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AquaVenture Holdings Limited (NYSE:WAAS)
Q3 2019 Earnings Call
Nov 6, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the AquaVenture Holdings Third Quarter 2019 Earnings Conference Call. [Operator Instructions]

At this time, I would 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. Present on today's call are Tony Ibarguen, Chief Executive Officer; Lee Muller, Chief Financial Officer; and Doug Brown, Chairman of the Board.

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

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

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

Anthony Ibarguen -- President and Chief Executive Officer

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

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

Moving to slide 4, we recently announced two acquisitions on October 1st. Mirex AquaPure Solutions, based in Houston, Texas and Flowline Canada based in Edmonton, Canada. Mirex was an early adopter of cross selling ice dispensers into current bottleless water cooler accounts [Phonetic] and delivers high quality service at above average rental rates. It was in business for over 20 years and built up a loyal customer base in the top five US metro area. Flowline, which was a Blueline dealer expands our presence in the top 10 Canadian market and once again demonstrates the value of providing our indirect dealer network with attractive exit opportunities. Both of these acquisitions increased our customer density in important markets enabling margin expansion and improved customer service. We've now completed and integrated four acquisitions in 2019 including, Aguaman and Carolina Pure Water Systems, which we discussed on our last earnings call.

These four acquisitions were completed for approximately $21.3 million in aggregate consideration, at approximately 5.4 times adjusted EBITDA and added approximately 7,600 rental units to Quench's installed base which brings Quench's total installed asset base to more than 155,000 company owned rental units.

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

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

Within our desalination business as previously announced, we are happy to close a nine year extension and amendment of our agreement with the Emerald Bay development in Great Exuma in the Bahamas. Our relationship with this valued customer, whom we observed since 2009 will now be extended through at least 2028. This is the second contract extension we've completed this year.

You may recall that in March, we extended our agreement with Limetree Bay Terminals in the US Virgin Islands by an incremental three years to 2024 and also secured a contract to increase our water production capacity by an additional 1 million gallons per day using both existing and new equipment. And we're pleased to announce today that we've completed that capacity expansion as of November 1st.

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

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

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

Lee Muller -- Senior Vice President and Chief Financial Officer

Thanks, Tony. As Tony mentioned, we are pleased to report another strong quarter with significant year-over-year revenue and adjusted EBITDA growth in both segments. On slide 5, Seven Seas Water reported revenues of $22.2 million during the third quarter of 2019, a 42.5% increase over the prior year.

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

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

Turning to Quench results on slide 6, Quench reported revenues of $30.7 million in the third quarter, a 44.7% increase over Q3 2018. This increase included organic growth of 18.2% in the third quarter, which was driven by strong performance in both the direct rental and indirect businesses. Inorganic growth was 26.5% over the prior year period, bolstered by the PHSI and Bluline acquisitions in December 2018 and the more recent Aguaman and Carolina Pure acquisitions in 2019.

Quench's gross margin of 48.9% decreased from 51% in the prior-year period largely due to elevated depreciation and amortization expense related to higher rental revenues. However, if you exclude depreciation and amortization expense from the cost of revenues, our rental gross margin increased for Q3 2019 compared to the prior year quarter. Product sales gross margin of 39.5% continues to show improvement over the prior year.

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

On slide 7, I'd like to provide a brief update on select balance sheet and cash flow items. As of September 30th, 2019, cash, cash equivalents and restricted cash was $113.8 million and our total debt was $317.6 million, resulting in net debt of $203.8 million. This includes the net cash proceeds of approximately $75 million from the completion of our first follow-on offering in July issuing 4.7 million ordinary shares, including the exercise of the underwriters' option.

Our current net debt leverage ratio is now approximately 2.7 times on a trailing 12-month basis. Through the first nine months of 2019, we generated operating cash flow of $20.2 million, as compared to $22 million in the prior year period. This decrease is largely due to higher working capital needs to fund our substantial growth, specifically the 15.3% year-to-date organic growth at Quench, higher cash interest expense related to the $150 million flex [Phonetic] of our corporate credit facility late last year. And the adoption of the new lease accounting standard which we categorize certain costs from investing activities to operating activities for new leases entered into in 2019.

