Pure Cycle Corporation (PCYO) Q2 2025 Earnings Conference Call April 10, 2025 08:30 AM ET Company Participants Moderator - Conference Call HostUnknown Investor - Investor (Questioner)Greg Bennett - ShareholderUnknown CEO - Chief Executive OfficerMark Spiezeali - Chief Financial OfficerOperator - Teleconference OperatorDan Kozlowski - Board MemberJeff Scott - Board Member Conference Call Participants Bill Miller - Investor/Analyst (Questioner)Elliot - Investor/Analyst (Questioner)Bob Schloss - Investor/Analy ...

PART I [Consolidated Financial Statements](index=6&type=section&id=Item%201.%20Consolidated%20Financial%20Statements) The consolidated financial statements reflect improved financial position, increased net income, and positive operating cash flow for the period [Consolidated Balance Sheets](index=6&type=section&id=Consolidated%20Balance%20Sheets) The balance sheets reflect an increase in total assets to **$149.7 million**, a decrease in liabilities, and a rise in shareholders' equity Balance Sheet Comparison (in thousands) | Account | Feb 28, 2025 | Aug 31, 2024 | | :--- | :--- | :--- | | **Total Current Assets** | $26,991 | $37,862 | | **Total Assets** | **$149,656** | **$147,354** | | **Total Current Liabilities** | $7,180 | $9,349 | | **Total Liabilities** | **$15,244** | **$17,652** | | **Total Shareholders' Equity** | **$134,412** | **$129,702** | [Consolidated Statements of Income](index=7&type=section&id=Consolidated%20Statements%20of%20Income) Total revenues increased to **$9.7 million**, driven by tap fees and royalty income, resulting in a more than doubled net income of **$4.7 million** Six Months Ended Income Statement Highlights (in thousands) | Metric | Feb 28, 2025 | Feb 29, 2024 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $9,747 | $8,583 | +13.6% | | Water and wastewater tap fees | $3,592 | $581 | +518% | | Commercial water usage | $1,175 | $3,613 | -67.5% | | Oil and gas royalty income, net | $4,717 | $87 | +5322% | | Operating Income | $392 | $1,388 | -71.8% | | **Net Income** | **$4,746** | **$2,183** | **+117.4%** | | **Diluted EPS** | **$0.20** | **$0.09** | **+122.2%** | Three Months Ended Income Statement Highlights (in thousands) | Metric | Feb 28, 2025 | Feb 29, 2024 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $3,995 | $3,197 | +25.0% | | Water and wastewater tap fees | $2,126 | $0 | N/A | | Oil and gas royalty income, net | $1,910 | $53 | +3504% | | Operating Income (Loss) | ($1,327) | ($368) | -260.6% | | **Net Income** | **$809** | **$118** | **+585.6%** | | **Diluted EPS** | **$0.03** | **$0.00** | N/A | [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operations turned positive at **$4.2 million**, while investing activities used **$7.1 million**, leading to a **$3.2 million** decrease in total cash Cash Flow Summary for Six Months Ended (in thousands) | Activity | Feb 28, 2025 | Feb 29, 2024 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $4,227 | ($1,685) | | Net cash used in investing activities | ($7,128) | ($3,192) | | Net cash used in financing activities | ($318) | ($313) | | **Net change in cash** | **($3,219)** | **($5,190)** | [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail revenue recognition, Sky Ranch CAB receivables, segment performance, water rights acquisitions, and information on debt and employee stock plans - For the six months ended Feb 28, 2025, the company sold **90 water taps** and **87 wastewater taps**, generating **$3.6 million** in revenue, a substantial increase from **15 taps** and **$0.6 million** in the prior year period[32](index=32&type=chunk) - Water sales volume to commercial customers (mainly oil & gas) dropped significantly to **367 acre-feet** for the six months ended Feb 28, 2025, from **1,028 acre-feet** in the prior year period[33](index=33&type=chunk) - The company acquired **378 acre-feet** of ditch water and **300 acre-feet** of groundwater rights during the six months ended Feb 28, 2025, increasing its Lost Creek water supply investment by **$3.5 million**[47](index=47&type=chunk) - In February 2025, a Water Court denied the company's application for a new **1,635 acre-feet** water right from the Box Elder Creek Alluvial aquifer. The ruling did not impact existing water rights[48](index=48&type=chunk) [Management's Discussion and Analysis (MD&A)](index=25&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses performance, strategy, and financial condition, highlighting increased net income, ongoing Sky Ranch development, and sufficient liquidity despite market challenges [Business Strategy and Market Conditions](index=25&type=section&id=Business%20Strategy%20and%20Market%20Conditions) The company integrates water/wastewater services, Sky