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AquaVenture Holdings Limited (NYSE: WAAS)
Q4Â 2018 Earnings Conference Call
Feb. 27, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Good morning, and welcome to the AquaVenture Holdings Fourth Quarter and Full Year 2018 Earnings Conference Call. Today's call is being recorded, and we have allocated time for prepared remarks and Q&A.
At this time, I'd like to turn the conference over to Courtney Denihan, Investor Relations at AquaVenture. Thank you. Please go ahead.
Courtney Denihan -- Investor Relations
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. Today's speakers are Tony Ibarguen, Chief Executive Officer; Doug Brown, Chairman of the Board; and Lee Muller, Chief Financial Officer.
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, expectations regarding financing plans or capital raising and our ability to access capital markets, 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; our ability to capitalize on the vertical integration capabilities; statements relating to AquaVenture's ability to complete the proposed acquisitions on the terms or in the time frames currently expected; the ability of the conditions to closing to be satisfied or waived; AquaVenture's ability to successfully integrate and operate the acquired businesses or assets and to achieve the expected financials, including EBITDA contributions 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 12, 2018, 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 Ibarguen.
Anthony Ibarguen -- President and Chief Executive Officer
Thanks, Courtney. Good morning, and thank you for joining us on today's call. I'd like to start today's call by commenting on some highlights from AquaVenture's fourth quarter and full year 2018, as well as the operational highlights of our Quench segment. Doug will then provide an overview of the operational highlights of our Seven Seas Water segment. Lee will then walk you through our financial results in more detail. And finally, I'll return to provide color on our outlook for 2019 and closing remarks, before opening up the lines for your questions.
Starting on Slide 3, AquaVenture had another terrific quarter with $41.8 million in revenue in Q4 2018, which represented almost 30% growth over Q4 of 2017. This is our fourth consecutive quarter of double-digit year-over-year revenue growth and was driven by solid organic growth of over 6% coupled with the successful execution of our M&A strategy. We are also pleased to report $15.6 million of adjusted EBITDA, including the principal collected on the Peru construction contract, which was also 30% higher than the fourth quarter of 2017 and was our ninth consecutive quarter of double-digit growth going back to our IPO in October of 2016. In addition, our adjusted EBITDA margin of 34.2% reflected a 60 basis point expansion over Q4 of 2017.
Moving to Slide 4, our full year 2018 revenues of $145.6 million represented a 20.6% year-over-year growth rate, comprised of a solid 8.7% of organic growth, and a 11.9% from acquisitions. During the fourth quarter, we completed our two largest acquisition since becoming a publicly traded company, AUC and PHSI, which we will tell you more about in a few minutes. In total, we completed 11 deals during 2018, 10 acquisitions and one new long-term water supply agreement which enabled us to significantly grow our capabilities and offering water as a service solution to more customers in more locations and with a broader array of product offerings.
In addition, we raised incremental capital during the fourth quarter by further expanding our Corporate Credit Agreement to fund some of these acquisitions, as well as to support future growth opportunities, and we also reduced our average interest rate under the loan agreement. This demonstrates once again our ability to access capital and optimize our capital structure and positions us to continue to invest in the growth of our AquaVenture as strategic organic and inorganic opportunities arise.
Moving to Slide 5, the consistent theme for Quench during 2018 was the successful execution of its acquisition and integration strategy, completing nine transactions. Combined with a strong organic growth and a declining customer attrition rate, Quench grew to over 50,000 customers with more than 140,000 company-owned units on rental agreements, which represented a 46% increase over the prior year. The nine acquisitions enabled expansion into several new markets, while also increasing customer density within the existing footprint which spans over 250 of the top metropolitan statistical areas in the US and Canada. It's important to note that Quench's continued investment in people, process, and technology make it possible to get maximum leverage out of its acquisition by fully integrating them shortly after closing.
