Consolidated Water Co Ltd (CWCO) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Breanna and I will be your conference operator today. At this time, I would like to welcome everyone to the Consolidated Water Co. 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 the forward-looking statement. This conference call may include statements that may constitute forward-looking statements usually containing the word believe, estimate, project, intend, expect or similar expressions. These statements are made persistent to the Safe Harbor provision 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 of the jurisdictions in which it operates, the ability to successfully secure contracts for water projects in other countries, the ability to develop and operate such projects profitably and other risks detailed in the Company's periodic report filings with the Securities and Exchange Commission.

By making these forward-looking statements, the Company undertakes no obligation to update these statements for revisions or changes after the date of its conference call. Thank you.

It is now my pleasure to turn the floor over to your host, Rick McTaggart, CEO and President of the Company. Sir, you may begin your conference.

Thanks, Breanna. Good morning, ladies and gentlemen. Thank you for calling in this morning to discuss our 2007 first-quarter results. Mr. David Sasnett, our CFO, is also on the line today from our Florida office. David will discuss our financial results in some detail, but first I would like to give you a brief overview of what we have been doing in the Company so far this year.

Our retail sales in Grand Cayman in dollar terms remained flat in the first quarter of '07 compared to last year, however sales in terms of water volume actually increased by about 3% when compared to the first quarter of '06. What we saw was a shift in consumption to lower tariff residential customers from our higher tariff commercial customers in 2006.

The first and second quarters of the year are historically our best-performing quarters in our retail business and you will see that in terms of sales, we had an increase of about $1.2 million when compared to the fourth quarter of last year. And we have always said this cyclical retail consumption is typical due to increases in tourism and decreases in rainfall during the first half of the year.

There are still three large developments that are nearing completion in Grand Cayman, including the Caymana Bay development and although we had expected some water usage from these projects in the first quarter, it now looks like it will be a few more months before these come online. However, we do expect additional commercial usage by these properties later in the year.

We completed the installation of 1 million gallons per day of temporary water production capacity at one of our Grand Cayman retail production plants in March and you will recall that last year we relocated four containerized RO units from Nassau and these units are now being utilized to meet increased water demand in Grand Cayman.

Water demand in April has been a little bit better than we expected and we are utilizing these temporary units to meet that demand.

Turning to our bulk business. Our bulk segment has shown significant revenue growth since the first quarter of 2006 and that is mainly due to the commissioning of the Blue Hills plant in the Bahamas last July. We also benefited to a much lesser extent from increased sales in our Belize operation. Our bulk segment typically generates lower gross profit margins than retail and you will note that there has been a shift from a predominantly retail-based business in the past to business with approximately equal retail and bulk revenues. This shift has caused an expected shift in the Company's gross profit percentages.

So if you look at the first quarters of this year's figures and you take out the nonrecurring services segment revenues of about $2.1 million, in the past quarter, you will see that bulk revenues comprised about 49% of total revenue compared to about 41% during the same quarter last year.

Our bulk segment gross margin improved in the first quarter when compared to the same quarter last year and compared to the fourth quarter of 2006 and we expect further improvements when we complete the nonrevenue water project in the Bahamas later this year. We have mentioned before that we are essentially providing 1 million gallons of water to the Bahamas government at no cost until we have completed the remedial works on their distribution system and save them 1 million gallons per day of lost water from their distribution system. That project is moving along very well and we expect that to be completed later in the year.

I would also like to mention that I'm particularly pleased with the improvements that our management team has made in the Belize operations, which is generating more revenue at lower operating costs than in the past.

Also in the bulk segment, we expect the North Sound plant expansion in Grand Cayman, which was commissioned on April 1, to generate incremental bulk segment revenues starting in the second quarter of this year. The construction profit that we made on the sale of this expansion to the Water Authority-Cayman under a seven-year build-to-own-operate-transfer contract was included in our services segment during the first quarter of this year.