Ranch land development, and single-family rentals, leveraging water assets in the Denver market despite high mortgage rates - The company's primary land asset, Sky Ranch, is zoned for up to **3,200 homes** and over **two million square feet** of commercial space, which will be serviced by its water and wastewater segment[92](index=92&type=chunk) - The company is expanding its single-family rental business, with **14 homes** currently rented and plans to grow the portfolio to **98 units** at Sky Ranch over the next three years[37](index=37&type=chunk)[50](index=50&type=chunk)[108](index=108&type=chunk) - Development of Sky Ranch Phase 2 is underway across five sub-phases (2A-2E). As of Feb 28, 2025, Phase 2A is **100% complete**, 2B is **95% complete**, 2C is **48% complete**, and 2D is **18% complete**[101](index=101&type=chunk)[102](index=102&type=chunk)[103](index=103&type=chunk)[104](index=104&type=chunk) [Results of Operations](index=29&type=section&id=Results%20of%20Operations) Net income increased **117%** to **$4.7 million**, driven by higher oil and gas royalty income and tap fees, despite a decline in water deliveries and increased operating expenses Six Months Ended Performance Highlights (in thousands) | Metric | Feb 28, 2025 | Feb 29, 2024 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $9,747 | $8,583 | 14% | | Total Cost of Revenue | $4,554 | $3,464 | 31% | | Operating Income | $392 | $1,388 | (72)% | | Other Income, net | $5,892 | $1,573 | 275% | | **Net Income** | **$4,746** | **$2,183** | **117%** | Key Operational Metrics (Six Months Ended) | Metric | Feb 28, 2025 | Feb 29, 2024 | % Change | | :--- | :--- | :--- | :--- | | Water Delivered (acre-feet) | 367 | 1,028 | (64)% | | Water Taps Sold | 90 | 15 | 500% | | Wastewater Taps Sold | 87 | 15 | 480% | [Liquidity and Capital Resources](index=33&type=section&id=Liquidity%20and%20Capital%20Resources) The company has **$19.8 million** in working capital, including **$16.8 million** cash, deemed sufficient for the next 12 months, with planned Sky Ranch investments and expected homebuilder payments - The company has working capital of **$19.8 million**, including **$16.8 million** in cash and cash equivalents as of February 28, 2025[123](index=123&type=chunk) - Cash from operating activities was **$4.2 million** for the six-month period, a **$5.9 million** positive swing from the prior year, mainly due to reimbursements from the Sky Ranch CAB[127](index=127&type=chunk) - Future capital commitments include up to **$24.2 million** for Sky Ranch development and approximately **$6 million** for **17 new rental homes** over the next 12 months[124](index=124&type=chunk)[125](index=125&type=chunk) [Controls and Procedures](index=35&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of February 28, 2025, with no material changes to internal control over financial reporting - The President and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period[130](index=130&type=chunk) - No material changes were made to internal controls over financial reporting during the quarter[131](index=131&type=chunk) PART II [Legal Proceedings](index=35&type=section&id=Item%201.%20Legal%20Proceedings) A Water Court denied the company's application for a new **1,635 acre-feet** water right and reservoir enlargement, but the ruling did not impact existing water rights - A Water Court denied the company's application for a new **1,635 acre-feet** water right and for the enlargement of certain reservoirs on the Lowry Ranch[133](index=133&type=chunk) - The court's ruling does not impact the company's existing water rights or storage sites[133](index=133&type=chunk) [Share Repurchases](index=36&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company continued its stock repurchase program, repurchasing **16,000 shares** during the quarter ended February 28, 2025 Common Stock Repurchases (Q2 FY2025) | Period | Shares Purchased | Average Price Paid | | :--- | :--- | :--- | | December 2024 | 6,000 | $12.62 | | January 2025 | 10,000 | $11.99 | | **Total** | **16,000** | **~$12.24** | - As of April 7, 2025, **112,074 shares** remain available for repurchase under the authorized program[135](index=135&type=chunk)

Core Insights - Pure Cycle (NASDAQ: PCYO) has been a disappointing investment over the past few years, with the stock showing no significant movement since its peak in 2018 [1] Company Performance - The stock performance of Pure Cycle has stagnated since reaching its peak in 2018, indicating a lack of growth or recovery in its market value [1] Investment Sentiment - The overall sentiment towards Pure Cycle reflects disappointment among investors, as the company has not delivered expected returns over the years [1]