Capital expenditures of $28.6 million for the nine months ended September 30th, 2019 were $15.7 million higher than the prior year period which was primarily due to supporting the growth of our wastewater treatment business as well as the growth related activities within the desalination business mentioned earlier related to volume capacity expansions.

Please keep in mind that our capital expenditures are primarily growth related, which in turn are expected to generate incremental revenue, adjusted EBITDA and operating cash flow for the Company in future periods.

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

Anthony Ibarguen -- President and Chief Executive Officer

Thanks, Lee. Turning to slide 8, our robust organic performance and the effective integration of acquired businesses has driven consistently strong results throughout 2019. So, we are increasing our guidance expectations for the full year of 2019. We now anticipate that total revenues will be in a range of $197 million to $201 million. Adjusted EBITDA will be $72 million to $75 million and adjusted EBITDA plus principal collected will be $77 million to $80 million.

As a reminder, this outlook includes all completed acquisitions to date including the two Quench acquisitions announced on October 1st, but excludes the impact of any future projected acquisition. In closing, our strong performance throughout the first three quarters of 2019 continue to exceed expectations. Our strong and growing company-owned water purification assets portfolio produces consistent results based on the contractually recurring nature of the revenue it generates.

We look forward to seeing this trend continue into deploying the proceeds from our follow-on offering into our active pipeline of growth opportunities across both segments. On behalf of our Executive team and Board of Directors, we'd like to thank our dedicated employees across the world. And on behalf of all of them, we thank you for your continued interest and support as we remain committed to our mission of delivering solid results for our shareholders in creating clean water solutions for customers around the world.

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

Questions and Answers:

Operator

Certainly, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Andrew Kaplowitz of Citi. Please go ahead.

Andrew Kaplowitz -- Citi -- Analyst

Hey, good morning, guys.

Anthony Ibarguen -- President and Chief Executive Officer

Good morning.

Andrew Kaplowitz -- Citi -- Analyst

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

Anthony Ibarguen -- President and Chief Executive Officer

Yeah, great question, Andy. I know it's starting to stream credibility here and the game here.

Andrew Kaplowitz -- Citi -- Analyst

[Indecipherable]

Anthony Ibarguen -- President and Chief Executive Officer

Yeah, yeah. Well listen, it's -- Here's the thing, our rental business, really the core business continues to be, it was in the nines [Phonetic] this quarter, so it's growing dynamically, the team is really doing a great job of cross-selling and up-selling customers and gaining new customers out there. So we're really doing a great job.

But the -- it's the indirect business that is not as predictable. It's not contractually recurring. We have great dealers out there who are killing it and doing a great job, but we are still reluctant to call that as a consistent double-digit grower. It is probably going to continue in the fourth quarter in that direction. But for 2020 we're not quite ready to do that. And I still think the rental business is one that is best called as a mid to high single digits, maybe a little bit more on the higher side of that as we are seeing the market really move in our direction.

Andrew Kaplowitz -- Citi -- Analyst

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

Anthony Ibarguen -- President and Chief Executive Officer

That would be the plan. That would be the plan. I think we see Quench continuing to look at mid to maybe higher single digit number consistently. AUC as you heard has been pretty much spot on with the acquisition model and plan from a year ago and we continue to see great opportunities.

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

Andrew Kaplowitz -- Citi -- Analyst

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

Douglas Brown -- Chairman and Founder

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

Andrew Kaplowitz -- Citi -- Analyst

Easy enough. Thanks guys.

Douglas Brown -- Chairman and Founder

Okay. Thanks, Andy.

Operator

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

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone.

Anthony Ibarguen -- President and Chief Executive Officer

Good morning, Dean.

Lee Muller -- Senior Vice President and Chief Financial Officer

Good morning, Dean.

