Consolidated Water Co Ltd (CWCO) 2006 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Consolidated Water Company Second Quarter Conference Call. This conference call may include statements that may consist of forward-looking statements, usually containing the words ``believes, estimates, projects, intends, 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 the relationship with the governments in the jurisdictions in which it operates, the ability to successfully secure contracts for the water projects in other countries, the ability to develop and operate such projects profitably, and other risks detailed in the Company's periodic report filing 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.

[OPERATOR INSTRUCTIONS].

It is now my pleasure to turn the floor over to your host, Jeff Parker. Sir, you may begin your conference.

Good morning, ladies and gentlemen. This is Jeff Parker. I'm the Chairman of the Board of Consolidated Water. I'm here in Nassau for our Board Meetings Bohemian Company tomorrow, and on the line is Rick McTaggart, he's here with me in Nassau, and David Sasnett, our CFO is joining the call from our Aqualex Office in Deerfield Beach.

Since I was here, I just wanted to say hi to I'm sure a lot of my old friends that are on the line. We're coming off another very good quarter Rick and David will be dealing with in detail. The only other event that I wanted to emphasize, which you saw our press release end of the quarter, we have commissioned the Blue Hills plant here in Nassau, and that completion was done pretty much on time as we promised a year ago. I'll turn the call over now to Rick McTaggart, who will also introduce David and deal with the last quarter's results in detail. Thank you.

Good morning ladies and gentlemen. I'd just like to introduce David Sasnett before I get into results. This is the first call that David is on as our new CFO. He joined the Company in early June after serving as a Director for, and Chairman of the Audit Committee since December of 2004, and David brings extensive experience in public company financial management. I'm personally very happy to have him onboard with management.

The Company again had a very impressive quarter, second quarter compared to prior year. I'd like to give you a review of some of the things that affected the financial results. Keep in mind as always we say that first quarter results for the Company, or sorry first half results for the Company are generally better than the second half of the year because of tourism demand; also weather conditions in most of the countries that we operate. The first half of the year is generally drier; there's a higher water demand, so keep that in mind when you think about second half results.

Our retail water results are primarily generated from our Cayman operations easily exceeded the previous year's results. This was primarily due to water demand growth from tourism-related properties in our Seven Mile Beach service area in Grand Cayman. The Ritz Carlton development which opened in December of 2005 has been generating a lot of new demand for the first half of the year, both from the hotel and their golf course and other new construction projects on Seven Mile Beach are fueling water demand growth.

A number of older 2 and 3-story tourist accommodation properties that were damaged by Hurricane Ivan have since been demolished and new 7-story condominium developments are taking their places, and so we expect to see increased demand from those properties as they come on line in the future.

We reported last quarter that we are presently expanding our production capacity in Grand Cayman to meet during next year's high season, and we're in the process of putting 1 million gallons of temporary production capacity that will be online in December of this year. And then a permanent 2-million gallon per day expansion of production capacity at our existing Governor's Harbor site on West Bay Beach Grand Cayman.

I'd also like to mention that all this growth on the West Bay Beach Peninsula, the Cayman government is in the process of constructing a new road parallel with the existing road. There's been a lot of traffic congestion which has obviously [inaudible]; they expect that this road will be online at the end of this summer.

Also in our Cayman retail area, the Caymana Bay project is progressing very well. They've been talking to us about their projected demands, and they expect to take in water for that project toward the end of this year or early next year and then that will ramp up as it continues to develop. It's over a 200-acre project that's being billed as a new town on Grand Cayman so it consists of schools, condominiums, homes and shops so we're getting their business in the future.

Turning now to our bulk water segment, this growth in the first half of this year was fueled primarily by higher sales to our customer in Nassau from the temporary Windsor Plant expansion, which went online in the fourth quarter of 2005. And later in this past quarter by the interim commissioning of the Blue Hills plant; Jeff mentioned that the plant is now fully commissioned; however, we were producing water from certain units in the plant in late May, so we do have some sales in the second quarter from the Blue Hills plant. That plant is now delivery 7.2 million gallons of water per day to the Bahamas government.