Quench had several sizable acquisitions during the year including Wa-2 in Q1, which significantly increased its presence in Canada; and Alpine in Q3, which brought several Fortune 500 customers and a large national installed base. The largest and most strategic acquisition of the year for Quench was Pure Health Solutions or PHSI in December. As we discussed on our call in December, this acquisition impacted the core direct rental business by adding customers and teammates in seven major markets and PHSI's extensive pure water technology dealer network brought more scale to Quench's growing indirect dealer business, including expanded product development and manufacturing capabilities and increased sourcing volumes.
It is also worth noting that while the bulk of the revenue from the indirect dealer business is reported as product sales, this revenue is highly reoccurring due to the contractual relationships between Quench and its dealers across both the PHSI and Wellsys networks. This is much like coffee revenue, which is also reported as product sales, but it's typically associated with the contractual obligation by the customer to purchase coffee and related consumables from Quench. Additionally, similar to the 2017 acquisition of Wellsys, PHSI brings strong dealer relationships that could potentially lead to future acquisition opportunities.
Lastly, we are pleased to report that the integration at PHSI is on plan and can confirm that it has significantly expanded Quench's position in standing in the highly fragmented and rapidly growing point-of-use purification industry.
I'll now turn it over to Doug to walk you through the operational highlights of the Seven Seas Water segment.
Douglas Brown -- Chairman
Thanks, Tony. Moving to Slide 6, 2018 was a very strong year for Seven Seas Water. It completed its largest acquisition since our IPO, it expanded its core footprint in the Caribbean, and it had very strong performance from its core operating locations. AUC was a transformational acquisition for us as it meaningfully expanded our capabilities and presence in the waste water treatment and water reuse markets, while also enhancing AquaVenture's footprint in the United States. Currently, AUC has approximately 90 plants with long-term lease arrangements with customers contributing to AquaVenture's recurring revenue model.
While we look to expand AUC's footprint outside of its Texas base, AUC also provides Seven Seas Water with a unique cross-selling proposition of being able to provide customers both desalination and wastewater treatment options. AUC will also benefit from transitioning to Seven Seas Water's ERP system, which is ideally suited for AUC's project-oriented requirements. Due to these synergies and opportunities across AUC and Seven Seas Water, we will be reporting AUC's financial results as part of the Seven Seas Water segment, and I'm pleased to report that the integration of AUC is on plan.
We also continue to increase our customer density and expand our relationships in the Caribbean. In the fourth quarter, we closed a deal with the Water Corporation of Anguilla to provide potable water under a 10-year contract. Similar to other agreements, we will initially provide the Water Corporation of Anguilla up to 500,000 gallons of water per day, but we have the potential to add another 500,000 gallons per day of additional capacity as the demand for water increases. Opportunities like Anguilla are ideal tuck-in transactions that further diversify our geographic and customer exposure.
Overall, Seven Seas Water had a very successful year and that success has been shown in the achievement of consistently strong financial results during 2018. In addition to Seven Seas Water's recurring contractual revenue, the growth was bolstered by organic growth in excess of 5% on a year-over-year basis. This organic growth was driven by increased water volumes produced for our customers and contractual increases in our water rates.
Finally, I will touch briefly on the status of the pending acquisition in Ghana. At the end of 2018, we extended the contracts of long-stop date to March 31, 2019. Unfortunately, it is clear that the project is not going to be completed by that deadline. At this time, we do not intend to extend the long-stop date beyond March 31. We have devoted substantial time and resources to this acquisition, because we believed it to be an attractive investment opportunity and that the parties were making good progress toward completion. More recently, uncertainties regarding whether and when this deal will close and whether the existing terms make sense in light of those uncertainties, have made us less optimistic about the deal's completion. We do continue to be interested in the project and will entertain reengaging after certain major milestones and issues have been satisfied.
I will now turn it over to Lee to talk about our financial highlights in more detail.
Lee Muller -- Chief Financial Officer
Thanks, Doug. As Tony mentioned, we are pleased with our strong fourth quarter and full year performance in 2018, which included double-digit year-over-year revenue and adjusted EBITDA growth in both segments.
