strong first half results and believe we have the momentum to drive continued execution for the balance of this year. To help advise us on continuing this momentum, we announced last night that we have appointed Tim Whall to our Board of Directors. Tim's decades-long career in the subscription-driven home security industry will provide us invaluable perspective. In addition, his prolific M&A experience, passionate advocacy for the customer experience and extensive operations, sales and supply chain experience will bring fresh insights into our business processes, and we're excited to welcome him to our Board.

When we went public in 2016, our goal was to double our adjusted EBITDA by thoughtfully investing IPO proceeds, internally generated cash and borrowings. We remain on track to achieve that goal this year, which was largely enabled by the effective deployment of more than $270 million on acquisitions since the IPO. It is our plan to continue to strategically deploy capital through acquisitions and to integrate these acquisitions quickly and effectively, driving increased operating leverage.

To that end, as mentioned earlier, we're very pleased to have completed our first follow-on offering and appreciate the strong show of support from our existing and new shareholders. While we're not able to comment specifically about active acquisition negotiations, we proactively sought this additional capital to ensure that we have the ability to take advantage of our active pipeline of growth opportunities in all segments.

On behalf of our executive team and Board of Directors, we would 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) Your first question comes from Rob Brown with Lake Street Capital Markets.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [2]

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Congratulations on a nice quarter. Kind of on your acquisition strategy, maybe just focus on Quench, how is that market in terms of acquisitions? And are you seeing any larger acquisitions or is it tend to be smaller or -- just to sort of characterize that because you may play in that market, if you could?

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

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Sure. Yes, it continues to be, as it has been, where last year, we had Alpine and PHSI, sort of outliers, slightly larger than average dealers available to us. But the pipeline is very active. There's a lot going on. As you may recall, we made the strategic decision to acquire Wellsys and then PHSI and Bluline for the indirect business, as we call it, the dealer business, which now is north of 250 dealers in our network, with whom we have great relationships. And we're building a stronger one as we go and that business did particularly well this quarter.

And as part of that, we offer to those dealers an exit opportunity at the time when they are interested in that. And that is going to be at different times for different people. But so far, that's yielded some nice opportunities for us, including the 2 deals we've closed so far this year: Aguaman, which was part of the Bluline network; and Carolina Pure, which is a Wellsys dealer. And so we think we'll continue to see steady flow of opportunities to acquire but largely skewing to the smaller and mid-sized.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [4]

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Okay, great. And then on AUC, you talked about growth there. What's sort of your thoughts on the CapEx requirement in that business? And how does that growth pipeline shake out over the next 12 months?

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

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Yes. The great news about that is we have great visibility. So this process is 12 to 18 months looking forward. And so at the time of the acquisition, we had planned on funding the CapEx that was going to be required to deliver on a big portfolio of signed but not yet billing leases at that time. And you've seen the numbers grow dramatically in the leases that we call active, meaning they've now gone from signed but not billing to actually being billing where we've completed construction. And you're going to continue to see that grow.

And we had planned on some additional CapEx in the second half of this year for plants that we would hope to have come online in 2020. It's still a little bit early. This is our -- really, eighth month or so of owning them, ninth month now. And so we're really pleased with the progress they're making. And really excited about the potential for them in the future.

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Operator [6]

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Your next question comes from Vladimir Bystricky from Citi.

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Vladimir Benjamin Bystricky, Citigroup Inc, Research Division - VP [7]

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So I just wanted to follow up on the secondary offering that you just completed. So with the leverage coming down and the expanded balance sheet capacity now, can you give us an update on what you're seeing in the M&A pipeline?

And based on your commentary, it seems like Quench clearly has the potential to do steady tuck-ins going forward. But how are you thinking about the potential for a larger deal over the next 6 to 12 months?

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [8]

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So Vlad, this is Doug. On the -- we just heard from Tony on -- the Quench train keeps marching forward mostly with smaller deals once -- hopefully, once in a while, something larger. On the Seven Seas side, the pipeline has gotten a lot healthier. We haven't been specific about any of the deals yet, for obvious reasons in terms of being active in negotiation, but we feel good about the pipeline and other alternatives.

We still work on the Ghana transaction. We still seem to be making progress on that, although African deals seem to be taking longer than even Caribbean deals do. But there are other things outside of Africa and the Caribbean that we're working on that we're pretty focused on at this point. So we're hopeful that we're going to be able to talk about something more specific in the near future.

