Consolidated Water Co Ltd (CWCO) 2007 Q3 法說會逐字稿

Good morning. My name is Jessica and I will be your conference operator today. At this time, I would like to welcome everyone to the Consolidated Water Company third-quarter 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 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 government 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 this conference call.

Thank you, it is now my pleasure to turn the floor over to your host, Rick McTaggart, President and Chief Executive Officer. Sir, you may begin your conference.

Thank you, Jessica. Good morning, ladies and gentlemen. Thank you for joining us this morning to discuss our 2007 third-quarter results. David Sasnett, our Chief Financial Officer is also on the call with me this morning. I would like first to give you an overview of things that affected our results during the quarter and then David will talk a bit more in detail about the numbers.

I'm very pleased that revenues from our retail segment continue to grow in the third quarter when compared to last year. They were actually up by 13% over the third quarter of 2006 due to higher sales volumes in Grand Cayman. Retail sales in total dollar terms in our third quarter are typically somewhat lower than the first and second quarters of each year and you will note this trend if you're comparing this quarter's results to last. This seasonality is usually due to a tapering off of tourist arrivals in Grand Cayman during September and rainier weather conditions during the summer months.

The Company continues to work on two separate projects that will expand water production capacity in our Grand Cayman retail operation by about 2.3 million gallons per day by the end of next year. We're very pleased to report that our Governors Harbor site was rezoned last month and this will enable us to more efficiently utilize this site for our present expansion project as well as for future projects. Earlier this year we also completed the purchase of a parcel of land directly adjacent to this site which will provide additional space for water production and storage in the future.

Tenants are now moving into the first phase of the 500 acre Camana Bay project which is within our franchise area and we expect to benefit from increased sales of this project as this project continues to grow over several years. In a new development, the Ritz-Carlton project in Grand Cayman recently purchased the Safe Haven 18-hole golf course property which is also within our franchise area and which has been a valued customer for many years. We understand that the new owner intends to develop the properties around the golf course with high-end homes and condominiums to complement the very successful Ritz-Carlton hotel and residences which are located just next door to Safe Haven.

So, as you can see, we're positioning ourselves for continued growth in our retail segment in Grand Cayman. In our bulk businesses, our Belize operation, although small and contributing about $1 million a year in revenues, continues to improve with a consistent 14% year-over-year revenue growth. Gross profit margins have also continued to improve since we completed certain modifications to the plant which have reduced energy consumption and maintenance costs.

Our customer, the government-owned water utility on Ambergris Caye is keen to extend its water distribution system to the northern parts of the Caye which would generate additional revenues for us and we're currently in discussions with them to assist with this expansion. We hope to have the opportunity to meet with senior government officials in Belize later this week to iron out the final terms of such assistance.

In Grand Cayman, our bulk segment revenues grew by about 7% over the prior year's third-quarter revenues and this growth is an improvement over revenues in the second quarter of this year which were flat compared to the prior year's second-quarter results. Our customer, the Water Authority completed the commissioning of a booster pumping station earlier this year which is pumping greater volumes of water to the Eastern districts of Grand Cayman and should continue to positively impact our revenues as it did in the third quarter.

In the Bahamas, we believe that we fully met our obligations under the NRW portion of the Blue Hill's contract as a March 1, 2007 and we have made a final submission to our customer with data supporting that completion date. However, our customer is currently reviewing the submission. We have therefore not yet booked any revenues for the one million gallons per day of NRW water that we have supplied after March 1. The cost of producing this NRW water during the third quarter without corresponding revenues continue to depress our profit margins and we're hopeful that our customer will sign off on the project soon.

We believe that this project, although it's been difficult has been a win for both the Company and our customer. Provision of NRW reduction services helped us to win the Blue Hill's plant contract and has greatly benefited the Bahamas Water and Sewage Corporation who is now saving more than $2.5 million per year in lost water.

During the quarter, we also made good progress identifying ways to lower the incremental operating costs that we are incurring to keep our membranes clear from fouling at the Bahamas plants. And we will be embarking on three separate engineering projects which when completed are expected to improve bulk operating margins early next year.

