Consolidated Water Co Ltd (CWCO) 2005 Q4 法說會逐字稿

At this time I would like to welcome everyone to your Consolidated Water Company conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS)

Please note 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 relationship with the governments or the jurisdictions in which it operates; the ability to successfully secure contracts for water projection in other countries; the ability to develop and operate such projects profitably; and other risks detailed in the Company's period report filings with the Securities and Exchange Commission.

By making these forward-looking statements, the Company undertakes no obligation to update these statements for revision or changes after the date of this conference call. Now for your host, Mr. Rick McTaggart, President and CEO. Sir, the floor is yours.

Good morning, ladies and gentlemen. Thank you for taking time from your busy schedules to listen to us this morning and to hear about the recent events and our performance during 2005.

I'm calling in this morning from Grand Cayman; and with me is our Chairman of the Board, Mr. Jeffrey Parker. Also on the line is Mr. Joe Pivinski, our CFO; he is calling in from our office in Deerfield Beach, Florida.

I'd like to start off by giving you an overview of some of the main things that affected our business in 2005 and how our business is looking so far in 2006. Then I will turn the discussion over to Joe to give you an overview of the numbers.

Our retail water sales, which are comprised primarily of our Cayman operations, exceeded our pre-Ivan levels for 2005, which was very exciting for us. Retail water sales increased 10.6% over 2004 levels.

Although the tourism numbers still indicate that the stay-over tourists are down below pre-Ivan levels, our water demand certainly has not reflected that at the end of 2005 and then early 2006.

So far, the first two months of 2006 have been outstanding. We're presently benefiting from demand from two golf courses in Grand Cayman that are growing in new grass, so we would not expect these demand levels to carry through for the whole year. But it certainly is an exciting start for 2006.

We are very encouraged by the number of new construction projects within our franchise area in Grand Cayman, including the Caymana Bay project, which commenced construction early last year. This project is essentially a new town that will include houses, condominiums, shops, a school, theaters, and a marina. We expect this project to generate new water demand as it develops over a period of several years.

In fact water demand growth in Grand Cayman has been so good that we're presently reevaluating whether we need extra production capacity. We will add that capacity if and when it is required.

Turning to our bulk sales, growth was very good in 2005 with a 13.8% increase in sales. That is primarily because, again, of additional demand in our Cayman market and to a lesser extent because of higher sales in our Belize market.

Although this particular item did not contribute to 2005 sales, we completed the expansion of our Lower Valley Plant in Grand Cayman in early January, increasing the production by 260,000 gallons per day; and secured a seven-year contract extension with our customer, the Water Authority of the Cayman Islands.

We are currently completing the expansion of our Belize plant by 100,000 gallons per day. That will enable us to obviously sell more water to our customers, but it will also reduce our per-gallon unit energy cost for production. This expansion is expected to be completed early in the second quarter of this year.

Construction by our affiliate of a second desalination plant in Tortola is continuing on schedule, and we expect to see sales from this plant in the third quarter of this year. The eastern end of Tortola, where this plant is located, has for some time suffered from serious water shortages. I'm sure the residents of that area will be very pleased to see this plant online.

Bulk sales for 2005 could have been better had it not been for operational problems we experienced at our Windsor plant in Nassau. We have talked in the previous conference calls about fouling problems that we have experienced there. I'm glad to say that we believe we have identified the cause of the fouling problem and we have taking steps to remediate that problem. The results so far of our corrective work have been very encouraging.

In addition to that corrective work, we commissioned an additional 1.5 million gallons of production capacity at the Windsor plant in Nassau in late October; and this expansion is part of the Blue Hills supply contract. We are currently supplying 1.2 million gallons per day under the Blue Hills contract. The additional capacity is being used to supplement the Windsor plant in order to reduce our production penalties and increase our sales.

In Nassau as well we have been very busy completing the Blue Hills project, the actual new plant that we're constructing there. The interim commissioning date of mid-April is fast approaching. We will be required to have two of the six production units online by that time. Everybody involved in the project views it as our new showpiece plant, and I'm very pleased with the progress that we're making there so far.

Incidentally the Blue Hills plant will be our largest plant to date, capable of producing 7.2 million gallons per day.

As part of the Blue Hills contract, we have also undertaken to reduce water losses on the government's water distribution system in Nassau. We have assembled team of industry experts. I'm glad to say they're making very good progress on the project which will save the Bahamian government at least 435 million gallons of lost water per year when it is completed later this year.

I would like to turn the discussion over to Joe now to give you some financial highlights and numbers.