On Slide 7, Seven Seas Water reported revenues of $20.7 million during the fourth quarter of 2018, a 38.2% increase over the prior year period. This increase was comprised of 35.5% inorganic growth driven by the inclusion of the AUC operations, and 2.7% organic growth primarily due to increased volumes in certain operations and higher water rates in others. Gross margin of 54.5% decreased 50 basis points over the prior year period, primarily due to the inclusion of AUC's operations, which have an overall lower gross margin than the existing Seven Seas Water business.
Adjusted EBITDA of $9.4 million for the fourth quarter of 2018 increased 33.7% over Q4 2017, and adjusted EBITDA margin of 45.7% reflected a 150 basis point decline, primarily due to higher expenses for repairs and maintenance during the quarter at several of our plants. I would like to remind you that repairs and maintenance expenses in Seven Seas Water can vary from quarter-to-quarter which makes looking at margins in any one specific quarter challenging. Note that the adjusted EBITDA margin for Seven Seas Water for the full year actually increased by 200 basis points. Finally, adjusted EBITDA plus principal collected on the Peru construction contract increased 30.1% to $10.7 million in the fourth quarter.
Turning to Quench results on Slide 8, the highlights for the quarter were Quench's adjusted EBITDA which increased 23.2% to $6 million and its adjusted EBITDA margin of 28.2%, which reflected a year-over-year increase of 20 basis points. Revenues increased 22.6% over the prior year period to $21.1 million, and both rental revenues and product sales had strong year-over-year growth, benefiting from both organic and inorganic growth. Quench's gross margin of 53.6% for the fourth quarter increased 40 basis points compared to Q4 2017, which was primarily due to margin expansion in the rental business, partially offset by growth in lower margin dealer equipment sales.
On Slide 9, I'd like to provide a brief update on select balance sheet and cash flow items. As of December 31, 2018, cash and cash equivalents were $56.6 million, and our total debt was $319.7 million, resulting in net debt of $263.1 million. As a reminder, we amended our corporate credit agreement twice during the fourth quarter, increasing our borrowings by $150 million to fund acquisitions, while reducing the interest rate of our loans. From a cash flow perspective, we generated $4.8 million of cash flow from operations during the quarter and had $6.7 million of capital expenditures. As a reminder, we see variations in our capital expenditure amounts on a quarterly basis depending on the timing and type of projects we are working on. As a result, we look at our cash flow trends on an annual basis to account for these fluctuations.
For the full year of 2018 we generated $26.9 million of operating cash flow, an increase of $7.9 million over 2017, and had $19.6 million of capital expenditures. Our free cash flow, which we define as operating cash flow less capital expenditures, was $7.3 million, an increase from $4.5 million in the prior year. Also, remember that our capital expenditures are largely composed of growth-related activities that will result in the generation of additional revenues and adjusted EBITDA in future years.
We continue to evaluate both debt and equity financing opportunities that will support our goal of maintaining adequate levels of liquidity, while optimizing and expanding our capital structure as we grow the business. Therefore, as a matter of good corporate housekeeping, we plan to file a universal shelf registration statement for up to $250 million of debt and equity securities to allow us to raise capital opportunistically over the next couple of years to fund our growth plans. The filing is currently scheduled to be done around the time of filing our 10-K.
I will now turn it over to Tony to discuss our outlook and provide closing remarks.
Anthony Ibarguen -- President and Chief Executive Officer
Thanks, Lee. On Slide 10, you can see that, for the full year of 2019, we're targeting annual revenues of between $190 million and $197 million, adjusted EBITDA of between $67 million and $72 million, and adjusted EBITDA plus the principal collected on the Peru contract of between $72 million and $77 million, a midpoint of which represents a very healthy 39% growth over 2018. While this outlook includes the full year effect of all acquisitions completed during 2018, it excludes the impact of any pending or future acquisitions.
A few final notes. First, I'd like to mention a recent change in our Board of Directors. Brian O'Neill, who has been on our Board for the past five years, recently accepted the position of Chief Operating Officer of the Inter-American Development Bank, which required him to step down from our Board. We are very excited for Brian as he takes on this huge role, and we want to thank him for the time, commitment, and contributions he made to AquaVenture over the years. To take Brain's place, we're excited to have announced the appointment of Debra Coy, who brings many years of executive experience and deep knowledge of the global water industry. We're thrilled to have her join our Board.
