Consolidated Water Co Ltd (CWCO) 2005 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Consolidated Water third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. [OPERATOR INSTRUCTIONS] This conference call may include statements that may constitute forward-looking statements usually containing the words believe, estimate, project, intend, expect or similar expressions. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include but are not limited to continued acceptance of the Company's products and services in the marketplace, changes in its relationships with the governments in the jurisdictions in which it operates, the ability to successfully secure contracts for water projects in other countries, the ability to develop and operate such projects profitably, and other risks detailed in the Company's periodic report filings with the Securities and Exchange Commission. By making these forward-looking statements, the Company undertakes no obligation to update these statements for revisions or changes after the date of this conference call. Thank you, it is now my pleasure to turn the floor over to your host, Rick McTaggart, President and CEO. Sir, you may begin your conference.

Thank you. And good morning, ladies and gentlemen. Thank you once again for taking time from your busy schedules to participate in this call, and to listen to news about what we think is a very exciting third quarter and year for the Company. Just to let you know, I'm calling in today from Nassau, we had some meetings over here this week, and Mr. Joe Pivinski, our CFO is also on the call and he's calling in from our office in Deerfield Beach, Florida. Good morning, Joe.

Good morning. Good morning, all.

I'd like to start off by highlighting a couple of main points about the third quarter and more recent events then I'll turn the discussion over to Joe to give you an overview of the numbers. For the benefit of our friends in the Bahamas that may be listening on the call, all of the water volumes that I quote are in U.S. gallons, and to convert those to Imperial gallons which are used in the Bahamas, you simply divide by 1.2.

Having said that, the Company has been very busy with the Blue Hills desal plant project in Nassau. Actual construction of the plant commenced on site in the third quarter. We completed two financing initiatives in the Bahamas to provide financing for that project. One being a $10 million Bahamian bond placement in early July, and the second being a Bahamian depository receipts offering of CWCO-backed securities, and that closed earlier this month on the 4, of November. These financing initiatives raised about 16.6 million Bahamian dollars, and for your information, the Bahamian dollar is pegged to the U.S. dollar at 1 to 1.

In late October, we completed the expansion of the Windsor plant, which is also in Nassau, by adding 1.5 million gallons of extra capacity that we will initially use to fulfill our obligations under the Blue Hills contract and then to supplement capacity of our existing water production equipment at the Windsor site. And we presently have six containerized water production units on site, which will stay there until the final phase of Blue Hills is commissioned in mid summer, 2006. Our retail water sales, which is primarily the Cayman Islands market, have almost returned to pre Ivan levels for the first nine months of the year, and we're very excited about that. We continue to see the rebuilding efforts make a lot of progress in Cayman, and Grand Cayman. And while our commercial customers within the retail segment still trail last year's sales, our residential customer sales have increased significant -- or have experienced significant growth for the first nine months and for the quarter.

Our bulk water sales growth has been strong because of additional demand in our Cayman and Belize markets, and it could have been better if it had not been for these continuing operational problems at the Windsor plant, which we are making good progress on, and resolving, and we've -- obviously management has given this their full attention until it's resolved. I'd like to now just turn the call over to Joe to talk about our third quarter and nine-month results in more detail. Joe?

Thank you, Rick. Good morning, again, everyone, and thank you for participating. Fortunately, all my comments will be in U.S. dollars, and as Rick has indicated, there is parity with the Bahamian dollar so there's nothing to divide at all. To add some humanity by way of voice to numbers we did report in our Form 10-Q yesterday, total revenue increased from 5.3 to $6.2 million, the short side of an 18% increase, and that was the result of retail sales increasing about $0.5 million for the quarter, or 19.2%, and a bulk sales increase of about 300,000 for the quarter. And on a percentage basis, that was up 12.4%. And as an aside, I should indicate that as certainly you all know, Cayman itself was devastated, so to speak, by Hurricane Ivan, which occurred in mid-september last year, so just to put some of these numbers for the third quarter ending September 30, in context, the -- we lost only a couple of weeks for the third quarter in terms of production capacity on Cayman in the prior year.

Moving on to total gross margin or gross profit, if you prefer, the margin did increase from 1.9 million to 2.2, but on a percentage basis, it narrowed somewhat, about 3.5% from 36.8 to 35.5. On the resale side, margin increased very comfortably from 49.3% to 55.8%, and about half this increase was due to volume -- due to a volume variance where the actual increase in margin contributed on the dollar side, the other 50%. The bulk margin was disappointing, being reduced to the short side of 15%, as opposed to last year's third quarter margin of 25%. Again, this is almost 40% increase in margin will be discussed by Mr. McTaggart when I finish with this numerical summary of results, but certainly was cause for some concern at this point at consolidated.