Thank you, Rick. Certainly good morning, all, and you also have my thanks for your participation. To begin and to summarize from a statistical perspective, and apologies in advance for perhaps some repetition here, as you know we did achieve record revenue of $26.2 million, which was a 12.5% increase from the prior year.

The gross margin did increase about 4%. Net income as reported was down to about $5.5 million, with at year-end 12.2 million diluted shares outstanding, which represented about a 3.5% increase, as the result of both our split as well as our Bahamian depository receipt issue in November in the Bahamas. Diluted EPS came in at $0.45 per share.

Cash flow continued strong throughout 2005. We ended the year with approximately $12 million in cash.

To talk briefly about operations, for 2005 our total capacity increased 20% to about 13.1 million U.S. gallons per day. As Rick has already mentioned, a good portion of that was the result of our expansion of the Windsor plant in the Bahamas.

For the future we expect new completed projects during 2006 to add slightly less than 8 million U.S. gallons per day to our operations, with about 0.5 million or 600,000 gallons of that as a result of the expansion in Tortola; and the remainder the Blue Hills project in the Bahamas.

These added volumes outside Cayman will result in the Cayman volume, as a proportionate share of total water volume, being reduced from about 42% to 26% of our total volume, obviously to some degree diversifying a bit of concentration of risk. As you have already heard, however, we do actually also expect growth in Cayman.

In terms of water deliveries in our retail segment, most of you are familiar with us. We operate in two significant subsegments in retail operations, the commercial and the residential. The commercial segment is still down relative to 2004 due to some lingering hurricane effects; but only about 5.5% at year-end.

I think more importantly on the Cayman residential side, given we have had an increase in the number of customers; an increase in the number of U.S. gallons sold in the neighborhood of 28%; and given that the latter is about 61% of our retail segment and is the most profitable, we are pleased with where the retail segment has developed over the last year.

As has been suggested, the segment is off to a good start as far as we can tell for the new year 2006. In that segment, our price also increased about 10% during the year.

We also believe that perhaps in this regard comparative quarterly trends may be a little more informative than the statistics I'm reading you that are static because of the anomalies, the lingering anomalies still associated with the 2004 storm.

To summarize the year from a trend perspective, a disappointing first half in 2005 clearly cost us to some degree in terms of short-term performance; but second-half volume is about 25% over the comparable period for the prior year. We consider this a positive sign.

As for bulk operations, bulk water deliveries did follow a similar pattern, albeit not as strong, with volume growth of about 12% in the second half of the year; and an overall increase of 5.7%; and a 7%-plus increase in average selling price for the year.

Our services segment was up about 4% compared to 2004.

Just with respect to other news, we are ensconced in new offices in Cayman for the last half of the 2005 year, and also have established an office here in Deerfield Beach, Florida, in the U.S.

On a split adjusted basis, the common share price, which began the year at $15.49, closed on 12/31 at $20.29, which was a 31% increase, and I know at least as of the weekend sits above $26.00.

From a financial perspective, just to go through similar segments, retail overall was up $13.4 million, as Rick mentioned, a 10.6% increase. We held cost of sales to a nominal increase of between 2% and 3% and enjoyed a double-digit 17% increase in gross margin to just under 60% in that segment.

On the bulk side, again, there was an increase of about 14% or $11.7 million, but disproportionate cost of sales increase of about 26% resulted, as would be obvious, in a reduced margin compared with the prior year.

Clearly a disappointment. as had been discussed during the 2005 year and by Rick McTaggart prior to my comments here, primarily the result of prior-year production penalties and added expenses associated with the issues at the Bahama plant.

Services also increased and contributed about $450,000 in gross profit. As a result of some expertise we provided to our affiliate at Tortola, since we have commenced the construction of the new Baugher Bay plant that Rick mentioned.

G&A in 2005 was up a hefty $1 million on 4.3 2004 base. $400,000 of that hopefully is primarily in the past and resulted from accounting and SOX issues associated with the 2004 year, primarily, and to some degree to a general level of increased operational activities, contracted in financing and increased production levels.

Here again, however, we believe perhaps comparative quarterly trends may contribute to a more meaningful perspective, again. In brief, the second half of the year and in particular the fourth quarter of 2005 was very good. Sales volume as well as overall gross and net profit margins did improve as the year progressed.

In terms of other income and expense, net interest expense increased as a result of certainly rising LIBOR rates. On the positive side, an earnings increase from our affiliate in Tortola contributed $1.4 million to earnings.

With respect to cash flow and the position our balance sheet ended the year with, the balance sheet remained strong despite a long-term debt increase of about $6.5 million to $19 million at year-end, as a result of the $10 million bond issue in the Bahamas. We also did a Bahamian dollar equity issue in November, which provided $6.8 million in proceeds. Both of which are obviously to finance our expansion there and which resulted in a debt-equity ratio and other comparable statistics generally comparable to prior year, and I believe are ratios and results which still allow for flexibility in our capital structure.

