Consolidated Water Co Ltd (CWCO) 2006 Q3 法說會逐字稿

Good morning. My name is Lawrence and I'll be your conference operator today. At this time, I would like to welcome everyone to the Consolidated Water Company third quarter earnings conference call. [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 or its 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 & Exchange Commission. By making those 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. Rick McTaggart. Sir, you may begin your conference.

Good morning, ladies and gentlemen. Thanks again for calling in to our conference call this morning or this afternoon. I'm joining you today from Tortola in the British Virgin Islands. I don't want to make everybody feel too bad but I'm just looking out my hotel window here at a lot of yachts out in the Sir Francis Drake Channel. It is a wonderful island. David Sasnett, is our CFO, is calling in from our offices in Deerfield Beach, Florida. David is going to walk you through the financial results and some detail. But first, I would like to give you a brief overview of what's happened this past quarter with the Company and make some comparisons with our second quarter results and what we've seen for the first half of this year.

The Company, I think again, had another great quarter although not as strong as the first two quarters of this year. Sales in our retail water segment during the third quarter are typically not as strong as the first half of the year because of lower water demand after Labor Day when tourism drops off in Grand Cayman. And also we have higher rainfall this time of the year, which affects sales. In spite of a drop in retail sales, from the second quarter of this year, of about $800,000, our retail gross margin continued to improve due to control of costs.

And we're planning for continued growth in the Cayman retail business and expect to have have an additional 1 million U.S. gallons per day of production capacity online at one of our Grand Cayman production facilities by mid-December of this year. And that's to meet really our tourist high season, which goes through until April of next year. During the third quarter, we completed an extension to our distribution pipeline in Grand Cayman within a newly opened West Bay Beach bypass road. and this new arterial road has greatly reduced traffic congestion in the franchise area. It will hopefully allow the area to continue to develop to its full potential.

Big news this past quarter for us has been the commissioning of our new flagship plant in Nassau, Bahamas at Blue Hills. Our bulk water segment revenue growth of about $800,000 compared to the June quarter of this year, was primarily the result of the higher sales to our customer Nassau from the Blue Hills plant. Gross margin, however, declined slightly when compared to last quarter because of a one-time write-off of some assets that we moved from the Bahamas operations -- related to some assets that we moved from the Bahamas operations to Grand Cayman. These are four containerized RO plants that were no longer needed in Nassau after Blue Hills was commissioned.

Another item of note, commissioning by our affiliate of the second desalination Plant here in Tortola on the east end of the island continues to experience delays and we don't expect to benefit from sales from this new plant until early next year now. Although construction of the plant is substantially complete, our affiliate is currently engaged in discussions with the Government of the British Virgin Islands regarding connection of this plant to the distribution pipeline and on terms of sale. I'm currently here in Tortola for our affiliate's annual general meeting and for meetings with government officials to discuss the status of the [Barbers] Bay and Bar Bay plants and you probably remember we put out an 8-K a couple of weeks ago about the [baggers] Bay plant.

We're hopeful that these negotiations will yield a satisfactory solution to all of the parties and we'll be providing most of the desalinated water. We have been providing most of the desalinated water on Tortola for 15 years and we've never let the Government down in this respect. So, we hope that our track record weighs heavily in our favor in these negotiations. Improvements in our services segment were due to engineering and procurement fees related to the design and construction of the Bar Bay plant, which I just mentioned earlier, here in Tortola. And we have substantially completed that project.

So, these engineering fees and related revenues in the service segment will decrease going forward. I would like to turn over the line now to our CFO, Mr. David Sasnett so he can speak a bit more about the quarterly financial results. David?

Thanks, Rick. Good morning, everyone. I hope by now you've had a chance to review our 10-Q filed last Thursday. Our Company was pleased to announce that we had net income for this quarter of $1.247 million or $0.10 per diluted share on revenues of approximately $10 million. The growth in revenues for this quarter represents a 61% increase from the same quarter of last year. Our gross profit was up 55% to $6.2 million on these increased sales.

For the nine months ended we reported net income of $6.847 million or $0.54 per diluted share. I would like to point out that at $6.8 million, our results for the nine months exceeds our net income for 2003, 2004 and 2005. So, 2006 has already been a good year for us. Our revenues grew first of all in the retail sector because of greater demand in Grand Cayman. Rick had pointed out earlier that this is historically one of the -- this is our weaker quarter for retail demand. But if you'll remember last year, at this time, the Cayman Islands were still recovering from the impacts of Hurricane Ivan.

With the reconstruction that's gone on and the fact that the Islands returned a little bit more to normal, we saw greater demand and greater tourism levels this quarter as compared to the same quarter of last year. And that accounted for the increase in our retail sales for the quarter of over $1 million. As Rick mentioned earlier, our bulk sales are up due to the commissioning of the Blue Hills plant. And our service revenues grew both for the quarter and the nine months because we're earning design and engineering fees from our affiliate OBCBI in conjunction with their construction of the Bar Bay plant.

