Consolidated Water Co Ltd (CWCO) 2006 Q1 法說會逐字稿

Good morning. My name is Henry, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Consolidated Water Company first-quarter 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 that only two questions will be taken at a time. (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 relationship with the governments of the jurisdictions in which it operates, the ability to successfully secure contracts for water project in other countries, the ability to develop and operate such projects profitably, and other risks detailed in the Company 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, Mr. Jeff Parker, Chairman of Consolidated Water Company. Sir, you may begin your conference.

Thank you, Henry, and good morning, ladies and gentlemen. I appreciate your taking the time out from your busy schedules to join us this morning. This is Jeff Parker, the Chairman of Consolidated. I have with me Rick McTaggart, who is the President and CEO. We are both in Nassau at the moment for a waterfields Board meeting this afternoon. Also on the line is Joe Pivinski, our Senior Vice President and CEO. He is actually dialing in from Cayman, so we're scattered around the globe this morning.

We are coming off a very good quarter, which we are here to talk about. Rick and Joe will give you more details in a few moments.

I would just like to emphasize a couple of things. We had very good results, as you have seen from the Cayman retail segment. Certainly, that represents increasing demand as properties come online. It also represents considerable demand from refurbishing of receding golf courses on Grand Cayman. That is non-potable water and it doesn't fall within our exclusive license. Also, when those golf courses are grown in, the demand should fall. Now, obviously, we are taking steps to ensure that we continue to supply their maintenance water, but there is no guarantee to that. But, account to that is that there are still a number of properties still to come back online and a lot of new development in our license area, so that we don't view the future of Cayman demand with any trepidation. Indeed, at our last board meeting, as we said in the press release, we are seriously looking at expanding capacity for that Cayman retail market later in the year.

With that caveat, I will hand over to Rick McTaggart, the President and CEO, to give you further details on operations for the first quarter. Rick?

Good morning, ladies and gentlemen.

Well, we are very pleased with the Company's performance in the first quarter. Obviously, the very strong financial results are related to a couple of things. As Jeff mentioned, our retail water sales, primarily in our Cayman operations, exceed previous years' levels but more than 60%. This was primarily due to the rebound in water demand from tourism-related properties in the Seven Mile Beach franchise area. We've commissioned our Hyatt plant in October of last year. That was rebuilt and expanded after Hurricane Ivan and we are finding a very high -- we're running that plant at very high demands already, high online factors. You will recall that the damage that was caused by Hurricane Ivan in late 2004 depressed our water demand in our retail market early last year. The island appears to have now fully recovered and retail sales in the last quarter were at an all-time high, easily exceeding 2004 first-quarter levels.

We also, as Jeff mentioned, benefited from new sales, primarily to the Ritz-Carlton development, which is large hotel/condominium/golf course project that continues to work to completion. The golf course is being grown in now; I know they are still working on the condominiums. The hotel actually opened in December of '05. There's another large golf course in our franchise area, which is being replanted after Hurricane Ivan, and a third golf course that appears to be generating some new demand or some additional demand that is being grown in again.

As Jeff mentioned, management is staying very close to these demand figures. We are presently designing an expansion to our production capacity in order to meet expected demand in our retail area during next year's high season.

As you can deduce from changes in our gross profit margins, the business is very sensitive to the timing and the level of capital investment for new production capacity, so we aim to match capital expansions as closely as possible to expected demand. Some of these things that Jeff mentioned at the beginning of the call we certainly are keeping in mind.

Turning to our bulk sales, quarterly sales growth was more than 39% compared to last year. That was primarily due to higher sales to our customer in Nassau from our expanded Windsor Plant. This expansion -- (technical difficulty) -- in the fourth quarter of 2005, we increased the capacity of that plant by 1.2 million gallons per day. We also benefited from reduced production shortfall pricing adjustments, and we virtually eliminated those by resolving the membrane fouling problems at the Windsor Plant and also utilizing the supplemental capacity, production capacity from the expansion. In addition to bulk sales growth in Nassau, we completed an expansion of the Lower Valley plant in Grand Cayman for our customer, the Water Authority, in January, and we benefited from higher sales to the Authority during the first quarter of this year.

Construction by our affiliate, Ocean Conversion BVI, of a second desalination plant on the eastern end of Tortola in the British Virgin Islands is continuing on schedule and we expect to benefit from income from his plant in the third quarter of this year. Sales in our services segment increased. They benefited from the engineering and procurement fees related to the design of this second plant in Tortola.