Now looking at services, as I just mentioned, our services segment benefited from the construction of two desalination plants; the Tynes Bay plant in Bermuda, which is currently under construction and the North Sound plant, which I just mentioned. We are making good progress on the Bermuda Project and we expect this plant to be online early next year.

We announced in our 10-Q that our management contract with Sandy Lane in Barbados will terminate next month, which will impact revenues in our service segment, but which we don't expect to significantly impact our overall financial results in the third quarter. We are obviously disappointed that Sandy Lane chose to terminate the contract and operate the plant internally, but we are always grateful for their business over the past seven years.

Our BVI affiliate continues to participate in negotiations with the BVI government to secure a new contract for the Baughers Bay plant in Tortola and to secure a contract for the Bar Bay plant on the east end of Tortola. There has been some posturing on both sides recently and the government has been paying us irregularly for the water from Baughers Bay and if you look at the 10-Q, we have included some detailed disclosure about that.

David, you want to just talk some more about the financial results?

Sure, Rick. Good morning, everyone. First and foremost, we are pleased that we could report $500,000 more net income this quarter as compared to the first quarter of last year. That was really driven by revenue growth of $3.5 million. If you read our 10-Q or looked at our press release, you will know that we generated $1.7 million more in bulk revenues this period and that was because of the commissioning of Blue Hills. We also had a big increase in our services revenue, almost $2 million, and that is directly attributable to the construction of Tynes Bay and also the plant we are building at North Sound or the expansion that we have at North Sound in the Caymans on behalf of the Water Authority-Cayman.

Overall, margin was 42% on a consolidated basis. That is simply because -- as compared to 52% from last year and that decline is simply because we now have most of our growth in terms of the bulk segment of our business and that, as Rick has mentioned earlier, historically has generated a lower margin than retail. But overall, gross profit was up about $600,000 for the quarter.

G&A was up and as we mentioned in our 10-Q, that's primarily because of the additional expenses we have incurred in Deerfield Beach for the opening of our Aquilex subsidiary. We made a strategic decision some time ago to increase our in-house engineering and design resources and in the past, those services were contracted outside of the Company, but now we have in-house expertise that we think is really the right move for us in a lot of our current construction and anticipated contracts that we hope to be winning in the future.

Our other income. Interest income is up. As everyone knows, we closed a stock offering in December. We've invested those excess funds until they could be utilized in capital projects and interest-earning deposits. As a result, interest income was up about $400,000 for the quarter. Interest expense is up as well, but that is because during the first quarter of last year we were capitalizing almost all of our interest expense to the Blue Hills contract.

If you look at the margins by segment, 65% that we generated for the retail segment this quarter was slightly lower than 71% for the first quarter of last year, but that is very consistent with what we have seen historically. The retail segment gross margin usually varies anywhere from 65% to 72%. As Rick said, we had some lower tariff residential customers that comprise most of the slight increase in retail for this quarter and as a result, our margin declined slightly.

We are very pleased that our bulk revenue division -- their margins increased from 22% for the first quarter of last year to 26% for the first quarter this year despite the fact that we incurred about $200,000 in variable cost at Blue Hills for the nonrevenue water that we are giving to them until we complete the repair to their distribution system.

From a balance sheet perspective, our Company has grown healthier since the end of the year. Our working capital now is about $45 million as of March 31 as compared to about $40.5 million as of December 31, 2006. We have slight increases in receivables because of the construction projects we have in the services segment of our business, but we've managed to continue to amortize our debt and we generated $1.9 million in cash for this quarter. This compared to about $1 million for the first quarter of last year. So the balance sheet has gotten healthier, cash flow has increased and we are happy that we can report increased gross profit and an increased net income and EPS figure for the quarter.

And with that, I will turn things back over to Rick for the conclusion of our call.

Thanks, David. As is typical on these calls, I will just spend some time now talking about the various projects that we have underway and that we expect or we hope to have in the future.