Financial Performance - Pure Cycle reported net income of $3.9 million for the three months ended November 30, 2024, a 91% increase compared to $2.1 million in 2023[2] - Earnings per fully diluted common share increased to $0.16, up 78% from $0.09 in 2023[2] - Total revenues for the three months ended November 30, 2024, were $5.8 million, a 7% increase from $5.4 million in 2023[2] - EBITDA for the three months ended November 30, 2024, was $5.8 million, reflecting a 71% increase from $3.4 million in 2023[2] Revenue Sources - Royalty income surged to $2.8 million in Q1 2025, compared to less than $0.1 million in the same period last year[2] - Water and wastewater tap sales increased to $1.5 million in Q1 2025, compared to $0.6 million in Q1 2024[11] - Lot sales revenue rose to $2.3 million for the three months ended November 30, 2024, compared to $1.9 million in 2023[12] Assets and Liabilities - As of November 30, 2024, cash and cash equivalents totaled $19.0 million, with working capital reported at $20.3 million[10] - As of November 30, 2024, total assets increased to $149,688,000 from $147,354,000 as of August 31, 2024, reflecting a growth of approximately 1.8%[18] - Current assets decreased to $28,202,000 from $37,862,000, a decline of about 25.5%[18] - Total liabilities decreased to $16,101,000 from $17,652,000, a reduction of about 8.8%[18] - Total shareholders' equity increased to $133,587,000 from $129,702,000, representing a growth of approximately 3.0%[18] Business Segments - The company operates in three business segments: wholesale water and wastewater services, land development, and single-family home rentals, enhancing recurring revenues[19] - The rental of single-family homes at Sky Ranch was launched in 2021, contributing to long-term recurring revenues and customer growth in the water resource segment[19] Development and Construction - The development of Sky Ranch continues, with 949 finished lots delivered to homebuilders and additional phases underway[9] - The single-family rental business remains stable with 14 homes built and rented, and 17 additional homes under contract for construction[8] Market Outlook - Forward-looking statements indicate expectations for future water and wastewater tap sales, home construction timing, and market demand for entry-level and rental homes[21] - The company emphasizes the potential impact of home mortgage interest rates and inflation on the housing market and sales[21] Additional Information - Additional information and updates can be accessed through the company's website and contact details provided[20]

Financial Data and Key Metrics Changes - The company reported record revenues of approximately $5.7 million for Q1 2025, representing a nearly 7% increase compared to the previous year [10][14] - Gross profits increased by almost 10% quarter-over-quarter, reaching approximately $3.67 million with a gross margin of 64% [12][15] - Net income for the quarter was nearly $4 million, translating to earnings per share of $0.16, which is a 78% increase in earnings per share compared to the previous year [16][19] Business Line Data and Key Metrics Changes - The water utility segment showed a slight decline, primarily due to a trade-off between monetizing tap fees and adding new connections [21] - Oil and gas revenues were anticipated to be weaker this year, but the company expects significant growth in the coming years due to numerous permits for new wells [22][24] - Tap fees increased by about 150%, and customer revenues grew by approximately 12% due to the expansion at Sky Ranch [23][35] Market Data and Key Metrics Changes - The company operates in a competitive market, with a focus on affordable housing in the Denver metropolitan area, where entry-level homes are priced under $500,000 [33][34] - The single-family rental segment saw a 14% increase in rental income, driven by both strengthening rents and the addition of new units [35][36] Company Strategy and Development Direction - The company is focused on three main business segments: water and wastewater utilities, land development, and single-family rentals, with a strategic emphasis on affordable housing [39][41] - The company aims to leverage its water rights and land development capabilities to enhance community value and generate recurring revenue [44][46] - Future growth is anticipated from the continued development of Sky Ranch, with projections of significant revenue potential from both residential and commercial developments [68][70] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the company's performance, highlighting a strong liquidity position that allows for continued growth and strategic acquisitions [64][65] - The outlook for oil and gas royalties remains positive, with expectations of continued high performance in the near term followed by a gradual decline [110] - The company is well-positioned to navigate the current interest rate environment, with homebuilders at Sky Ranch facing lower buy-down incentives compared to the broader market [114][116] Other Important Information - The company has a strong balance sheet and is actively repurchasing shares to enhance shareholder value [65][73] - The strategic acquisition of water assets over the past 30 years has positioned the company favorably in a water-scarce region, allowing for significant revenue generation [45][128] Q&A Session Summary Question: Can you provide more detail on the projected asset value? - Management explained that the projected asset value is derived from the number of lots remaining in inventory and the growth of reimbursables on the balance sheet [81][85] Question: What is the outlook for oil and gas royalties? - Management indicated that while there may be a decline in royalties from existing wells, new wells are expected to come online, maintaining a favorable outlook for the next five years [110][111] Question: How are homebuilders in the Denver area managing sales amid high interest rates? - Management noted that homebuilders at Sky Ranch are offering significantly lower incentives compared to the broader market, making the area attractive for entry-level buyers [114][116] Question: How does the company balance value creation versus reported earnings? - Management acknowledged the challenge of aligning reported earnings with long-term value creation, emphasizing the importance of demonstrating equity value through gross margins and asset appreciation [119][121]