The Company continues to be focused on completing the Blue Hills desal plant in the Bahamas, and we expect to be delivering water shortly to our customer under the second phase of this contract. You will remember that the first phase was actually the expansion of the Windsor Plant, which was completed in October of last year. The final phase of this project is expected to be completed in July this year, and at full capacity, the Blue Hills plant will be our single largest desalination plant, capable of producing 7.2 million U.S. gallons per day. We're very pleased that the Bohemian government chose our company to build and operate the Blue Hills plant, which when combined with the increased Windsor production, will be capable -- will be providing essentially 90% of Nassau's present water demand. Also as part of the Blue Hills contract, we have undertaken to reduce water losses on our customers' water distribution system in Nassau, and we continue to achieve good progress on this project, which will save the Bahamas government about 435 million gallons of lost water per year. In addition to all this, we continue to look at new opportunities to expand our business in the Caribbean, and you will hear about that, new projects, as they arrive.

I'd like to now turn the line over to Joe Pivinski, our Chief Financial Officer, so he can speak a bit more about the numbers within the quarterly financial results. Joe?

Thank you, Rick, and my good morning to all of you and thank you for your participation, and also thanks in advance for your patience with any repetition which might follow.

To begin and summarize from a statistical perspective, remembering that per-share amounts are adjusted for the 2-for-1 stock split which occurred last August, as you already know, record quarterly revenue of $9.2 million, a 52.6% increase from the previous year's quarter. Gross margin improved substantially, 99%, and net income increased to almost $3.1 million for the quarter, $0.24 a share versus $0.115 fully diluted last year on approximately 12.6 million diluted shares outstanding as of now, a 5.7 increase from last year, primarily as a result of the shares issued in the Bahamian BDR offering in November of last year.

From a cash perspective, our cash flow had continued throughout the quarter to provide funds to construct the various facilities that both Jeff and Rick have already mentioned.

Briefly, with respect to operations, notwithstanding future projects, just to remind you that we have increased our total capacity 20% going into the current year and have obviously been able to use that capacity to a great extent in the first three or four months of this year. That 20% represented a 13.1 billion U.S. gallon per day increase in at least stated or rated capacity or design capacity, which is carrying us pretty well through the first-quarter demand, in particular in retail operations.

When Windsor -- excuse me, when the Blue Hills plant in the Bahamas is completed and the Bar Bay plant in Tortola, British Virgin Islands, is completed, we will respectively have added another 7.2 million gallons and a 600,000 million gallons to our capacity. These added volumes outside of Cayman will result in our Cayman volumes as a proportionate share of total design weighted volume being reduced from about 42% to about 26 or 27%, obviously diversifying the concentration of some risk, notwithstanding that we once again are anticipating increasing Cayman's rated capacities.

With respect to deliveries, the retail segment, as you know, we operate really in two different segments in retail operations, residential and commercial, both of which continue to trend upwards similar to the trend that began in the second half of 2005. In particular, as mentioned, the residential subsegment here in Cayman, from where I'm speaking, experienced almost a 95% increase in volume.

In our bulk segment, bulk water deliveries followed a similar pattern with volume growth previously reported for the second half of 2005 continuing, in particular in both the Bahamas and in Cayman, and our smaller services segment also contributed, up 91% comparatively.

On a split-adjusted basis, common share price, which began the year I believe at $20.29, closed yesterday at about $31.05. I assume -- or perhaps there has been a little bit of profit-taking today, but nevertheless representing an increase in excess of 50% in the current fiscal year.

With respect to a little more detail on the financial side, that retail segment was at 5.1 million, a 61.4% increase in revenues, and enjoyed a 19% increase in gross margin to 71.3% as economies of scales impacted our margin.

Bulk sales of 3.7 million reflected a 39.1% increase. Perhaps more significantly, the gross margin improved to 22.2% for the quarter as the production shortfall penalties and other expenses associated with (indiscernible) membrane elements in the Bahamas were abated. Services also increased, contributed about 337,000 to gross profit as a result of engineering services we are providing to our affiliate, Tortola since we commenced to construction of that new plant.

General and administrative expenses were up about 700,000 for the quarter, relative to the prior year, primarily due to additional staff, costs related to the increased project bids we are preparing, and to some degree due to additional rent and related non-cash depreciation charges associated with our new offices in both Cayman and the U.S.

With respect to other income, a contribution of about 62,000 in affiliate earnings resulting in an increase in that portion of our income statement also.

Moving onto the balance sheet and cash flow, the balance sheet remains strong with a significant increase in construction in-progress, obviously reflecting the activities in the Bahamas and Tortola, and increasing receivables as a result of primarily the increased residential sales. We expect to shortly arrange for additional funds to finance the completion of the current projects and prepare for success with some of the new initiatives both Rick and Jeff have mentioned. I've been talking to bankers in Cayman, the Bahamas and other areas of the Caribbean.

To conclude, we expect to continue with our successful business model and to put it in Mr. Parker's words, continue to scatter our operations as well as ourselves hopefully around different portions of the globe.

With that, Henry, I will turn this back to you perhaps for questions.

Thank you. (OPERATOR INSTRUCTIONS). Ryan Connors, Boenning & Scattergood.