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Vladimir Benjamin Bystricky, Citigroup Inc, Research Division - VP [9]

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Okay, that's helpful. And then just on the organic growth at Quench. So 15% organic in 2Q, I think that's the second quarter in a row of double digits-plus organic growth. Can you just talk about your visibility to sustaining double-digit organic growth for the back half of this year?

And Tony, I think you mentioned a particularly good quarter at -- in your indirect dealer network this quarter. Can you talk about what changed there, or what drove that outperformance?

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [10]

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Yes. Great. And they're related. So that we think is going to continue for a bit here, for sure. The business overall is growing quite rapidly across the marketplace. This technology, replacing 5-gallon jugs and enabling users across the U.S. and Canada to drink great water in a much more efficient way, is very much taking hold. And so we're seeing that trend in our direct business, but we're also seeing it through the many dealers that we have brought into the fold and continue to sign new dealers. And so that is one factor. Generally, the market, we think is continuing to expand.

Secondly, we have -- if you go back to September of 2017, when we bought Wellsys, we have invested in growing and developing the product line, introducing some new alternatives to the dealers in that network, and we're now introducing that to the PHSI and Bluline dealers as well. And those products are enabling those dealers to grow their business, and that has been a key driver of the success so far this year, and we would expect that to continue. Having said that, as you know Vlad, that part of the business at Quench is not contractually recurring. We have these dealers under contracts so when they do buy something, they have to buy it from us. But unlike the rental business that is contractually recurring and the business at Seven Seas and AUC, where there are lease contracts or water provision contracts, it is inherently less predictable.

And so I would continue to guide towards the upper single digits for Quench for the back half of this year. The rental business grew a very healthy, close to 7% organically. We're looking forward to seeing that continue. Always. I have talked about mid- to high single digits on the Quench rental side and the indirect business, again, right now, is significantly outperforming, but I would say a reasonable go-forward is a high single-digit. It's a blended number.

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Operator [11]

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

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [12]

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Maybe we can stay with this upside organic in Quench, and Tony you gave some good color there. Another way for us to look at this, if we were to unpack that 15% organic, can you give us a sense directionally? How many are new customers or increased penetration of existing customers and maybe also pricing?

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [13]

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On the -- thanks, Deane, on the rental side, the organic growth is a mix. We continue to what we call new logos. We're bringing in a record number of new customers, brand-new customers. Churn or the loss of customers is down to a historic low of approximately 7.5%. So that means we're retaining existing customers longer. And when you retain existing customers longer and you increase the density of our coverage in markets, service levels go up. And that means that you have more opportunity to add onto those customers. So we're seeing add-ons to existing customers grow dramatically.

As we've improved the product line mix across Quench as well, we're seeing average rents go up because we're selling a lot of upgrades. People, who've been water cooler customers for a long time, are now adding an ice machine or perhaps replacing the water cooler with an ice machine that does hot and cold water at the same time. So all the trends there are quite strong in terms of new additions as well as retention and then add ons.

On the indirect side, I'd say, all our top dealers are growing very nicely. They're seeing the positive trends in the marketplace and investing in new sales capacity. They're taking on these new product lines that we're bringing to market. So that's very strong as well. But we've also been adding dealers. And we have good coverage in the dealer network across the country, but there's some white space for us. And so our sales team on the indirect side has been focused on finding, creating, training and helping onboard new dealers, as well.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [14]

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So the adding of new dealers on the indirect side goes towards organic revenue growth? Is that correct?

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [15]

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It would, yes. It would. That's correct. And the growth of an existing dealer would be organic, as well.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [16]

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All right, that's real helpful. And then I also like having to ask about upside surprise in margins. And on Seven Seas, margin's significantly above last year, is there -- what's sustainable on the margin front in Seven Seas? Is there any one-timers that came into the quarter that would have skewed it to the upside?

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Lee S. Muller, AquaVenture Holdings Limited - CFO, Senior VP, Treasurer & Assistant Secretary [17]

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No, no, no. Deane, it's Lee. Not really, we had really strong performance in some of our island locations, particularly USVI and BVI, and so increased water usage and it led to increased revenues and profitability.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [18]

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Got it. And just last one for me, Lee, while we have you. Anything on the working capital items, cash taxes that were more temporary that would reverse in the second half?

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Lee S. Muller, AquaVenture Holdings Limited - CFO, Senior VP, Treasurer & Assistant Secretary [19]

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Cash taxes stay pretty much the same at around, say, around $2 million year-to-year. And that's pretty much steady state based on our mix of locations and taxable jurisdictions.