PURE CYCLE CORPORATION Earnings Presentation For the Three Months Ended November 30th, 2024 Presented by Mark Harding www.purecyclewater.com Forward-Looking Statements Statements that are not historical facts contained or incorporated by reference in this presentation are "forward-looking statements" ("FLS") within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 as amended. FLS involve risks ...

Housing Market - The housing market stabilized in 2024 with consistent interest rates, but 30-year fixed mortgage rates remain at their highest level in over 15 years [99]. - The ongoing impact of the Federal Reserve's monetary policy is expected to create headwinds for the housing market in 2025 and beyond [101]. Sky Ranch Development - Sky Ranch is zoned for up to 3,200 single-family and multifamily homes, with a total of approximately 5,000 residential and equivalent units planned at build-out [107]. - The average lot prices in Phase 2 of Sky Ranch increased by approximately 38%, with the price for a 45-foot lot rising from $75,000 to $103,200 [110]. - As of November 30, 2024, Phase 2A of Sky Ranch is nearly 100% complete, with $18.4 million received from the sale of 219 lots [111]. - Phase 2B of Sky Ranch is approximately 97% complete, with $17.3 million received from the sale of 211 lots [112]. - The company has received $25.0 million in water and wastewater tap fees from homebuilders since the start of development at Sky Ranch [117]. - The company expects to recognize the majority of the remaining $13.7 million of revenue from Phase 2C before the end of fiscal 2025 [115]. - The company plans to expand its single-family rental business, with a goal of more than 200 rental homes at Sky Ranch over the next several years [102]. - The company has contracted to construct 17 rental units in Phase 2B, with estimated construction costs of approximately $6 million [134]. Financial Performance - For the three months ended November 30, 2024, net income increased to $3.9 million from $2.1 million, a 91% increase, primarily due to higher oil and gas royalty income [120]. - Total revenue for the same period rose to $5.75 million, a 7% increase from $5.39 million, driven by a 22% increase in lot sales revenue [122]. - Lot sales revenue reached $2.32 million, up from $1.90 million, reflecting ongoing development in Phase 2A, 2B, and 2C [129]. - Water and wastewater resource revenue decreased by 7% to $3.06 million, primarily due to a 52% drop in commercial water usage [127]. - The total costs of revenue increased to $2.09 million, a 2% rise compared to the previous year, aligning with revenue growth [122]. - Operating income for the three months ended November 30, 2024, was $1.72 million, slightly down by 2% from $1.76 million [122]. - As of November 30, 2024, working capital was $20.3 million, including $19.0 million in cash and cash equivalents, indicating sufficient liquidity for operations [132]. Accounting Policies - The accounting policies and estimates used for the interim consolidated financial statements for the three months ended November 30, 2024, remain consistent with those described in the 2024 Annual Report [137]. - There have been no changes to the critical accounting policies during the three months ended November 30, 2024 [137]. - Certain disclosures typically included in annual financial statements have been condensed or omitted in the interim financial statements as per SEC regulations [137].