Administrative expenses were up for both periods, primarily because of the opening back in November of 2005 of our new administrative and engineering offices here in Deerfield Beach, Florida. We didn't incur much in the way of expenses for the fourth quarter of 2005. We've had a full nine months worth of expense here and for the quarter. We've also incurred incremental payroll cost and personnel costs in our other subsidiaries as a result of new hires and pay raises and bonus accruals. Our interest expense was up for the nine months and for the quarter. $518,000 in the quarter and $516,000 for the nine months and this reflects the incremental borrowings we incurred to finance our Blue Hills plant.

We closed $15.7 million in 5.9% bonds at August of this year. And if you read our 10-Q, you'll know that we used the proceeds from that bond to repay our $5 of $6 million line of credit we have outstanding for most of the quarter. The sign of credit a high interest rate of 10.25%. And in conjunction with the Blue Hills construction back in it July of 2005, we closed $10 million of Series A Bonds in an offering in the Bahamas. And the interest expense for those bonds only impacted three months worth of results for last year, full nine months for this year. So, with that, I would like to turn things back over to Rick. And we'll proceed here perhaps to answer some questions.

Thanks, David. Just want to talk about some projects that are underway right now, which will impact our financials in the future. We announced back in early July that we were awarded a contract by the Water Authority in Grand Cayman to expand the North Sound desalination plant from 800,000 gallons per day to 1.6 million gallons per day. We're currently working on that expansion and it should be online early next year.

We also announced in that late September, that we were advised by the Government of Bermuda that we were successful in our design build and operate bid for a new 600,000 gallon per day desalination plant in Tynes Bay, Bermuda. We're currently finalizing the terms of the contract and have commenced preliminary design work for the project. And this project should be online in late 2007. As we previously announced, the total value of this contract is approximately $10.5 million and includes the construction and operation of the desalination plant plus a pipeline from the plant to the customer's storage reservoirs in Hamilton.

In the Bahamas, we believe there's still opportunities in the Bahamas for additional business. Demand continues to grow in Nassau due to several golf course developments and hotel developments that are underway. And our customer has been very aggressive at getting that business from perhaps self-supplied by the hotels. There is a new development in Nassau called South Ocean, which has recently started grow in a large golf course.

There was an announcement in the Nassau papers last week about a new development called Albany, again on the west side of nEw Providence Island where Nassau is. And this is in close proximity to our Windsor plant. Of course, we think there's some opportunities there for us to supply more water to the Bahamian Government. In Barbados, we continue to watch for any developments on a project, which was announced by Government earlier this year, which includes the construction and operation of a new desalination plant and waste water reuse plant in Barbados.

We were prequalified earlier this year with our partners in Barbados and a U.S.-based engineering firm but there hasn't been anything further to report on this project at this time. The Government hasn't released any bid documents yet. And of course, we continue to evaluate other opportunities in the Caribbean and believe that the demand for our services is growing. As the local populations of these islands and tourism growth forces many islands to transition to seawater desalination from more traditional water supply methods. I would like to now open up the call for questions. Lawrence?

Thank you. [OPERATOR INSTRUCTIONS] Your first question is coming from Ryan Connors of Boenning and Scattergood.

I wondered if you could just drill down a little bit on the SG&A line. David, I know that you went through some of the driver. But now that Deerfield Beach is up and running, I wondered, should we expect to see some leverage going forward off of those -- off the current SG&A levels or should we expect that to remain somewhat confident on a percentage of sales, kind of a basis?

I think that -- we have a certain level of SG&A that we're required to have in place just because we're a public Company and reporting requirements. We have engineering costs. But I would think those expenses are not going grow as quickly as sales. So, as a percentage of sales, if sales were to increase significantly, I would expect our SG&A not to grow as quickly.

Okay, great. And then this one more for you, Rick. You mentioned some specific deals but if you could just kind of give us a more broad update on your thinking on the competitive environment. Just in terms of what you're seeing. Is competition for deals, is it heating up? Is it cooling off? Is it unchanged? In particular, with regard to some of the big deep pocketed type of players?

Well, sure, GE and [Violie] are in this market and we're always seeing them on the bigger projects. Sometimes on the smaller ones and certainly on these expansion projects, it is not a competitive situation. We had one other competitor in Bermuda, although there were four prequalified. It was two companies that bid including ourselves. So, I don't think there's a sort of a general statement that you could make about it. These guys -- I don't know what their plans are from the standpoint of our market. I hear things but on the bigger projects, we'll certainly come across them.

Great. And then one last one. We take a look at the Cayman Islands Department of Tourism data they publish in terms of the tourism trends. And they indicate that there's a pronounced shift going on where more and more tourists in the Caymans are cruising as opposed to staying onshore. I wondered if you could just comment on whether you guys are seeing that trend and what impact it has on you from a water demand standpoint and your growth and your core market?