Deane Dray -- RBC Capital Markets -- Analyst

Hey, I'm not sure you disclosed the terms of the Bahamas extension, but anytime we've seen these in the past, you typically have a modest price concession for increase in volume and ends up being a win-win for everyone. Was that pattern here evident in the Bahamas expansion too?

Douglas Brown -- Chairman and Founder

Yeah. Small price concessions, but it doesn't really have a meaningful impact for us, but we get the extra nine years.

Deane Dray -- RBC Capital Markets -- Analyst

Good and just remind us what, in order of near-term where there are extensions coming up?

Douglas Brown -- Chairman and Founder

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

Deane Dray -- RBC Capital Markets -- Analyst

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

Douglas Brown -- Chairman and Founder

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

Deane Dray -- RBC Capital Markets -- Analyst

Got it. And then just last one for me. On AUC, it's been great to see the continued lease growth there. I'm still watching for any signs that there might be some product extensions of using them brands, and that would be for the wastewater side. Is there -- is that being looked at, any pilot programs, what might the timeframe be?

Douglas Brown -- Chairman and Founder

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

Deane Dray -- RBC Capital Markets -- Analyst

Absolutely, and congrats on the quarter. Thank you.

Douglas Brown -- Chairman and Founder

Thanks, Deane.

Anthony Ibarguen -- President and Chief Executive Officer

Thanks, Deane.

Operator

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

Rob Brown -- Lake Street Capital Markets -- Analyst

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

Anthony Ibarguen -- President and Chief Executive Officer

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

Douglas Brown -- Chairman and Founder

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

Rob Brown -- Lake Street Capital Markets -- Analyst

Okay, great. And then -- maybe on the capex expectations for this year and kind of growth, sort of what are your capex expectations?

Anthony Ibarguen -- President and Chief Executive Officer

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

Rob Brown -- Lake Street Capital Markets -- Analyst

Okay, great. Thank you. I'll turn it over.

Anthony Ibarguen -- President and Chief Executive Officer

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

Operator

The next question comes from Chip Moore of Canaccord Genuity. Please go ahead.

Chip Moore -- Canaccord Genuity -- Analyst

Good morning. Hey guys, congrats on the strong results.

Anthony Ibarguen -- President and Chief Executive Officer

Thanks, Chip.

Chip Moore -- Canaccord Genuity -- Analyst

Wondering if you could drill in, Tony, a bit on Quench some phenomenal SG&A leverage. Maybe you can talk about anything specific. You're doing a learning there and how you think about the trajectory of leverage for that business?

Anthony Ibarguen -- President and Chief Executive Officer

Yeah, thanks. No that was always the plan. And this happened to be one of those quarters where given the dynamic growth, both organic and the acquisitions, we were able to start to see some of that trickle all the way through -- that should continue, that is the operating leverage, that we've always loved about this business, between the sticky contractual revenue. And the fact that we've invested in building scale in this business for the better part of the last decade, to be able to be the one consistent, fully integrated national provider of these services, but that has required significant build-out of centralized and decentralized support infrastructure.

There are still opportunities for us to get even more leverage as we look forward. Right now we're in the middle of putting in place a revamp of our national distribution infrastructure. But on the corporate back office, on the G&A side in particular, given the implementation of some new cloud-based IT systems over the past several years. We're starting to see that really come through. So I would say we -- at the beginning of, at the end of last year, we're running in the mid-20%s in EBITDA margins. Now, this quarter we're at 30% [Phonetic]. And that might float a little bit quarter-to-quarter into the high-29%s, low-30%s, but we would expect that to continue to grow as the top line growth.

Chip Moore -- Canaccord Genuity -- Analyst

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

Anthony Ibarguen -- President and Chief Executive Officer

Yeah. That is the key that will be the measure. It's little bit early. We just -- we just launched it, but met with great enthusiasm, it is a differentiator. We're starting to having now established the national footprint and gain access to -- more and more larger national accounts are starting to leverage branding. John Whalen, our Head of Sales; Lisa Guillaume, Head of Marketing have done a great job of starting to get creative and innovate, so that we're not just the next too [Phonetic], cooler provider and being able to provide consistent water around the country that we know has an incredible taste and is a really clean alkaline PH-balanced water is something the whole team is very excited about.