Second, I'd like to thank the entire AquaVenture team who worked their tails off and had a phenomenal year in 2018 along with our leadership team, Board of Directors and shareholders who have been very supportive and helpful as we transitioned the Company's leadership. But my most special thanks go to Doug Brown, our Founder, whose vision of creating a broad-based water as a service company with the foundation of high quality, contractually recurring revenue and world-class people in operations is the reason we're all here today.
When AquaVenture went public in late 2016, our goal was to double our adjusted EBITDA by thoughtfully investing IPO proceeds, internally generated cash, and borrowings. We're very excited to be on target to more than accomplish that goal in less than three years, as the midpoint of our guidance range for 2019 is more than 2.2 times our 2016 adjusted EBITDA plus principal collected on the Peru construction contract, which was $33.8 million.
In summary, we are very happy with what our team was able to accomplish in 2018 as we expanded our water as a service solutions to more customers in more locations and with a broader array of product offerings. Going forward, our primary focus will continue to be on growing internally generated cash flow and investing in organic expansion and strategic acquisitions, and the water as a service applications of desalination, wastewater treatment and point-of-use purification. Across all of AquaVenture, our team brings great passion to our purpose of performing for our shareholders and creating clean water solutions for customers around the world.
With that, operator, please open the line for questions.
Questions and Answers:
Operator
Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Andrew Kaplowitz with Citi. Please proceed with your question.
Vlad Bystricky -- Citi -- Analyst
Good morning, guys. It's Vlad Bystricky on for Andy.
Anthony Ibarguen -- President and Chief Executive Officer
Good morning, Vlad.
Lee Muller -- Chief Financial Officer
Good morning.
Vlad Bystricky -- Citi -- Analyst
So nice finish to the year and thanks for all the color around Ghana and (technical difficulty) Just discussing that, 2018 was a year obviously of accelerated M&A and one -- and you broadened the scope of the business with acquisitions like PHSI and AUC. So if you look at the M&A pipeline today, what areas would you say will be most promising in terms of potential significant M&A opportunities that you hope to close in 2019?
Anthony Ibarguen -- President and Chief Executive Officer
Thanks, Vlad. Well, we have M&A opportunities we think in all the areas that we had last year and a little bit more opportunity than a year ago in that we now have wastewater treatment as a key opportunity area for growth in the US. But we continue to have a robust pipeline across our desalination business. We are active in a number of potential engagements across the world. Quench continues to participate in the highly fragmented point-of-use business across the US and Canada and we see continuing the trend that we saw last year of many of the hundreds or perhaps thousand dealers out there looking to exit the business at some point in time.
And through our acquisition of PHSI and Bluline along with what we had acquired in Wellsys, the opportunity to develop great relationships through the indirect business with those dealers, and that's all progressing very nicely. And then with wastewater, obviously, we're focusing primarily on integrating AUC and making sure that we can help them grow that business, but that opens up our opportunity pipeline to other wastewater-related businesses in the US.
Vlad Bystricky -- Citi -- Analyst
Great. That's helpful. And then maybe just digging into Quench for a minute, I think the 9.4% organic growth there in 4Q, I think it applies to organic growth (technical difficulty) Can you talk about how you are thinking about the underlying organic growth potential of the business here in 2019 and is the mid to upper single-digit organic growth sustainable in the near term at Quench?
Douglas Brown -- Chairman
Yes, I do. I think in fact our organic growth prospects remain very healthy in both segments of the business. We continue to see Seven Seas Water as a low single-digits grower naturally year-over-year through a combination of volume as well as rate improvement. Now with AUC, we have the potential to add to that. But for 2019, we still see that as a low to mid single-digit grower. And Quench continues to see great opportunities for organic growth as the market continues to convert away from 5 gallon jug plastic bottled water to better technology in point-of-use, and we have a healthy organic pipeline there, that should support a mid to high single-digit growth once again this year.