Resolving these technical and operational issues in the Bahamas has sometimes been very difficult and finalizing the NRW program has taken longer than we had originally planned. However, I'm extremely encouraged that we're making progress and expect that the Bahamas operation will be more profitable in 2008.

Revenue and profits from our services segment was up nicely during the quarter as work continued on the construction of the Tynes Bay plant in Bermuda. That project, which is being constructed for the Bermuda government, is expected to be operational early next year and we will continue to operate the plant for a period of at least one year after its commission.

Last but not least, I would like to talk a bit about our BVI affiliate, Ocean Conversion BVI Ltd. During the last quarter, the British Virgin Islands held general elections and a new government was elected in late August. The government negotiating team that we had been dealing with under the old government was disbanded after the elections and we just recently had the first opportunity to meet with the new minister of communications and works to discuss the Baughers Bay contractual situation and the status of the Bar Bay plant.

The meeting was productive and we spoke about the history of the dispute and apprised the honorable minister of the present condition of the two plants. And the two positives outcomes that I took away from the meeting were that we have now engaged a new government in discussions about the issues and the minister fused the resolution of the Baughers Bay dispute as a priority and seems willing to take immediate action.

On another positive note, sales from Baughers Bay have increased significantly over last year which is a testament to the island's continued dependence on the plant which produces about 75% of Tortola's water. And the costs at this plant continue to be well under control. I would like to turn the call over to David who will talk to you about the numbers in more detail.

Thanks, Rick. I just want to touch on the few financial highlights for this quarter. Our net income of $2.5 million for the three months ended September 30, 2007 was more than double the net income for the same quarter of last year and our EPS was up 70% to $0.17 for the quarter. The nine months, our net income was $8.7 million, represents an increase of about $1.9 million from the same nine-month period of last year.

On record revenues of $36.6 million, our EPS grew from $0.54 for the nine months ended September 30, 2006 to $0.60 for the current nine-month period. Our operating results reflect increases in revenues for all three segments. As Rick mentioned earlier, our retail and bulk segments grew as a result of increased demand for water. And the services revenues reflect the construction of the plant in Bermuda on Tynes Bay paid.

Our net other income increased by more than $1 million in the three months September 30 2006. The three or four components of that, interest income was up $435,000 as we have substantial cash balances that we presently are investing paid; our interest expense was down by about $280,000. As you will recall, we took some of the proceeds from our public offering and repaid debt. And our net average balances -- interest bearing balances have decreased from the same period of last year. And our equity pickup from the operations of OC-BVI was up about $170,000 for the quarter. The increased demand has led to increased profitability of that affiliate.

Turning briefly to our cash flows, I would like to point out that we generated a very healthy $8.3 million from operations, which is $2 million more than last year. We believe we have taken our solid financial position at the end of the year and continued to improve it. Our cash is up $3.5 million from year-end. Our net current assets are $46.6 million as compared to about $40.6 million as of the end of the year and we continue to repay debt. So, we're healthy from a financial position perspective. We think we're generating very substantial cash flows from operations and net income and profits are up.

So, overall we're pleased with the results for this quarter and we're optimistic about the results for the fourth quarter and for 2008. With that, I will turn things back over to Rick.

Thanks, David. There's a couple of other other projects that we have on the -- underway that I would like to update you on that I didn't speak about earlier. In the Bahamas, and we have talked before about the Wynton plant bid on the east side of Nassau. We now believe that the Bahamas government is considering other options to supply water to Nassau, including the expansion of existing desalinization facilities and the construction of new plants on different sites.

The government continues to barge water from Andros Island to Nassau and I believe they are trying to further reduce or eliminate this barging. Recent bad weather associated with tropical storm Noel stopped the barging operation for almost a week while our desalinization plants were unaffected. So, hopefully this quarter some brownie points with the government and again alerted them to the unreliability of the barges.

We're working closely with our customer in the Bahamas and would likely pursue any new desalinization projects that go to bid or we would certainly bid on them. For the time being, however, I think that the government is reassessing its options and that the Wynton bid is probably not going to proceed.