Good morning, guys. Congratulations on an outstanding quarter.

I wondered if we can drill down a little bit on margins. I know you mentioned economies of scale and obviously the penalties coming away in the Bahamas, but we were just really blown away by the margin performance, operating margins I guess of 29%. Can you just talk a little bit more about what's driving that and how sustainable these kind of levels are going forward?

Ryan, this is Rick McTaggart. If you're talking about the bulk segment in particular, obviously over the last year, year and the half, we've suffered from low margins because of client performance issues, so we expect that, with these being resolved, these margins particularly in bulk should be sustainable.

Now, with respect to the retail margins, in Grand Cayman, we have -- we're talking about expanding our production capacity. Over the last quarter, we've certainly leveraged our fixed costs as much as possible, as much as humanly possible in Grand Cayman. So, you may see some shift in gross margins in Grand Cayman as we put on new production capacity. But as I said earlier in the call, we aim to match that as closely as possible with the demand.

We also, in bulk segment, just mentioned that we've seen improvements in margins there in Belize, because of costs going down, operating costs going down, not necessarily a significant growth in demand but getting costs under control.

Okay. Then secondarily, just in terms of new projects and new business, is there anything starting to firm up there that you can tell us about '07, as far as things that are looking like they are moving down the pike and will happen, and that we can kind of get concrete? In particular in the Bahamas also, if you can talk about -- I know you have talked a little up a lot about the government wanting to go 90% desal. I mean, what inning do you think we are in in that process, and how long until that plays out? How much more could we see there in '07 and near-term?

Well, I will just say that we are working on a couple of interesting projects now and if anything develops with respect to those, the market will certainly know about it. There's really nothing more I can say at this time on things that are ongoing.

The two projects that we've made public are a potential business in Bermuda and a potential business in Barbados. In terms of Bermuda, we have qualified to bid on that project and in fact would have bid a short while ago but the government extended the time and I think the bid is due in about the 27th of this month, and we will be bidding on that. We were putting the bid in Bermuda prior to that bid.

In Barbados which is the other project, potential project that we've made public, we have submitted prequalification data. Once again, it was supposed to be announced a long time ago, but I think the government went on holiday. So there has been no formal announcement yet in Barbados as to whether we have prequalified to bid on that project.

I refer to that project because the government hasn't really quite decided what the project is yet. They've indicated that the total mix between wastewater and desalination projects will total about $50 million of capital expenditure, but they haven't defined the project yet. As I said, we're just waiting to get confirmation that we've prequalified to bid on those projects.

On the Bahamas, we've still got the [outer Waki] bid in there and there's been no notification of what the government intends to do beyond Blue Hills yet. In fact, we're hoping to try and get a little bit more clarification on that over the next two or three days whilst we are in Nassau.

Thank you.

David Schanzer, Janney Montgomery Scott.

Yes, good morning. Congratulations on a good quarter. You mentioned wastewater along with Barbados. Could you give us an idea of where else in the Caribbean or maybe rather than talking about specific places, give us an idea of the size of the market for wastewater in particular? It's a growing initiative here in the States. I was wondering. How do you perceive that market size and your opportunities?

Jeff was talking about Barbados. That particular project, they are looking for 2 million gallons per day of wastewater treatment. It would be highest level wastewater treatment so that water could be reused for irrigation or agriculture, something like that. That's really the only indication within the Caribbean area that we are aware of now, to give you sort of scale. I mean, obviously, Barbados is a large island; its population is over 200,000, similar to Nassau. We would hope, in the future, that some of the other, the larger islands would look at wastewater reuse. (multiple speakers).

Is it your perception that people are actually looking at what Barbados is doing with you folks and maybe taking note of it?

Well, just to be clear, we're not doing anything with them at the moment. We are just trying to -- (multiple speakers).

Well I mean the bid, you know, the fact that they are looking for, you know, somebody to do something in the way of wastewater?

My perception of the market is that the other countries do look up to Barbados and sort of follow the leader. I mean, they have a very well-established Water Authority there in Barbados. I would be hopeful that their islands follow suit with this sort of project in the future.

Okay, great. My other question had to do with Mexico. Is there any indication not so much of a resolution but any mileposts or any progress made?

No, that project is being constructed at the moment by [Enima]. There's no indication of how they're going to get paid for once they're finished. But there has been no further movement at the federal level. What was it? About two years ago the bids were thrown out but the local mayor authorized [Enima] to move forward and they are moving forward. But as I said, there's no indication of how they're going to get paid once they've finished. But clearly, the prospects for us doing anything are now somewhat dim because, however it is worked out, that plant is going to be completed in the not too distant future.

(OPERATOR INSTRUCTIONS). Christopher Gasson, Global Water Intelligence.