General and administrative expenses, excuse me, were up about 4% for the quarter, but in terms of contribution vis-a-vis revenue, it was -- there was an 11% decrease reflected, and for the nine month period, that trend is somewhat positive, in terms of a reduction in reporting G&A costs. Other income, which was down about 6.5% is feeling the effects of rising U.S. and LIBOR rates, where most of our debt is pegged, and we would expect, as I think all of you would that interest cost to continue to increase slightly over the next six months or so. Net income, after adjusting for a loss in 2004 of 387,000 recognized, gives us comparable income from operations where the number to compare to the 1.009 million becomes 811, nevertheless still had an increase of $200,000 or so is about a 24% increase. All of the earnings per share numbers naturally in the Q are adjusted for the recent split in late August, and the basic EPS for the quarter, up $0.05 to $0.09, as adjusted, and diluted is now $0.08 for the quarter ended, as compared to $0.03 for the prior year. In terms of cash and cash flow, cash flow approximated about 3, 3 million-plus for the quarter. We had in excess of $12 million on the balance sheet at the 9/30 quarter end, as Rick has mentioned, that's been supplemented by recent proceeds from an equity offering, but just completed last week in the Bahamas. And of course, supplemented by the -- or includes the $10 million which was raised at the beginning of the quarter.

We are comfortable with our current debt-equity ratio, before and after the recent equity transaction. Certainly comfortable with our current leverage, still maintain a borrowing capacity which, to repeat myself, we are comfortable with also. And as you know, once again, we have declared a dividend payable the last day of January next year to record holders as of the end of the year. With that, I will turn this back to Mr. McTaggart to continue his comments on operations.

Yes, thanks very much, Joe. I'd like to actually just recap some of the projects that we've already announced, and talk about some other opportunities we see in the market as well. The Windsor plant in Nassau is now online with the expanded capacity as of the end of October. This extra capacity will be online until Blue Hills is commissioned midsummer of next year. Obviously we hope to negotiate a longer term arrangement for that capacity with the Bahamas government. After Blue Hills is commissioned.

We're progressing nicely on Blue Hills, that plant, which will be 7.2 million gallons per day production will be our single largest plant when it's completed next summer, and just to recap, it's a 20-year take or pay contract with the Bahamas government and initially it's for 4.8 million gallons per day, and at the government's option, they can increase that take or pay amount to 6 million gallons per day. Also in the Bahamas, we have a team of industry experts that is making very good progress on our non-revenue water reduction project in Nassau. And that will save the Bahamian government at least 435 million gallons of lost water per year when that project is completed in conjunction with the Blue Hills project. We continue construction in Tortola on our second desalination plant, which we expect to produce 600,000 gallons per day and that will be online in mid-2006. When that plant is completed, along with our existing Boggers Bay plant, the total capacity on on Tortola will be 2.3 million gallons per day.

We recently announced that we were awarded a seven-year extension to our operating agreement for the lower valley desalination plant in Grand Cayman. That plant is currently capable of producing 800,000 gallons per day, and under terms of the extension, that will be expanded to 1 million gallons per day, and that will be online, the extra capacity will be online in early January 2006. And we're very excited about this extension. We've had a relationship with the Water Authority, the government utility in Grand Cayman, since 1989, and we think that it's, the extension, the second extension we've received from them on a plant is very indicative of a satisfied customer. We're currently designing an expansion for our plant in Ambergris Caye Belize at our customer's request. The plant will be increased by -- plant capacity will be increased by about 20%, or 100,000 gallons per day, and we expect to have this expansion online early next year, in time for the peak winter tour season in Ambergris Caye.

We recently signed -- turning to a different sort of market, we recently signed a nonbinding memorandum of understanding with a company in Barbados called New Water, Inc., and their business is primarily designing and operating wastewater treatment and reuse plants in the eastern Caribbean. This MOU envisages that the two companies would work together on projects that require both our experience in sea water RO and their experience in wastewater treatment and reuse. We're actually looking at a couple of projects that have a potential for both of us to cooperate, to carry out within our -- within CWCO's existing areas, and we as -- as always, we continue to field inquiries for new projects, both within our existing operating area, and in other Caribbean countries, and we're actively working on those projects and we will make announcements if and when these projects -- if and when it's appropriate. I'd like to now open up the call for any questions. If you could come back on there?