We expect to use our capital structure and market demand for our issues as a strategic tool to perhaps enhance shareholder value further. To conclude, we will continue to focus on our geographic and/or geopolitical if you prefer niche, and recognize that at least one industry trend is towards turnkey water solutions. Rick?

Thanks a lot, Joe. I'd like to just ask Jeff now to jump in and give us an overview of some of our developing businesses. Jeff?

Thanks, Rick. Good morning, ladies and gentlemen. Since I don't occupy the hottest seat anymore, I have a little bit more time to look forward and look at potential new business. Rick asked me to sit in this morning to talk a little bit about it, some of which you have already heard.

In the Cayman Islands bulk market, we have already increased the Lower Valley Plant this year. Our customers, the Water Authority, are laying considerable lengths of new pipe, firstly into all along the north coast, into the Cayman Kai and Rum Point areas there already developed.

Experience and circumstance is it takes a while for existing properties to be weaned off their systems and to get tired of repairing their pumps before they become full customers on our main line. But that happens over a year or two, so we can look forward to increasing and good demand from that area.

They are also going east on the north coast, particularly to include a site for a new Mandarin hotel which is due to start construction later this year and be completed by the end of 2007. Once again that will give us demand for construction and also, farther out, for use of the hotel when it is constructed.

On the Cayman retail side, again, you heard quite a bit from Rick. Sales the first couple of months this year are really outstanding.

The government's figures for rooms online are still way down on what was available before Ivan. The Hyatt hotel has not reopened. They were in arbitration with their insurers in England and I think got rather less than they expected. I have not heard plans for the reopening of that, but obviously somebody is going to do something in the not too distant future.

Also another reason for the downturn in rooms at the moment is that quite a number of properties are redeveloping up to seven stories. The older properties were only built to two and three. So again we have got a brief hiatus there while these projects go through the rebuilding stage. But perhaps in a year to 18 months they will be back at 2.5 times the level of demand that they were before the hurricane.

Rick has covered the Blue Hills contract in the Bahamas. But I would just mention there that as part of the government's overall plan to produce 90-odd-percent of the island's water from desalination, they have indicated they will be going out looking for additional plants over the next few years.

The first one of these that was announced was a plant called Arawak Cay; there has been no announcement on that at the moment, so I really don't know what that situation is. But obviously we have an interest in supplying water either from that site or by increasing the capacity in one of our existing sites.

The Water Authority has indicated that they intend to supply water to Paradise Island, which is where the Atlantis resort is located. Also fairly recently a huge redevelopment of Cable Beach was announced. Again, there are ongoing discussions about how water will be supplied to that redevelopment. So there is even beyond Blue Hills considerable potential in New Providence, particularly in the Bahamas.

Both Joe and Rick covered Baugher Bay and Tortola. I don't think I need to say any more about that.

Belize, Rick indicated that we are immediately increasing the size of the plant there by 100,000 gallons a day. When I first went to Belize, I said -- this is Cayman 30 years ago; and I am still hopeful that I am going to be right. It is increasingly looking as though that is the case.

There is now a bridge across the [Cotala] River up to the northern part of Ambergris Caye, which is by far the largest but most undeveloped part. There appear to be a number of very large projects either planned or just beginning to start. So that we are monitoring that situation very carefully, and we do entertain the possibility of increasing the size of the plant in Belize even further later down this year if demand warrants.

That is the really quite exciting potential in our existing markets. We are always looking for new opportunities. Along with three other companies we have prequalified to bid on a new plant in Bermuda at [Times] Bay. We're just in the process of putting the bid together for that. It will be a new market very similar to our existing ones, in that it is a former British colony, English-speaking, English legal system. So we are very comfortable working there.

Secondly in Barbados, you may remember that we signed an MOU at the back end of last year with a company that was involved primarily on the wastewater side. We have indicated that we have an interest in becoming more involved in that side in any event. But jointly with them we have recently submitted statements of qualifications both on the wastewater and the potable water side along with our partners.

The shape of the project is not decided yet. It will be a mix of water, potable water, and wastewater. But as I say, the exact proportions are not defined by government yet. I think they're waiting to see what sort of proposals they get as well. They have indicated that it is total something like a $50 million project between the two sides. But that is another project that we are actively pursuing and working on at the moment.

In addition I can only add my usual rider to these comments that there is tremendous interest out there for potable water. Many, many possibilities come across my desk on a monthly basis. Some we reject offhand for various reasons. Some we say that we are interested in pursuing.