In addition to sales growth in Nassau in our bulk segment, we expanded the Lower Valley plant in Grand Cayman in January, and we've continued to benefit from higher sales in the first half of the year from that plant.

Construction by our affiliate of a second D-cell plant in Tortola is continuing; however, we have experienced some delays in construction and we now do not expect to benefit from sales at this plant until either very late in the third quarter or early fourth quarter this year. And just to give you an idea what these delays are about, some equipment got damaged in shipping and we've had coordination issues getting key commissioning engineers from suppliers down to the Island, so not anything major but it has pushed back the commissioning of the plant for a month or two.

I'd just like to mention finally in our services segment, we have some improvements in results, mainly from the engineering and procurement fees from that project in Tortola.

I'd like now to turn the line over to David Sasnett and David can speak a bit more in detail abut the financial results.

Thanks Rick; this is my first opportunity to speak to the investors of Consolidated Water. I hope to have the opportunity to meet many of you in the coming months. Unlike some of my other positions, I've had a chance to actually get to know the Company before I took this job. And I'm confident that I've joined a Company with quality leadership, both at the Board and at the Management level; very solid business model, and I think excellent prospects for the future. So I'd like to go over the numbers here briefly this morning and reiterate some of the information that we provided in the press release and in our 10Q.

Net income for this quarter was $2.5 million or $0.20 a diluted share; that's up 70% as we mentioned in our headline of our press release from last quarter. For the 6 months we made $5.6 million or $0.44 a share; revenue is up 47% for the quarter to $9.7 million, and for the 6 months it was up 50% to $18.9 million. Rick has already given you some of the reasons why we did better this quarter relating to demand, both in the bulk and retail segment. Our margins either held steady or improved.

With our factories typically our margins improve as our production increases because we're able to spread fixed costs over a larger base. So increased gross profits really drove profits for this quarter and this 6-month period.

With respect to our financial condition, the largest changes we had in our balance sheet was the increase in construction in progress from December 31 to June 30. That relates almost entirely to Blue Hills. As Rick had mentioned earlier this factory is now operating in July so you'll see a reclassification of that amount to property and equipment in next quarter's financial statements.

Receivables are up; that's a function of increased revenues for this quarter as compared to the last quarter of the fiscal yea, and we also had a significant increase in other current liabilities and that's primarily related to a $5.6 million short-term line of credit that we put in place to cover some of the construction costs at Blue Hills. And we replaced that line of credit subsequent to the end of the quarter by issuing $15.8 million in bonds in the Korean market. I think this bond issuance shows the quality of our credit rating. We've taken this money, we've paid the line of credit, and the remaining funds will be available for capital projects. It's important to note that these funds are 5.95%; we think they're relatively below fixed rate. We think we're well positioned and our balance sheet is where it needs to be to take advantage of some of the opportunities we'll have in the future.

And with that, I'll turn it back over to Rick for questions.

Thanks David; I'd just like to talk now a bit before we go to questions about some projects that are in the pipeline. I can't give you any assurance that we're going to secure these projects but we've certainly been working on them over the last quarter. We had mentioned on the last call that we were submitting a bid to the Bermuda government for a 600,000 gallon per day plant in Bermuda. We haven't heard anything back on that yet and we hope to be advised of the government's decision some time later this summer.

We also mentioned that we've been pre-qualified to bid on a large D-cell in waste water reclamation project in Barbados along with a partner in Barbados and U.S.-based engineering firm. And again, we're waiting for the bid documents to come out that project. We're very excited about it and we hope to begin on that, the bid documents later this summer.

We also see further growth opportunities in our present operating areas and in new areas such as certain Central American Coastal Islands and we're presently evaluating these opportunities, and in some cases engaged in discussions with the local government. So as these things drop out of the pipeline as Jeff often says, we'll keep you advised of progress.

Now Operator I'd like to open up the call for questions.

Thank you [OPERATOR INSTRUCTIONS].

Michael Goggler, Brean Murray Carret.