Vlad Bystricky -- Citi -- Analyst
That's helpful. Thanks. I'll hop back in the queue.
Anthony Ibarguen -- President and Chief Executive Officer
Thank you, Vlad.
Operator
Thank you. Our next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.
David Lu -- RBC Capital Markets -- Analyst
Hi, everyone. This is David Lu on for Deane.
Anthony Ibarguen -- President and Chief Executive Officer
Hi, David.
Douglas Brown -- Chairman
Good morning, David.
David Lu -- RBC Capital Markets -- Analyst
So I would like -- hi, there. It's good to see that you've decided to keep AUC within the Seven Seas segment rather than break it out as one separate segment. So can you remind us about the synergy opportunities? You mentioned the ERP transition, but anything around shared services, cross-selling, getting scale on engineering and procurement, and maybe any color on what progress you've made so far?
Anthony Ibarguen -- President and Chief Executive Officer
Yeah, sure. Let me take that one. There is definitely the opportunity on the engineering side to share resources. As you may recall, on the Seven Seas side, we already are in the wastewater treatment business. We have wastewater treatment plants in the Bahamas and in Turks and Caicos. In fact, we have two examples there, where we have customers that wanted both desal and wastewater treatment. So there's cross-selling opportunities where somebody is looking for both water supply and wastewater treatment. There's engineering resources that can be shared. We think there could be -- there can be some procurement benefits by consolidating that. So we do see a number of synergies across engineering, sales, and procurement.
David Lu -- RBC Capital Markets -- Analyst
Great. And then on the Anguilla contract, looks like it's a 10-year contract, typically your initial contract terms are around 15 years. So is there anything special about this contract that will make it deviate a little bit from the average?
Anthony Ibarguen -- President and Chief Executive Officer
Well, the contract term is usually proportional related to the contract size, so the bigger contracts or the longer contracts, the smaller contracts tend to be shorter, because there's just less of a benefit for going into long-term contract. When you have a $100 million investment, that usually ends up as a 25-year contract because you're trying to amortize the $100 million over a longer period. Remember, this is a relatively small contract by our standards of 0.5 million to 1 million gallons a day, so 10 years would be typical of the size of contract.
David Lu -- RBC Capital Markets -- Analyst
Great. That's good to hear. And then lastly, I just wanted to confirm all the accretion numbers around AUC and PHSI. Is still about $13 million to $15 million of as adjusted EBITDA and $8 million to $9 million in adjusted EBITDA for 2019?
Lee Muller -- Chief Financial Officer
Yes, and there is -- those are all incorporated in our guidance.
David Lu -- RBC Capital Markets -- Analyst
Perfect. Thank you very much.
Operator
Thank you. Our next question comes from the line of Chip Moore with Canaccord Genuity. Please proceed with your question.
Chip Moore -- Canaccord Genuity Limited -- Analyst
Morning. Hey, folks.
Anthony Ibarguen -- President and Chief Executive Officer
Hey, Chip.
Chip Moore -- Canaccord Genuity Limited -- Analyst
Wondering on AUC and as you've had it for a few months, maybe you can update us on how things are going there? And then some of the initiatives you can do to expand that leasing model?
Anthony Ibarguen -- President and Chief Executive Officer
So there have been -- the integration is going as planned. The results are actually coming in a little bit on the higher side of plan, but basically on plan. And the level of integration and cooperation between our Seven Seas team and the AUC team has been terrific. So we're really happy. They continue to place new contracts at a rate that is at or slightly above what we expected. So overall we're really happy with the performance of AUC at this point. No surprises.
Chip Moore -- Canaccord Genuity Limited -- Analyst
Great. And, Doug, maybe on the pipeline, whether it's portable or wastewater, maybe you can update us on some certain regions, whether it's Texas, South America? Just a little more color on some of the opportunities you're seeing.