These projects tend to have a very long lead time. You're either dealing with governments who take a long time to make up their mind; or maybe you are dealing with private developers where they want to nail down their infrastructure right at the conceptual stage of the development, so it can be two or three years before some of these projects come to fruition.

But there are a number of other potential projects that we're likely to undertake -- at least start this year from those sources.

So with that I think you have probably gathered, and hopefully from the enthusiasm in my voice, that we still have a tremendous potential in front of us. We ramped up our staff and facilities to accommodate Blue Hills, so that we are well capable of taking on new projects in an orderly manner going forward. We think that it is going to be quite an exciting ride.

With that, I'll hand back to Rick with my thanks to you for joining us this morning.

Thank you very much, Jeff. Sandra, I would like to open the call up for questions now.

(OPERATOR INSTRUCTIONS) David Schanzer, Janney Montgomery.

A couple of questions. Would it be safe to say that, if you took the Hyatt out of the equation completely, that the hotel room availability currently on Cayman is getting closer to full capacity? Is it basically the Hyatt that is holding back the capacity numbers?

Remember that a lot of the tourist accommodation is in condominiums. Certainly in terms of hotel rooms, yes. Because the Ritz-Carlton opened up in December, and their rooms are available and pretty much fully booked, even at the prices that they charge.

So in fact we're quite possibly ahead with hotel rooms. Much of the tourist accommodation is condominiums; and there are a good half-dozen developments that are in the course of reconstruction there.

Okay, great. As far as the two projects that come online in '06, you talked about or Rick talked about the April date for the two units at Blue Hills. Is it still an August expectation date for the full project?

Yes, Dave. The final commissioning will be sometime in the summer, late July, early August.

So it could even be before August, but probably early August. Okay. Then, again, just clarification for us to get an idea about revenues. In your comments, Rick, you mentioned Tortola coming online in the third quarter. I think originally it had been early third quarter. Is that still a September kind of '06 date?

We're looking at midsummer actually for getting that plant online. It actually won't be completed until late third quarter, but we will be producing water midsummer.

Okay; all right. Lastly, I guess this is going to be a tough question for you guys to answer, but General Electric is now involved in your backyard, I think, with this acquisition of Zenon. Can you guys characterize either what you expect from that, or what impact it will have on you folks, or any potential partnerships? Or just give us a little color if you could about the way you see the sandbox, so to speak.

It is early days and certainly we haven't had any approaches or discussions. It immediately impacted the -- or potentially impacted the Barbados project. But basically Zenon there were simply equipment suppliers. They may well continue to be that to the group that have submitted the statement of qualifications.

But I think the final answer to your question might be tune in next week. You know?

Okay, great. Thanks a lot.

Michael Gaugler, Boenning & Scattergood.

Just two questions, Rick. The first one, I was wondering if there is any progress on a new water supply agreement with the BVI Water and Sewage Department.

We haven't had any discussions other than what we have indicated in our filings. No.

Nothing planned for the future in terms of targets to meet or --?

There's nothing happening right now, Mike. We're waiting for them to essentially respond to some discussions that we had several years ago.

The government are buying the water and they are paying for it, which is the main consideration as far as we are concerned. If they want to shore up their future, their supply, they're going to talk to us about a long-term contract. But there have been no indications that they are in any hurry to do that.

Okay. Just one other one. Are there any new developments in the [Bywater] litigation as it pertains to the judicial review on the Blue Hills contract?

There is nothing new, certainly nothing that involves us. We have just been observing the case as it proceeds, and nothing of interest really.

It is proceeding at a snail's pace in the Bahamas. The first question to be resolved was whether injunctive relief was appropriate, or merely damages if indeed Bywater had a good claim. There was a hearing a few weeks ago, and then it was adjourned for the Attorney General to make a written response to the arguments of both parties.

We don't know when it is going to be rescheduled. This is only whether injunctive relief is appropriate. The likelihood is that we're going to have the plant online before they even decide whether they ought to have an injunction to stop us.

That's exactly what I was getting around to, Jeff, so thanks for just going on and making that statement for me. That's all I have, gentleman.

Since you're on, Michael, perhaps I should also mention that as of Friday, on the IR front, as of Friday the shares of CWCO were included in the ISE Boenning & Scattergood water index of 20 water companies. So hopefully that will generate further interest in our stock.

I think you can count on that.

(OPERATOR INSTRUCTIONS) There appear to be no further questions at this time.

I'll just make some quick closing comments. I appreciate as always everybody joining in to the call. Thank you for your interest and support in the Company, and we will talk to you next quarter.

Thank you. This does conclude today's teleconference. You may now disconnect your lines and have a wonderful day.