Good morning everyone; congrats on the quarter.

Thank you.

Just a quick housekeeping question Rick; I noticed G&A expenses, they seem to be running now at about $2 million. Do you think that level is sustainable or would you expect a deviation from that now that Blue Hills is wrapped up?

Well, I'm not sure how much of the G&A related to Blue Hills, but I would think that's going to remain fairly stable; we don't see anything that's going to affect that too much going forward.

Okay, you've answered all my other questions. Again congrats on the quarter.

Thank you.

Jim Lucas, Janney, Montgomery, Scott.

Thanks, good morning guys. The, following up on the G&A one of the things that you said in the Q contributing to it has been the cost of getting the Deerfield Beach Office up and running and hiring the people. Do you anticipated any more additional costs in terms of hires or do you have the staffing level pretty much where you want it right now; that's question one.

David, do you want to take that one?

Well the cost in Deerfield Beach, I don't expect them to vary significantly from where they are right now. I mean, we may hire another engineer or two; it depends on the prospects or the projects that we have and the opportunities we think we have from an accounting staff standpoint. Again we may hire another person or two. I wouldn't expect to see a substantial increase in the cost here if at all.

Okay thanks for the clarification.

And then secondly, with some of the expansion that you have going on right now, could you update us on what your CapEx outlook is for the remainder of this year?

Well, we've provided some information on capital expenditures in the commitment section of our 10Q. For the remainder of this year, when you're talking about subsequent to June 30, we have some monies we plan to spend obviously to finish Blue Hills. We have made a contingent offer to buy an office building that's located near our Governor's Harbor plant in Grand Cayman. We've announced the North Sound plant expansion and we guess that will be about $1.7 million. Those costs will be incurred through the first quarter of 2007.

Then we have miscellaneous capital expenditures of a smaller magnitude. Rick can you think of anything I've missed here?

The production capacity expansions in Grand Cayman at Governor's Harbor, and we currently developing costs for that.

Okay, and finally with regards to some of the temporary capacity that you had in place in Nassau, you allude to moving some of that capacity elsewhere in the interim. Is there any additional color you can expand? You talked a little bit about where it was going, I think it was Governor's Harbor.

Basically Jim, that production capacity, temporary capacity has now been replaced by the permanent Blue Hills plant, but we do intend to move some of that capacity to Grand Cayman before the end of the year and get that online.

Okay thanks.

Mario Gabelli, Gabelli and Company.

Hi Rick; we haven't talked for a while. We own a tiny amount pf share; can you kind of go to 30,000 feet and look down and say hey when you go in and figure and you want to bid on Bermuda or Barbados or somewhere else, who do you figure you're competing with on these projects, and what's the pitch that you, kind of what do you bring to the table in terms of D-cell and waste water?

Well, I mean from the standpoint of D-cell I mean we pitch that we've been in the business for over 30 years; we know how to operate these plants intimately; we know, we have been on the learning curve and gone around that --.

That part I got, and waste water?

Waste water we're not pitching any waste water plants without qualified partners at this time. We don't have a whole lot of experience in that department and this Barbados project is a joint venture with other people with a lot more experience than us.

Who does waste water in the Caymans?

The government operates a facility there.

Okay, and as you're looking out over the next 5 years in terms of taking on new skill sets, do you take on bidding for projects like that that try to learn; how do you get to learn on your own?

And secondly, but go back to the question, who are you competing with? I mean we should call the government ourselves and we will, but just so I can get some running start on this, who are you competing with in terms of the bids in Bermuda and so on?

Well we typically go up against companies like E-Ionic, Violia, By-Water, there's some companies that do mostly equipment sale business that we come up against once in a while, EDS.

Okay got it, and --.

That will give you a general idea.

The operator limited it to 2 questions so that was only one; thanks, I'll come back later.

Mario maybe I could just jump in there a little bit. A lot of these projects particularly the smaller ones don't go out to competitive bid. I mean they tend to come and find those because of our Caribbean base and our experience in the Caribbean. So often we're in direct negotiations with potential customers.