The Governor's Harbour plant in our retail segment is being expanded to meet increased demand. These containerized RO units that are presently in operation will be moved toward the end of next year and by that time, we will have replaced that capacity with a permanent expansion to that plant. We are looking carefully at our demand growth and at this time, we are anticipating putting in one million gallons per day of additional capacity, but we are looking at possibly expanding that depending on how this peak season continues out this year.

In Bermuda, the Tynes Bay plant is progressing as expected and we will have that online early next year. There is also a one-year operating contract that starts when we complete construction of the plant, which will take us into 2009 -- early 2009. We continue to see opportunities, other opportunities to grow the business in Bermuda and we believe that the island will need additional desal capacity in the future.

I mentioned during the last conference call that we had been asked by the Water Authority-Cayman to bid for a 2.5 million gallon per day RO plant in Grand Cayman. I will just mention that this bid deadline has been extended a couple of times and we expect to submit our bid in early June. We understand that other competitors, including General Electric Corporation, are also looking at this project. We certainly hope that our local experience and expertise will give us an edge that we need to be successful.

In the Bahamas, a very busy market that we recently submitted, but we believe to be a very competitive bid for a 3 million gallon per day RO plant to the Water and Sewage Corporation of the Bahamas and this plant is located or will be located at Winton on the east end of Nassau. We were one of two companies that were invited to bid for the project and we are presently awaiting a decision by the Bahamas government.

You may have heard that the Bahamas held general elections about two weeks ago and there has been a change in government there. There is a new ruling party, though we don't expect to hear much about the Winton project until the new government settles in and gets acclimated.

In Belize, we are presently working with our customer, Belize Water Services Limited, to assist them to extend their water distribution system to the northern end of Ambergris Caye. We believe that extending the customer's pipeline will provide us with an opportunity to sell more water to the customer under our 23-year exclusive water sales agreement.

I will just mention that these discussions are still preliminary and we don't expect this project to impact our 2007 bulk sales.

Now Breanna, I would like to open up the call for questions.

(OPERATOR INSTRUCTIONS). Michael Gaugler, Brean Murray, Carret.

Good morning, everyone.

Good morning, Mike.

Rick, I noticed that you did a bit more retail volume in 1Q '07 versus the fourth quarter in '06, but your cost of sales actually ticked down slightly. Was that the result of better plant operations or is there something else affecting cost of sales?

It would be from more efficient plant operations. The cost of sales are really the costs in retail that we incur to produce and distribute the water.

Okay. And I was also noticing that the debt level really hasn't changed a whole lot since the offering. Should we be expecting to see a significant reduction in long-term debt or do you have other plans for the cash that is kind of sitting out there on the balance sheet right now?

I will answer this, Rick. Michael, if you look at the terms of our bonds in the Bahamas, they are not amortizing; we pay them off at the end of 10 years. The bonds we recently issued in Trinidad through Trinidad and Tobago, Scotia Bank in Trinidad and Tobago, they will not allow us to pre-pay those bonds for three years. So certainly we would like to pay down some of the debt, but we are just not allowed to. Other than that, we don't really have anything else significant on our balance sheet.

All right. Thank you, gentlemen.

Sure. No problem, Mike.

Ryan Connors, Boenning & Scattergood.

Thanks. Good morning, guys.

Good morning. Ryan, how are you doing?

Pretty good. Just kind of had a bigger picture question with regard to pricing. Obviously it seems that just structurally the value of water in the Caribbean should be going up. I mean obviously there is demand, the tourism markets are doing well, demand is going higher, there is not a lot of new incremental natural supply. So I am just wondering do you see that underlying kind of reality being reflected in the bidding and the negotiations that you go through or in terms of how contracts will go out on a per gallon basis or is kind of the competition -- the level of competition kind of holding that back from taking place?

Well, Ryan, it is hard to just put your finger on one particular thing like that and say -- and generalize it for the Caribbean. It depends on the size of the plant that is out for bid. It depends certainly on the number of competitors that are invited to bid for the capacity and I suppose it depends on the economy of the particular country that you are bidding in. So I mean the prices are going up.