My question was about the Blue Hills project in the Bahamas. I was just wondering whether you could confirm that there will be no penalty fees payable for late delivery of Phase II of this plant. My understanding was that the deadline for Phase II was the end of April, and we've passed that now.

Yes. Obviously -- (technical difficulty) -- we will let the markets know we're not very subject to penalties under the contract for late delivery. We've taken steps to mitigate those -- other phases of the project on time or earlier. Hopefully, we will please the customer.

But you are late with that particular phase?

Well, we are behind the original schedule, but there are obviously provisions in the contract to claim additional time as a result of events, and we intend to do that.

So you don't think there will be any penalties?

No comment.

Michael [Goggler], Brean Murray Carret.

Good morning, everyone. Congrats on the quarter. Just a follow-up question -- with regards to expansion on Grand Cayman, Rick, can you kind of give us an indication of what kind of size capacity you're looking to expand at this time?

We're probably looking at about a -- let me get the numbers in my head here -- probably about a 30% increase in production capacity, just for our retail area.

Retail area. All right, gentlemen. The bulk of my questions have been answered. Thank you.

Peter [Trapp] (indiscernible) Partners.

Yes, thank you. Just a follow-up question on Bermuda -- the bids, which are due in on 5-27, are you bidding with anybody? Is it a joint bid? Is it a consortium bid? Could you just give us a little bit more detail on that?

Well, we have local partners that we're dealing with. That's traditionally how we like to structure projects. We are not bidding with any other production companies or water companies, anything like that.

Okay, so who are your partners, then, in this bid?

We can't say at the moment, but you know, if we are successful, the market will know about it.

Okay. So to the extent that you aren't successful, then that releases the others to continue on other projects obviously. If you are successful, you will be then releasing the full details, including your bidding partners? And is Bermuda providing financing? Are you going to do the financing for this project on a project basis? Is it going to be on your balance sheet, or give us some thoughts on that?

Under Bermuda law, you know, these things have to be conducted by a local company. Again, under Bermuda law, you have to have majority Bermudian owners. We would be structuring the financing and make it favorable for us. We would have most responsibility for the project. We will give you details if we are successful. It would be along the lines, hopefully, of our traditional business model of a build/own/operate and finance arrangement.

The lease was not mentioned at all in either the press release, I don't think, or your call. Is there any movement or anything going on in Belize right now?

I did mention that we have seen margin improvements in Belize through cost reductions. There's been some slight increases in demand there on Ambergris Key.

Any other projects that you are working on in Belize, or --?

I'd say no.

Nothing, okay. As you look forward for the next year or two, where do you see the bigger projects, the bigger opportunities? Is it within the Caribbean as in other Caribbean nations, or is it in the southern United States or Mexico? Or could you give us some kind of general thoughts on where you're looking or what you're planning is as you move forward here for the next year or so?

I can take that. Obviously from the news you've had is there's a lot of potential growth within our existing markets, and we will continue to pursue that aggressively. We are constantly looking for new markets. There appear to be quite a number potentially opening up within the Caribbean, which is our backyard and which we will concentrate mostly on. Certainly, we've looked at Mexico in the past and we will continue to look there, possibly the northern part of South America also; projects might be opening up there.

We are not -- we've had some discussions about potential projects in the U.S., but it's not our main concentration, primarily because of the way that they go about these projects in the U.S. They take ten years to study it and spend a few million dollars before they do it, and every municipality seems to want to do that. So we're not terribly interested in getting into that long-term -- assessment and permitting process.

Is there any potential in Trinidad and Tobago?

I think there might be, yes.

All right, well, I will catch up with you guys at the water conference, so get a chance to ask some more.

(OPERATOR INSTRUCTIONS). David [Bumzell], Irvine Capital.

I jumped on late, so I apologize if this is repetitive. I was just curious. Has there been any development with the hotels that we're talking about going in on Grand Cayman, up on the way to Rum Point? I forget what side of the island that is, and I forget what large hotel chain was talking about putting something in there but I was just wondering if there were any developments there.

Nothing further on that, David. It was the Mandarin hotel chain that was looking at putting a property up on the east end of Grand Cayman. We haven't heard anything recently about that. The Water Authority, which is our customer there, bulk customer, they continue to extend their distribution system up into that area. So hopefully, if it is built, we would get some additional business from the Water Authority.

I think the latest announcement was that they expected to start construction roundabout September of this year.

Okay, thank you.

There appear to be no further questions. I will now turn the floor back over to your hosts for any closing comments.

Well, just as a final thank you for joining us, we've had an interesting first quarter. It appears to be continuing into the second quarter. We are looking forward to a good and a very busy year, both in our existing markets and pursuing some new ones. So, we appreciate your interest in Consolidated Water and your support as shareholders, and we will endeavor to do our utmost to ensure that your confidence is not misplaced.

Thank you, ladies and gentlemen.

Thank you.

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