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Operator [20]

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The next question comes from Jeff Van Sinderen with B. Riley & Co.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [21]

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On acquisitions, are you seeing any change in what sellers inspect in terms of multiples paid for the businesses? Or is it pretty much status quo?

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [22]

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Well, in the 2 acquisitions that we did this year, as I mentioned, they were at about 5x, and that's about middle of the range for us. We've gone as low as 4%, 4.5% and as high as 6.5% or 7% for strategic deals. These were both really good dealers, high-quality product. But given the relationship and our knowledge of the business, we're able to acquire them for a fair 5x EBITDA.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [23]

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Okay. And then any notable change expected in operating metrics that we should be aware of a Quench, and then any other trend shifts in what customers are gravitating toward in terms of your product lines? I think you mentioned adding ice, adding hot and cold.

And then any impact on -- well, I guess, on the Seven Seas side, can you remind us of any other contracts like Curacao that are coming up for decision in the near term? And how you're thinking about the probability of renewals or evolution of those contracts?

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [24]

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So on contract renewals, Tony mentioned in his presentation that we extended Limetree to 2024 and St. Maarten to 2025. Those are the next 2 that would come up for renewal after Curacao. And to be quite honest, we believe that both of those are going to continue to get extended again before the end of their contracts. The expectation is that the Limetree refinery will continue to operate for some time into the future. And -- but there's the new operator there who's comfortable committing for a 5-year contract, but we don't believe that refinery is going to discontinue operations in 5 years. So we would expect that to get -- continue to get renewed.

Curacao is in a unique situation because of the Venezuela situation. We would normally expect to be negotiating an extension in the water supply agreement for that refinery, but because of PDVSA and the uncertainty about PDVSA, everything is kind of up in the air in that situation. We expect that, that refinery will continue to operate. We expect that, that will give us an opportunity to enter into a new contract, whether we are able to get that or not is a risk factor, whether the refinery continues to operate as I said does represent a risk factor.

But the rest of our contracts are very long-lived. Tony mentioned an average of 11 years for -- on a revenue basis for the rest of our contracts. And that's including the St. Maarten and the Limetree contracts that are relatively short compared to the other contracts.

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Anthony A. Ibargüen, AquaVenture Holdings Limited - CEO, President & Director [25]

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And then on operating metrics and trends, Jeff, the business at Quench is still very focused on churn and customer satisfaction. And ultimately, net growth, right? So that is this growth number that we put up every year. It's very important to us to continue to get leverage on the platform, and we're seeing that come through in EBITDA growth in excess of revenue growth. So if you continue to focus on that, you'd know that we're getting great leverage off of investments made in the past to have a scalable IT and human capital platform.

And then as far as trends, I've talked about Ice frequently in the past. We're seeing increased interest in sparkling. That is growing very significantly, or seltzer water. There's an article in The Times about the summer of sparkling. It's a hot topic. We've got Coke and Pepsi and other people trying to figure out how to move from sugary drinks to healthier drinks and -- but still carbonated, and that's becoming a larger part of our upgrade and add-on business.

And more frequently now we're hearing about the interest in flavored sparkling to be able to replace the cans or bottles of LaCroix and other flavored sparkling beverages out there. People are now starting to look for us to supply units that also inject some flavor. So those are all the trends, all very positive. And these categories tend to be very sticky. They are also less price-sensitive generally than your first basic point-of-use water cooler that's replacing a 5-gallon jug. This is now much more interesting to principles and professionals and offices. And so we're seeing a lot of demand and growth in that area.

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Operator [26]

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The next question comes from Joseph Osha from JMP Securities.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [27]

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I think this question is going to be for Lee. With the deal now complete, can you maybe give us a sense looking at the other parts of the balance sheet, how much dry powder you think you have for additional acquisitions at this point?

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Lee S. Muller, AquaVenture Holdings Limited - CFO, Senior VP, Treasurer & Assistant Secretary [28]

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Well, if you look at the money just raised and our ability to use some other cash that we had on the balance sheet as well as our ability to continue leveraging our EBITDA, the number could be sizable. It could be about $200 million. And then -- and that could generate substantial EBITDA off of that investment.

Now that we have the equity deal behind us, we're going to turn our attention to other parts of the capital structure in terms of optimization. We'll monitor market conditions and market opportunities. And we feel very good about our existing dry powder and our ability to continue making further investments and generate incremental EBITDA.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [29]

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And on that $200 million, that would -- just again, just hypothetically, that would take you back to about 4x. Is my math roughly correct?