Douglas Brown -- Chairman
Okay, well, Tony mentioned that we do have an active pipeline on the desal side, and now we get to improve or add to that pipeline on the wastewater side in a more meaningful way. Texas is still plugging along. There has been a fair amount of activity done in Corpus Christi with the government trying to figure out what to do. They have pretty much acknowledged they have to do something and that desal does seem to be the most viable option and we believe we've got the most advanced proposal in front of them. But that's still a government decision and government decisions are very difficult to predict. So I don't want to go in there.
And Africa, there are multiple opportunities in Africa besides Ghana. Africa suffers from pretty significant drought conditions in much of Africa and desal seems to be the only opportunity there. But there's also been a lot of noise lately about South America. Mining industry has come back -- is coming back and number of opportunities in the mining industry is growing. A lot of mining projects got put on hold three or four years ago when copper crashed. And now it seems that the activity level is picking up again. So we're optimistic that something interesting for us is going to happen there as well.
Chip Moore -- Canaccord Genuity Limited -- Analyst
Got it, appreciate that. And maybe just one housekeeping one. I think you've referenced some repair and maintenance expenses this quarter, maybe you can just size that and what was that? Thanks a lot, guys.
Anthony Ibarguen -- President and Chief Executive Officer
Lee?
Lee Muller -- Chief Financial Officer
Yeah, on the Seven Seas side, there were some elevated repairs and maintenance. They were largely planned for the quarter. As you know, it's hard to predict when repair and maintenance would happen generally, but that's why we prefer to look at repairs and maintenance across the year rather than in any one particular quarter. But in this particular case, they were planned and they just happen to be elevated. But again, looking at over the course over the year is the right way to assess it.
Chip Moore -- Canaccord Genuity Limited -- Analyst
Understood. Thanks a lot.
Anthony Ibarguen -- President and Chief Executive Officer
Thanks, Chip.
Operator
Thank you. Our next question comes from the line of Rob Brown with Lake Street Capital Markets. Please proceed with your question.
Rob Brown -- Lake Street Capital Markets -- Analyst
Good morning.
Anthony Ibarguen -- President and Chief Executive Officer
Good morning, Rob.
Douglas Brown -- Chairman
Good morning, Rob.
Rob Brown -- Lake Street Capital Markets -- Analyst
Just wanted to get an update on kind of the market trends on the Quench side of the business. Have you seen an acceleration in the organic growth in that market with some of the shift away from plastic bottles or sort of what are the market trends there currently?
Anthony Ibarguen -- President and Chief Executive Officer
Generally speaking, it's been happening for a while, so I'd say it's pretty consistent. Unfortunately, we don't have great industry market data, that's something -- because it's so fragmented, I think it's not something that has been invested in much, so I don't have any great data on that. But just generally, I'd say, eight years ago or so when I started, 80% of our inbound leads were for the replacement of 5 gallon jugs, that's probably down to 50% now. So we're getting to the point where people are looking to upgrade other forms of filtration almost as often as to replace 5 gallon jugs. But our overall market survey that we do have, would suggest that we're still at maybe 25% total penetration.
And when we look to other relatively mature markets like parts of Europe, the target should be about 50-50 between point-of-use technology and bottles. Parts of Asia are north of 75% or 80% point-of-use, so there's aspiration for that potentially down the road. But for right now, we do see still lots of upside in the 5 gallon jug replacement business. But don't have great market data to support. It's something we're looking into to see what we can do to maybe get a little bit more of a statistical view on that.
Rob Brown -- Lake Street Capital Markets -- Analyst
Okay, great. And then you talked a little bit about the product having kind of a recurring run rate now with PHSI, I believe. Could you just give us some more color on what that is and maybe the run rate that that business should have on a revenue basis?
Lee Muller -- Chief Financial Officer
Great question. I think in the script what we're trying to introduce is this concept that we have recurring revenue which we define as contractually obligated payments associated with long-term agreements for, say, desalinated water on Seven Seas for leases for wastewater treatment at AUC and for point-of-use equipment and related services at Quench. And those are anywhere from 3 to 30 year contracts that require the customer to pay no matter what.