Okay so these are -- I'm glad you clarified that negotiations are always better than bids.

Yes, that's for sure.

Ryan Connors, Boenning & Scattergood.

Good morning gentlemen; I was wondering if you could talk a little bit about the Company's capacity just from a technical standpoint. Obviously, the Blue Hills process was very taxing on the Company's resources and personnel. And I wonder now that that plant is complete and commissioned whether that sort of frees up some bandwidth and allows you to be more aggressive after so many other bigger deals.

Well I wouldn't say more aggressive; I think we're very aggressive now. I think what it does is allow us to focus on a lot of these smaller projects that are coming simultaneously.

I think the other thing to add there Ryan is that the lead time on a lot of these projects can be 3 years or more so Rick alluded to my pipeline earlier on; I mean there are, there's a lot of potential business in the pipeline that we're constantly talking about and the trick fro our point of view to the extent that there is one is to try and make sure it falls out of the pipeline on a fairly even basis. I mean we certainly ramped up our operation as a result of Blue Hills and we've been able to cope with more. But I mean, it's ideal to have these projects falling out in a fairly steady basis that we can handle them 1 at a time or 2 at a time.

Great, and also there was a comment in the press release right at the end there that you guys were, that the sales cycles were running longer than you'd like, but you're still confident that the growth opportunities would materialize over the next several years. And if I read that comment to kind of maybe mean that we shouldn't expect anything major in the near term, am I reading too much into that? Or if you could just comment on sort of that comment and why you chose to include it.

I think it's just a general comment. I mean, a lot of times the markets see something like Blue Hills and then they expect it to just keep popping out every year, and there's just not, it's not that sort of cycle. I mean you're dealing with governments in these countries that sometimes take a long time to make decisions on projects, particularly the larger ones. And I think it just sort of tempers that sort of thinking. But we certainly have a lot of opportunities. We have a lot on our plate right now and not something as large as Blue Hills, but certainly on a combined basis a similar amount of work for the Company.

Very good; thanks for the time and congrats on the quarter. Good luck the rest of the year.

Thanks a lot Ryan.

[OPERATOR INSTRUCTIONS].

David Bumzell, Irvine Capital.

Hi guys; congratulations. I wonder if you could drill down, Rick you made a comment about seasonality and I'm just looking at past seasonality and wondering if you could give us a little more detail as far as what to expect here for the back half of the year, both from a revenue and earnings standpoint. I mean it seems like you've had some years where revenues kind of flat down a little bit but you've had other years where you don't get that bump. Obviously, you've got acquisitions in there and everything else, and then same thing from I guess from an earnings standpoint; it seems like it's maybe a little more consistent, but you mentioned on the call. I wonder if you could give us a little more detail there. And then I have a follow up.

I mean, I don't know how much more I can tell you. I mean, you've pick dup a lot of the things that have I guess clouded that trend over the last 3 years. I mean, acquisition income coming at the end of the year and things like that. But generally as a comment in a stable year, you won't see as much revenue growth toward the end of the year because for instance we don't sell as much water to golf courses when it's raining and the tourism figures are down.

It was a lot more pronounced I think in the past than it is now, but there is, you won't see -- let me just also say you won't see that sort of seasonality in our bulk segment operations because those are mostly fixed take or pay contracts. But you will see it more in our retail operation.

So it's kind of a flat sequential revenue comparison for the second half of the year. Is that, but obviously up year-over-year, is that the right way to think about it or --?

Well, I'd say on a year-to-year basis you would see --.

Growth obviously; I'm talking about first half of the year compared to second half of the year sequentially but then also the second half of the year obviously is going to be up from the second half of last year.

Well, we hope that it will but probably not as much as the first half.

Okay, so again down sequentially but not, we're still looking at positive year-over-year.

We're not going to give you any projections David, but that's what we would hope, sure.

Okay, and you've had the same dividend now for, I guess it's about I don't know 5 quarters if my machine is right. Are we getting to the point now where you guys are, I mean it seems the last dividend boost was after about 5 quarters, the one before that was a little longer but different Company. What are your thoughts on the dividend?