[OPERATOR INSTRUCTIONS] Your first question is coming from Michael Gaugler with Boenning & Scattergood.

Just one quick question for you. I was wondering if you could give us a little bit more color on what went into the increase in the bulk cost of sales?

Well, essentially, that is directly related to this filing issue at the Windsor plant. When the elements, the membrane elements foul, it costs us more energy to produce the water, and it also reduces our production capacity. So the unit cost per gallon increases.

Okay. And when would you anticipate that you'll have all that wrapped up and we'll see a return back to more, I guess I could characterize more normalized levels?

Well, I can tell you that we're working very hard on it at this point. We have a better understanding of what the problems are, and we are taking steps to resolve it. So we hope that that will pay off soon.

All right. That's all I had. Thank you, Rick.

Thanks, Mike.

Your next question comes from Richard Paget with Morgan Joseph.

With the six container RO units that you have, did you guys purchase those recently?

Yes, we did. Yes.

Okay. So once everything's kind of back to normal and Blue Hills is up, will you guys keep those in inventory, or you have other plans for them?

Well, we have a number of options that we're looking at. As I mentioned, Nassau still needs extra capacity, the Bahamas, the out islands are potential sites for some of these plants, and we certainly have use for them. After their commitment here is done.

Okay. And then, I guess, more of a housekeeping type of question, do you have volumes for the quarter for both retail and bulk?

We haven't announced those numbers. We do have that. I don't have it available in front of me, unfortunately, no.

Okay. And then finally, next year with the stock options expense, I know you guys outline it in the Q's. I mean, is -- can we pretty much expect the same levels of this year going into next year?

Yes, I would think so. I mean, the option expense that is in the accounts now is related to staff, some long-serving staff that get options. There's no executive bonuses and I wouldn't expect that you'd see any big change in those numbers, no.

Okay, so it's about a $0.01 to $0.02 a year total -- maximum?

Yes.

Okay. That's it for me, thanks.

Thank you, Richard.

Your next question is coming from Peter Treff with Biscoff Partners.

I am new to the stock so I have a few questions, and if they seem rather naive, I apologize. The first thing is, I notice that you have a -- on the balance sheet, you have a preferred stock outstanding, and I just wondered, is that a tradable instrument, is it quoted or listed on any exchange?

No, it's not.

So it's a private placement. And are the owners of it institutions, or is it -- can you give me a little background, just a couple of words on it?

It's a staff incentive plan that was, I guess, created back in the mid-'80s. So it's staff.

Okay. Great. In listening to your presentation, and you talk a lot about the Caribbean, I'm wondering if you could maybe just say a few words about your agreement with the guys up in Canada, I guess it's Xenon?

Well, let me clarify that, it's not an agreement with Xenon, it's an agreement with a company in Barbados, and they are the distributors for Xenon, and Xenon has some ownership interest in that company.

Oh, I see. Okay. So that's how it ties in. All right. So I'll look that up. That's the Newfields?

New Water.

New Water, okay. Then I was curious, given the technology that you have and the success that you have in the Caribbean, are you working on or do you have anything or have said anything about projects in, for instance, Mexico, California, or the Middle East? On the desal side?

We have looked at projects in the past in Mexico, the other two regions, no. We have -- well, essentially we have a lot of work on our plates right now just in our existing market areas, and we find that we have the expertise and the experience with the local governments to leverage that right now. We haven't looked at doing projects outside of the Caribbean and Latin American region yet.

I see, okay. And could you -- could you give me just a general sense as to what the services revenues are as opposed to the retail and bulk water sales?

Services revenue are related to management agreements that we have with the various operating entities in the Caribbean, and the ones that aren't consolidated in our accounts, account for the bulk of that services revenue. We're currently doing a desalination plant in Tortola and we're getting engineering fees from that.

Okay. Thank you very much, appreciate it.

No problem, my pleasure.

[OPERATOR INSTRUCTIONS] Sir, there appears to be no more questions.

Okay, thanks, I'll just say a couple of words to close it, then we'll sign off. I'd just like to thank everybody again for your continued interest in the Company, and I hope that you share our belief that desalination business and the Caribbean market area, presents a great deal of opportunity for a company like CWCO, that has a solid track word and over 30 years of expertise in seawater desalination. Thank you all very much and I wish you a very happy holiday season and new year.

Thank you.

If you'd like to listen to a replay of this call, you can dial for domestic calls (877)519-4471, for international calls, (973)341-3080, with a pin number of 6679358. The start time is today, November 10, 2005, at 1:30 p.m. eastern standard time, and will be available until November 17, 2005.