Yes, I certainly see the trend more. Cruise ship tourists and probably less stayovers but the stayovers, in my estimation seem to be a lot of higher end tourists. They have the Ritz-Carlton that came online, it was the end of last year. The average cost of a room there is like $800 and something a night. It is not -- Cayman is not and never has been a mass tourism market from the standpoint of stayover tourists. You can see in our earnings and in our revenues from our retail market that things continue to grow from a water demand perspective. So, perhaps, these people that -- the wealthier people that come to the island just use more water per capita or something. Buy we're certainly not seeing a drop-off in the demand. And it is sort of at odds with the tourism figures if you research them.

That's helpful. Thanks a lot, guys.

Ryan, I would like to add that I don't know what period you're looking at when it comes to tourism statistics but quite frankly, for a period of time there was no place for the tourists to stay in Grand Cayman because of the destruction of all the hotel rooms as a result of Hurricane Ivan. If you look at development on Seven Mile Beach, it is substantial. So, we haven't seen a drop-off in our retail sales. I don't know -- I can't quite understand the inconsistency with the tourism figures. But we haven't seen any adverse impact on retail sales yet.

Great. Thank you.

Your next question is coming from David [Softer] of Fidelity Merchants.

Good morning, gentlemen. Congratulations on a great nine months. Just a quick question for Rick. With respect to the [Airlocked E] Project, is that dead or is there any potential for that to re-emerge?

David, we hadn't heard anything about that in quite a few months. To my knowledge, it hasn't moved forward. I'm really -- we haven't been advised by Government that there's been a successful bidder there or anything like that. So, I really can't comment on it other than to say I'm not sure what the position is.

Okay. Thank you.

Your next question is from Debra Coy of Janney Montgomery.

A couple of questions. Rick, can you give a little more color on what the issues are there with the BVI Government, where you're there having discussions about the future of Bar Bay and baggers Bay. Kind of what the -- a little bit on what the politics surrounding the discussions are?

Well, I can only reiterate what we've said in our filings really which is, as far as I know the position. We have I suppose a difference of opinion on whether we still have a contract at the baggers Bay plant with Government. They took a particular position back in the late '90's about the plant regarding the contract status. And then seven years later, they've somewhat changed their position, so we're in discussions with them now to try to get everybody on the same page and to perhaps get a new contract going forward.

Has there been a change of Government that has caused a change of position?

No, I don't think so. I think it is just the fact that the extension to the contract expired back in the end of May this year. And I think we haven't been having any discussions with Government or very intermittent discussions over the last seven years regarding a new contract. So, I think it is just this expiration has brought everything to a head and it is good that we're all around the table now talking about it. To try to map things out going forward.

Okay. And just so I understand correctly, if very worst-case scenario, the whole thing fell apart, they decided to take it over, what you would be facing is a relatively modest loss of income, about $1 million a year, as I recall, in the other income? And then you would also take a write-off on the assets?

Yes. We've mapped that out quite accurately there in the 8-K and also in the 10-Q we just filed. That's worst-case scenario is what we've presented there in the 10-Q.

Okay. Understood. And do you have any sense of the timing of when this issue might get resolved?

No, I don't.

Too early to tell? Okay. Fair enough. So, you'll be in touch on that. My other question is related to the new Bermuda contract. Can you talk about how that would flow through in terms of construction revenue and so on? How we should expect that to flow through the income statement as you start the process? I know that your engineering service revenues are ramping down as Barbados completes. Will that ramp back up as a result of Bermuda going into next year? How does that work in terms of how the contract plays through?

Well, I would probably let David answer most of the detailed stuff. But I can tell you that this particular contract in Bermuda is not a boot contract. So, it is not going to flow through our bulk water segment. But most likely flow through services and we'll have engineering and design fees that come back to us from that project and we'll also have profit on the sale of the plant. So, maybe I could let David pick up from there.

Well, we formed a 40% owned affiliate, Debra and essentially, the contract is one where we're selling the plant itself to the Bermuda Government and agreeing to operate it for one year.

Right.

So, to the extent there will be profits generated by the affiliate, we get a portion of that. We also get management fees from the affiliate and there will be some incrementals on the engineering fees that we incur to the affiliate. I think it is important to note that this is not something that is going to generate long-term revenues for us as is the case with some of our other contracts. Essentially, we build a plant and then we operate it for a year. So, after two years, our revenue stream in theory would be completed from this plant.

Right. Understood. And there hasn't been a discussion about doing a long-term contract. It is basically a design build and once it is running well over a year, you turn it over to them.

Well, there has been discussion and I think the door is still open for that. But it is not clear really how that's going to end up at the end of the day. But for certain, we have a contract that generates revenue over the next two years.

Okay. Fair enough. Thank you very much.

[OPERATOR INSTRUCTIONS] There appear to be no further questions at this time.

Okay. Well, I'll just wrap it up. Just thank everybody for calling in today. And just wanted to mention that again, something that's always near and dear to our hearts, the end of hurricane season is drawing near at the end of the month. And we're thankful that none of our operations had any serious close calls from storms this year. And we hope that that will continue in the future. And I wish you all a very happy holidays at the end of the year and look forward to talking to you early next year when we have our 2006 earnings call. Thank you.

Thank you. This concludes today's Consolidated Water Company third quarter earnings conference call. You may now disconnect your lines at this time and have a wonderful day.