Well I'd just point to a little not that we put in the 10Q regarding our dividend policy.

I guess it was really little; I'll have to take a look.

yes, if you'll go to page 19 of the 10Q.

Okay.

You'll see what is said about dividends.

Okay, and then what's on the IR front here for the fall as far as conferences? It would be nice to get the new CFO out on the road. Any thoughts or plans yet as far as the fall is concerned?

I can answer that David, in the fall, we're lined up for the [inaudible] in New York in December; investment banks that --.

Hey Jeff I don't know if it's just me; I'm only hearing like every fifth word.

No I couldn't hear you either Jeff.

Sorry; we're lined up for the Stanford Conference in New York in September and David, we're also booked for the New York Society of Securities' Analysts in December; also working with Thaddeus Investment Banks that cover the stock into the third quarter and into the --. Did you hear me okay then?

I got most of it; I'll follow up offline.

Mario Gabelli.

Just looking out over the next 3 to 5 years as you're capitalizing on your skill sets and leveraging those into adjoining and other territories what' the philosophy toward the capital structure of the Company? Might you just take the market cap, your equity is $300 million and you've got GAAP book of -- I don't know what the number is $60, $70 million, how do you look on the opportunities that you capture in that space? Any plans?

David, do you want to take that one since you expressed it so eloquently at the last Board meeting?

Well we're always looking, I mean our Company, if you look at our Company we're capital intensive. It takes money to build these plants. We're always looking to strike the correct balance between debt and equity. We just raised $15.8 million through a line of bonds that we issued. If you look forward, we will if we, to capitalize on some of these opportunities we probably will be seeking additional capital at some point in time in the future. What form that will take I can't tell you, and when we would seek that capital I can't tell you that either.

But the fact that we have $65 [million] in equity if you look we, also have a significant investment in property and equipment and construction in progress. So to grow the business if you look at cash flow from operations if we do have some opportunities out there, we might need to raise additional capital.

David that was quite eloquent; the second part of that obviously could be to do some kind of financing on each of the projects on its own, but we can go over that wish list another time. Thanks for the help.

Bernay Box, Bonanza Capital.

Hey, a few years ago we spoke a little bit about the Company's potential expansion down into South and Latin America, specifically Mexico. Anything on the drawing board at this point there?

The only thing we've made public is that we've bit on a project in Cabo but that kind of got lost in Mexican politics, well not even Mexican politics, but we haven't announced any other projects although we're constantly looking.

Well, there's a few things going on down in the Baja; are you still kind of involved in negotiating there?

Not in negotiating, no; they're actually the low bidder from what we understand is actually building that project in Cabo at the moment. It's going to be interesting to see how they get paid.

Great, thank you guys.

David Bumzell.

Thanks; you guys you were asked about competition earlier, you mentioned GE. I'm just wondering if you could talk a little bit more about what you see them doing out there. There was some talk that they were backing away from your area, but then comments from management at conferences and stuff seem to indicate differently, and I'm just wondering what you're seeing maybe bidding on these projects or just out there, what you're hearing as far as GE and their commitment to the business, etc.

Well in Barbados David, I mean GE was one of the companies that got pre-qualified along with us. I really can't comment any farther than that. I mean we haven't come up against them on anything else recently. The have indicated that they are interested in the Caribbean; also some other large water companies are interested in the Caribbean so we will be competing.

I imagine they're quite busy sorting out their Trinidad operations at the moment.

Yeah I'm sure they have their hands full.

Thank you; at this time, we have no further questions.

I'd like to turn the floor back over to the speakers for any closing comments.

All right, well thank you all very much for joining us this morning and we hope that we've given you some good insight into what the last quarter's results and hope to hear from you next quarter. Thank you very much.

Thank you; this does conclude today's conference. If you have missed any of today's call you may call (877)519-4471 domestically or (973)341-3080 internationally with the PIN number 7710570. The digital replay will be available until August 17. And this does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day.