Certainly bids that we have seen recently are higher per gallon than water that say we bid on three, four years ago and that is driven by a number of things; material pricing, commodities pricing, stainless steel pricing has gone up. Energy pricing continues to go up. So there are a number of things that really impact the cost, but we try to be as competitive as possible and really examine each particular bid on its own to see what would fly really.

That's great. And so in terms of retail versus bulk, I mean would the answer you just gave kind of be the same for each of those or is there a difference in how that plays out one versus the other?

Well, I am talking specifically about bulk because in our retail segment, we are tied in by an exclusive license here in Grand Cayman. I mean that is predominately our retail revenue there. We also have the Bimini operation, which is a very small part of our retail segment. So you are not -- in Cayman, the pricing is dictated by the license; it is not something that we are growing and renegotiating every year or every few years. It was a 20-year license.

But in terms of the -- okay. Got it. That's helpful. Thanks a lot, guys.

Sure. No problem, Ryan.

(OPERATOR INSTRUCTIONS). David Bunzel, Irvine Capital.

Hi, guys.

Hi, David. How are you doing?

Fine. Could you repeat the question or give me a little more detail on the debt paydown? I didn't catch the beginning part. Did you say the first debt tranche you can't pay down for 10 years or is there a prepayment penalty and then three years was the anniversary for the second tranche?

That's correct. The bonds that we closed in the Bahamas are not amortizing. The principle is due at the end of 10 years.

And we can start repaying those down in June of 2008 actually without penalty.

And the other is the bonds that we closed with Scotia Bank in Trinidad and Tobago, we can start repaying those three years after they closed and that was back in August of 2006.

That would be August '09, yes.

Okay. Thank you.

No problem.

(OPERATOR INSTRUCTIONS). Heike Doerr, Janney Montgomery.

The language in the Q seems to indicate regarding Bar Bay and Baughers Bay that things aren't quite progressing at the pace that you had originally been planning. Can you maybe give us additional color on how those negotiations are going and what exactly it means when you say that you are being paid irregularly by the government for Baughers Bay water?

Sure, I don't think that we have ever given any sort of expectation of when this would finish. I mean it is something that certainly we are being patient with in the negotiating process. If you look at the Q, we do talk about what we mean by irregularly. I mean they have basically agreed to pay us a portion of what we bill them and we are waiting on some payments at that sort of rate as well.

I mentioned earlier that there has been some posturing. I think this is part of the government posturing. They must have a rate in mind that they want to come to in the negotiations and we certainly have offered them a rate back in November of last year and we are waiting for them to respond formally and I think we are just being patient with this. That is the bottom line, but we don't have any sort of -- we would like to finish it as quickly as possibly obviously, but we don't have any sort of expectations or deadline looming for this.

And are they continuing to take every drop of water that you are producing?

Oh, they certainly are, yes.

So there hasn't been any demand shift?

No, there hasn't. No.

Okay. And regarding the nonrevenue water, I know that that is a calculation you make quarterly. When is the next time that you will be going through that arduous process?

Well, the first-quarter numbers are being processed now, so end of March numbers and there is a validation process and sort of a procedure that we have agreed with the government there that needs to be -- to validate these numbers for the first quarter. So as soon as that is done then we will see where we are with the project.

Is it reasonable to think that the second quarter will be the last quarter that we see this nonrevenue water or could this continue into the second half of '07?

I think we originally supposed we thought we would be finished with this by the end of the third quarter of 2007.

That's right.

So that's --

So that expectation hasn't changed?

Not at this point, no.

Okay. Thank you, gentlemen.

Thank you. There are no further questions. I would like to turn the floor back over to Mr. McTaggart for any closing remarks.

Thanks, Breanna. Just like to thank everybody for dialing in this morning and wish you all the best and we hope to hear from you during the next call. Thank you.

Thank you. That does conclude the conference. You may now disconnect your lines and have a wonderful day.