Financial Data and Key Metrics Changes - The company reported record fourth-quarter results with revenue of $12.5 million, driven by the delivery of 197 lots in Phase 2D [9] - For the fiscal year, total revenue reached $28.7 million, marking another record year [10] - Gross profit was approximately $20 million, resulting in a gross margin of about 69% [10] - Net income for the year was $11.6 million, translating to earnings per share of $0.48 [10] - Year-over-year comparisons show significant improvement, particularly after a challenging previous year due to rising interest rates [11][12] Business Segment Data and Key Metrics Changes - The water utility segment achieved record performance, with oil and gas operations generating over $5.5 million in revenue [14][15] - The company experienced a 21% compound annual growth rate (CAGR) in utility customers, averaging $1,500 per connection annually [15] - In the land development segment, 194 finished lots were delivered in Phase 2D, with a total of about 1,200 lots developed to date [20][21] - The single-family rental segment is growing, with annual revenue approaching half a million dollars and plans to expand to 200 units [24][25] Market Data and Key Metrics Changes - The company operates in a water-constrained market, which presents opportunities for growth, particularly in oil and gas [19] - The average tap fee has increased from around $30,000 to approximately $40,000, reflecting the growing demand for water services [27] - The company has only utilized about 5% of its utility assets, indicating significant growth potential [17][59] Company Strategy and Development Direction - The company aims to leverage its water utility and land development segments to create a vertically integrated business model [27][28] - Future growth is expected from the expansion of the single-family rental segment, with a focus on maximizing land development opportunities [41][42] - The company is strategically acquiring additional land and water rights to enhance its asset base and operational capacity [69] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about continued growth in revenue and margins across all segments, particularly in land development and water utility [49][50] - The company anticipates a modest increase in revenues and improved margins for the upcoming year [50] - Management highlighted the importance of maintaining liquidity for strategic acquisitions while balancing stock repurchase programs [78][83] Other Important Information - The company has a strong balance sheet with nearly $57 million in cash and receivables, providing a solid foundation for future growth [47] - Recent refinancing of bonds has resulted in an investment-grade rating, enhancing the company's financial stability [68] - The company is actively pursuing additional land acquisitions to support its growth strategy [69] Q&A Session Summary Question: Interest in datacenters as water consumers - Management acknowledged the potential for datacenters but noted limited traction in discussions, emphasizing existing industrial customers as primary revenue sources [71][74] Question: Stock repurchase program and share count - Management clarified that while shares outstanding have increased, the company is balancing stock repurchases with the need for liquidity for acquisitions [76][78] Question: Potential for borrowing and valuation concerns - Management agreed on the undervaluation of the company and indicated a willingness to leverage for growth while maintaining liquidity for strategic opportunities [78][83]

Financial Performance - Pure Cycle reported a net income of $11.6 million for the year ended August 31, 2024, representing a 147% increase compared to $4.7 million in 2023[2] - Earnings per fully diluted common share increased to $0.48, up 153% from $0.19 in 2023[1] - Total revenue for the year ended August 31, 2024, was $28.7 million, a 97% increase from $14.6 million in 2023[2] - EBITDA for the year ended August 31, 2024, was $18.2 million, reflecting a 112% increase from $8.6 million in 2023[2] Revenue Sources - Lot sales revenue increased to $16.0 million for the year ended August 31, 2024, compared to $6.8 million in 2023[14] - Water deliveries reached a record 1,818 acre-feet for the year ended August 31, 2024, an increase of 89% from 964 acre-feet in 2023[2] - The company expects to generate an additional $19.8 million in water and wastewater tap fee revenue over the next three years from Phase 2 of Sky Ranch[8] Assets and Liabilities - Total assets increased to $147,354,000 as of August 31, 2024, up from $133,216,000 in 2023, representing a growth of approximately 10.8%[19] - Total current assets rose to $37,862,000 in 2024, compared to $29,727,000 in 2023, marking an increase of about 27.4%[19] - Cash and cash equivalents decreased to $22,113,000 in 2024 from $26,012,000 in 2023, a decline of approximately 15.5%[19] - Total liabilities increased to $17,652,000 in 2024 from $14,982,000 in 2023, reflecting a rise of about 17.8%[19] - Total shareholders' equity grew to $129,702,000 in 2024, up from $118,234,000 in 2023, indicating an increase of approximately 9.4%[19] Business Segments and Development - The company operates in three business segments: wholesale water and wastewater services, land development, and single-family home rentals, which contribute to recurring revenues[20] - The rental of single-family homes at Sky Ranch was launched in 2021, providing long-term recurring revenues and enhancing land development operations[20] - The Sky Ranch Master Planned Community is actively developing Phases 2A, 2B, and 2C, with substantial completion of Phases 2A and 2B[1] - The single-family rental segment had 14 homes built and rented, with plans for an additional 17 homes in Phase 2B[10] Future Outlook and Risks - Future growth is anticipated through market cycles, with expectations for increased water and wastewater tap sales and revenues[22] - The company is positioned to benefit from the strength of the Sky Ranch market and forecasts for future sales of water to oil and gas operators[22] - The company emphasizes the importance of monitoring risks such as home mortgage interest rates and inflation that could impact housing market dynamics[22]

PURE CYCLE CORPORATION Earnings Presentation F i s c a l Y e a r E n d 2 0 2 4 P r e s e n t e d b y M a r k H a r d i n g www.purecyclewater.com Forward-Looking Statements Statements that are not historical facts contained or incorporated by reference in this presentation are "forward-looking statements" ("FLS") within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 as amended. FLS involve ...