Then we have reoccurring revenue, which is -- where there is also a contract, but they are not required to spend a fixed amount every month or every quarter where I cited two examples, one being the indirect dealer networks at PHSI and Wellsys are under contract with PHSI and Wellsys to purchase their equipment when they do purchase equipment. So to the extent that they don't purchase equipment, it's not going to happen. There is no obligation to buy a certain volume each year. But there is a contractual relationship that dictates how that would happen when it happens, and that leads to a very predictable circumstance where those dealers are buying repeatedly year after year.
And then within that, they must use the filters that go with that equipment which also creates a long-term reoccurring revenue stream. And I cited the second example is coffee where customers of Quench, who have Quench coffee equipment are required to buy the coffee supplies from us when they have our equipment. Again, they could stop buying that at some point in time, but they are under contract. So that makes for a sort of two versions of sticky. We have the stickiest revenue at the top, we have the next level which is reoccurring, and then we have just straight up one-time purchases that happen from time-to-time.
At AUC, there are certain circumstances where the appropriate delivery of the service is through a fixed plant that they will buy and own. In the case of Quench, there are circumstances where they'll buy equipment and use it without ever buying again and so that's the third level. As far as expectations for growth in the reoccurring, we would say it's similar. It's growing with the market. This is -- if I focus primarily on the Quench side of the reoccurring dealer business, we would expect that to grow in the mid to high single-digits overall with the market as we see it on the rental side.
Rob Brown -- Lake Street Capital Markets -- Analyst
Okay, great. That's very helpful. Thank you.
Lee Muller -- Chief Financial Officer
You bet.
Operator
Thank you. Our next question comes from the line of Jeff Van Sinderen with B. Riley FBR. Please proceed with your question.
Jeff Van Sinderen -- B. Riley FBR -- Analyst
Good morning. I think you mentioned Corpus Christi and South Africa, but didn't hear anything on Saudi Arabia for Seven Seas. Just wondering what your latest picture is on desal on Saudi Arabia and maybe how we should think about your approach to that region?
Anthony Ibarguen -- President and Chief Executive Officer
Well, we do have an office in Dubai. We are active at evaluating opportunities there. We haven't been successful at completing a deal there. Our view is that -- so the Middle East is the largest desal market in the world. There is a -- and there are a lot of installed desal plants in the Middle East, in the Saudi. And we are actively working on opportunities there. My guess would be would be that if we were to do something in the Middle East, it would more likely be an acquisition versus a greenfield just because the population of existing desal plants is so big. But again, trying to evaluate them and find an opportunity and negotiate a successful purchase, it takes time in the Middle East and we have some good local partners, we have a very good partner, a local partner in Saudi that we work with. We think we'll get there eventually, but at this point, we're still in the evaluation stage in terms of evaluating opportunities, but it is a market that we're actively looking at.
Jeff Van Sinderen -- B. Riley FBR -- Analyst
Okay, fair enough. And then just turning to Quench for a minute, wanted to follow-up there on, I guess, obviously, a lot acquisitions, but what are you seeing in terms of overall customer retention metrics? I think you mentioned a positive trend there and then also conversion trends? Anything else to add there?
Anthony Ibarguen -- President and Chief Executive Officer
On customer retention, yes, we did cite a reduction in our customer attrition rate or inversely the increase in customer retention. That's now at about 7.5% of unit turnover year-over-year which we track on a trailing 12 month basis. I think it's important to note, I didn't mention it in the script, but we find that typically half of that or so is related to existing customers that are reducing in part their portfolio, the use of point-of-use coolers. And by the way, correspondingly, we have a good chunk of our organic growth comes from existing customers who add coolers to offset that.
So it's not -- even at 7.5%, we're not losing customers unnecessarily at that pace where we're simply reducing units and that's how we track it. So the retention actually has improved, we think, significantly. We track customer satisfaction very carefully and that has been improving as well. So we're quite pleased with the service levels that Quench has been able to deliver to its customers. With respect to conversion, can you tell me what you mean by that?
Jeff Van Sinderen -- B. Riley FBR -- Analyst
Yeah. I was just thinking in terms of conversions of new customers. In other words, converting them to being an active customer versus not being a customer.