And the early reception has been very strong. Ultimately, the measure will be the ASP, as you said. And yes, we would expect that we'll be able to get a very high return for a small incremental cost, and the filtration equipment will be getting rents that will be significantly higher than units without this kind of filtration.

Chip Moore -- Canaccord Genuity -- Analyst

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

Anthony Ibarguen -- President and Chief Executive Officer

Yeah. I'll cover Quench then maybe Doug can comment a little bit on the Seven Seas pipeline. The Quench pipeline continues to be strong. Four [Phonetic] deals so far this year we have a pretty steady drumbeat. This is no different than you would have heard me say, in any prior quarter at any point in time, there are handful of entrepreneurs who are considering the possibility of doing something else or joining our team or taking some chips off the table. We, as you know are quite opportunistic about this.

We certainly have targeted strategic conversations with certain of our dealers and others that participate as competitors in the market, but we're also, we welcome doing this on their timetable. We're at over 275 dealers now and so at any point in time there is always a series of conversations happening. That gives us great confidence that we can continue at least at the pace that we're on, if not a bit a bit faster as we go forward. So more to come on that I think.

Douglas Brown -- Chairman and Founder

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

Chip Moore -- Canaccord Genuity -- Analyst

All right. Great. Stay tuned. Thanks.

Anthony Ibarguen -- President and Chief Executive Officer

Thanks, Chip.

Operator

The next question comes from Pavel Molchanov of Raymond James. Please go ahead.

Pavel Molchanov -- Raymond James -- Analyst

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

Anthony Ibarguen -- President and Chief Executive Officer

That is an accurate statement.

Lee Muller -- Senior Vice President and Chief Financial Officer

That is correct. Yeah. And you know, this -- some parts of our business has some variability, Q4 can be softer. And so we -- we thought this would be a fair update to the ranges that we had provided previously and obviously it would be our hope and expectation to exceed them by the time it's all said and done [Phonetic].

Pavel Molchanov -- Raymond James -- Analyst

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

Douglas Brown -- Chairman and Founder

There are still new builds. We refer them as greenfields in our pipeline. I'll be honest, if you look at our pipeline is probably 25% to 30% greenfield, and 72% to 75% brownfield acquisitions. And that's just because the population of existing desal plants far exceeds the number of open RFPs outstanding for greenfield project. So there is just a bigger universe to pick from on the brownfield side. And, but we still do have greenfields. We look at and pursue, although we think our strategic advantage and our competitive advantage is greater in the brownfield side.

Pavel Molchanov -- Raymond James -- Analyst

Got it. Okay. That's helpful. I appreciate it.

Anthony Ibarguen -- President and Chief Executive Officer

Thanks, Pavel.

Operator

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

Jeff Van Sinderen -- B. Riley FBR -- Analyst

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

Douglas Brown -- Chairman and Founder

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

Jeff Van Sinderen -- B. Riley FBR -- Analyst

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

Douglas Brown -- Chairman and Founder

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

Anthony Ibarguen -- President and Chief Executive Officer

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

Jeff Van Sinderen -- B. Riley FBR -- Analyst

Okay, great, thanks. Continued success.

Anthony Ibarguen -- President and Chief Executive Officer

Thank you, Jeff.

Douglas Brown -- Chairman and Founder

Thank you.

Operator

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

Anthony Ibarguen -- President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Courtney Denihan -- Investor Relations

Anthony Ibarguen -- President and Chief Executive Officer

Lee Muller -- Senior Vice President and Chief Financial Officer

Douglas Brown -- Chairman and Founder

Andrew Kaplowitz -- Citi -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Rob Brown -- Lake Street Capital Markets -- Analyst

Chip Moore -- Canaccord Genuity -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

Jeff Van Sinderen -- B. Riley FBR -- Analyst

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