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Lee S. Muller, AquaVenture Holdings Limited - CFO, Senior VP, Treasurer & Assistant Secretary [30]

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Yes. A little bit higher than that, about 4.3x, yes.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [31]

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And without going into too much detail, you kind of anticipated on my next question, what -- are you getting big enough now that within the next 12 to 18 months, we might start to see other alternatives on the nonequity part of the balance sheet become more viable. Can you give us a little color there?

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Lee S. Muller, AquaVenture Holdings Limited - CFO, Senior VP, Treasurer & Assistant Secretary [32]

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Yes. So we always try to -- we always thought about $300 million as a bogey in terms of being sizable enough to go and to be eligible to try other parts of the capital markets, and we've hit that. We've exceeded it. We've eclipsed it. And so we are at the size right now where we can access deeper parts of the capital markets. And so stay tuned on that, and we're looking to optimize and extend our maturities. Okay.

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Operator [33]

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Your next question comes from Pavel Molchanov with Raymond James.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [34]

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We talked a lot about Curacao as a risk factor, but I wanted to kind of shift to Limetree where I believe you will have an expansion at the end of this year. And I just wanted to get an update on that, kind of the timing of the uplift in volumes from that facility, and how large that uplift is going to be?

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [35]

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So we are increasing the size of the plant from 600,000 gallons a day to 1.6 million gallons a day. So we're tripling the capacity of the plant. The actual production volumes will probably be a bit less than that. We're anticipating going from what was about 400,000 gallons a day to 1.4 million gallons a day. But the actual volume we're going to see, there will be a function of the production level of the refinery. And we really won't have a better view on the volume until that refinery is operating, which I believe is intended to incur around the end of the year. We're anticipating that our desal plant will be ready to operate in -- by the end of Q4 -- by the end of Q3, beginning of Q4.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [36]

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Okay. And do you have -- in addition to Curacao, is there an additional contract, maybe in the Bahamas, 1 million gallons that expires at the end of the year?

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [37]

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That's, technically, a contract that expired 3 or 4 months ago. It's small. It's for the Sandals Resort in Exuma. We have been talking with them about an expansion of that contract. We -- frankly, were expecting that it might be -- that expansion might be signed by this call. It actually hasn't happened just because we are dealing with the Caribbean, and things do take a little bit longer. But our expectation is that, that's going to be renewed.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [38]

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Okay. So you're still producing, even though it's technically retired already?

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [39]

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Yes, yes. We're still operating under the terms of the old contract. It's just gone month-to-month, while we dot the I's and cross the T's.

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Operator [40]

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The next question comes from Chip Moore with Canaccord.

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Chip Moore, Canaccord Genuity Corp., Research Division - Senior Associate [41]

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Good to see the increase in active lead at AUC. I assume that's primarily still in the Texas MUD market. Maybe you could just remind us on historical conversion rates and talk a little bit about geographic expansion efforts.

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Douglas R. Brown, AquaVenture Holdings Limited - Founder & Chairman [42]

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Yes, the primary business for them continues to be the Texas market. They have the strongest concentration in Houston, but they have also many active leases in Dallas-Fort Worth and Austin. They have activities outside of Texas. Primarily, those have historically been equipment sales as opposed to leases.

They have some leases that they have been pursuing outside the business. They also have this business where -- the bypass business, where they bring in a temporary waste treatment facility, while a primary facility is taken offline to be serviced and repaired. I believe they got their first contract for bypassing in California recently. So they have -- certainly, got business outside of Texas.

We're actively working with the management team on developing the lease business outside of Texas, but the Texas market has been so strong that it certainly kept them very busy, as you can see from the increase, I think, Tony mentioned, the increase in active leases from $83 million to $97 million. And we have a significant pipeline of what we refer to as signed but not build leases, which are basically plants that are under construction.

And so we're really happy with the growth and the forecast growth that we get from that. But we do have an active effort -- they do have an active effort to expand the business outside of the Texas market.

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Operator [43]

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There are no further questions at this time. I would like to turn the floor back over to Mr. Tony Ibargüen for closing comments.

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

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Thank you. Thanks to everyone for your interest and all the great questions and to our employees, our shareholders, old and new grateful for your ongoing support. We find ourselves in a dynamic time with really significant growth behind us and significant growth ahead of us. We're very excited about the future here and look forward to sharing more with you about that next quarter. Until then, we'll see you later. Thank you.

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Operator [45]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.