Anthony Ibarguen -- President and Chief Executive Officer
Yeah, yeah. Great. So pretty consistent, so we get 2,500 or so inbound leads every month pretty consistently and qualify them down to about half that number. So half of them are discarded as non-leads and then there's a pretty consistent conversion rate of 20% -- generally speaking 15%, 20% of those convert fairly quickly to become customers. And that's we think above the industry average and it's the result of highly trained and experienced inside sales team that works in collaboration with our field sales team across the country and our national account managers.
Jeff Van Sinderen -- B. Riley FBR -- Analyst
Okay. Thanks for taking my questions and continued success in 2019.
Anthony Ibarguen -- President and Chief Executive Officer
Thank you.
Operator
Thank you. (Operator Instructions) Our next question comes from the line of Pavel Molchanov with Raymond James. Please proceed with your question.
Pavel Molchanov -- Raymond James -- Analyst
Thanks for taking the questions. Your relationship with the Overseas Private Investment Corp as a result of the deal in Ghana, I'm curious whether there are ways to expand or maybe the better word is extend that link in terms of them referring you to other similar kinds of opportunities, whether in Africa or in other geographies or should we look at this as more of a one-off?
Anthony Ibarguen -- President and Chief Executive Officer
Pavel, I think you just hit the nail on the head there. We look at the relationship with OPIC as a strategic relationship. OPIC's mandate is to primarily invest in projects that are backed by American companies and developed by American companies and we're one of the few American companies that invest in water infrastructure overseas, where we're building infrastructure -- water infrastructure platforms. And so they -- OPIC looks at our relationship with us more as a strategic relationship, and we look at our relationship with OPIC as a strategic relationship and something that can significantly improve our competitiveness.
The lending terms that we can get from OPIC are far more attractive than what we can get from commercial banks. And so it makes our offering more competitive to -- in a competitive environment. So, we absolutely look at the relationship with OPIC on a strategic level. We have already identified other opportunities to work on together and we plan on using -- nurturing that relationship to develop more opportunities in the future.
Pavel Molchanov -- Raymond James -- Analyst
Okay, that's good to hear. And then turning to the balance sheet, so you have about $250 million of net debt at year-end, and given your adjusted EBITDA guidance for '19, so we're looking at just over 3 times kind of leverage on a forward basis. Is that about as high as you'd want to get or am I wrong about that?
Lee Muller -- Chief Financial Officer
I think the range that we are comfortable given our recurring revenue is probably closer to 4 times on a net debt basis, but that will just be a function of the timing of acquisitions and other spend relative to the contribution of incremental EBITDA. But we would look to keep it in that 4 to maybe 4.25 times net leverage ratio range.
Pavel Molchanov -- Raymond James -- Analyst
Okay. All right, very helpful. Thank you, guys.
Anthony Ibarguen -- President and Chief Executive Officer
Thanks, Pavel.
Douglas Brown -- Chairman
Thanks, Pavel.
Operator
Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'd like to turn the floor back to Mr. Ibarguen for any final comments.
Anthony Ibarguen -- President and Chief Executive Officer
Thank you, operator. Thanks for those great questions. Well, thanks for the -- to the AquaVenture team for an outstanding performance during 2018. Thanks also to our shareholders for your great support as we continue to grow this enterprise. And we're certainly looking forward to continued growth and a great 2019. So thanks for your attention we'll talk to you next quarter.
Operator
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Duration: 44 minutes
Call participants:
Courtney Denihan -- Investor Relations
Anthony Ibarguen -- President and Chief Executive Officer
Douglas Brown -- Chairman
Lee Muller -- Chief Financial Officer
Vlad Bystricky -- Citi -- Analyst
David Lu -- RBC Capital Markets -- Analyst
Chip Moore -- Canaccord Genuity Limited -- Analyst
Rob Brown -- Lake Street Capital Markets -- Analyst
Jeff Van Sinderen -- B. Riley FBR -- Analyst
Pavel Molchanov -- Raymond James -- Analyst
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