In Grand Cayman, we mentioned earlier in the year that we had been awarded a 2.6 million gallons per day plant by the Water Authority which is our bulk customer in Grand Cayman. We're working on this project and we expect it to be online toward the end of next year. That will start to impact our bulk segment revenues and profitability next year.

A new project I would like to talk about is in Roatan, Honduras. Earlier this year we purchased two parcels of land and formed an operating company on the Roatan which is one of the Bay Islands off of the northern coast of Honduras. And it's become a coveted destination for tourists from North America and Europe and there has been a lot of investment by North Americans in second homes, vacation homes on that island.

We've been investigating this market for about three years and we're presently in discussions with the local government officials to obtain the necessary permissions to produce and distribute water on the island firstly, on the western end of the island and in future to other areas of Roatan. This project would start out as a relatively small operation but we believe there is great potential for the project to become more significant to our retail segment as the island continues to develop and we expand our water production and distribution systems there.

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

(Operator Instructions) Heike Doerr, Janney Montgomery Scott.

I wanted to ask a couple of questions. First, I see that the bulk revenue increased about 290,000 -- a little under 6%. Can you tell us what percentage of that is associated with Blue Hills and what percentage of that is coming from your expanded operations on Grand Cayman?

Most of the increase is coming from the Bahamas. I don't have the exact percentage in front of me. But the majority of the increase came from the Bahamas.

Okay. And the nonrevenue water charges, will that bleed into the fourth quarter as you wait for the government to sign off that you have fulfilled your end of the obligations?

As we disclosed in the Q, the nonrevenue water billings that we have made to the WSC were not recorded in this revenue. The WSC has to look at the assessment that we prepared and agree with it and they could agree that we -- that the requirement is March 1 or at some later period or they could dispute everything.

But what we've done is, we've built them and we're not recognizing any revenues. As soon as they agree with our assessment, at whatever period in time we would recognize the revenues I guess from that date forth. And those revenues would be -- to the extent that they relate to periods prior to September 30, they would be recorded in the current quarter.

And do you have any any idea what the government's timeline is on resolving this matter?

I will just say that I'm going to be over there later this week and I have a meeting with them. Obviously, we're anxious to get this resolved. The government I think is going to be reasonable about it and try to get it resolved as quickly as possible. It's a big number for them and they obviously want to have enough time to do their own internal reviews so we we respect that.

And it's a lot of numbers for them to go through, correct?

Yes, it certainly is. Yes.

One last thing on this Honduras project, you say it's a small operation. Can you quantify that in relationship to Belize? Would it be smaller than what you had in Belize currently?

Yes, I think initially it would be smaller than Belize. The key here is that it would be a retail operation. Belize is a bulk operation. So, our margins on retail are typically a bit higher. And it would be a greenfield project. So, it would take a number of years to really become significant to our results, I think. But it's a new market for us and we're very excited about it.

Okay, and a final question. Assuming that these membrane fouling issues get resolved where do you think those margins end up? I know in the second quarter last year they were as high as 28%. Do you think that that is around the range that we could expect to see once the operating kinks have been worked out?

Last year at this time, we had some containerized units that were in use over in the Bahamas.

That's right, and that was included in the second quarter.

Those units generate very high margins. And, I don't know if we would ever reach 28% again. You mentioned the membrane fouling problems. We've solve the problems. We've had to incur some incremental costs relative to chemicals and other things that have depressed the margin somewhat. We think we've come up with alternative solutions that are cheaper than the previous solutions we implemented. We think those margins will improve as a result of those reduced costs.

Two things that will really impact the bulk operations going forward relative to margins will be lowering these costs and being able to bill for the NRW water. So, that's what you should really focus on, I think, if you're trying to look at where our margins would be going forward.

Understood. Thank you so much for your time.

Ryan Conners, Boenning & Scattergood.

A few questions. Number one, on the NRW issue, I wondered -- it seems to me that according to your March 30 completion date, you're actually able to complete that portion of the project fairly expeditiously. So, my question is, going forward -- number one, are there other territories you'd be bidding on where NRW would be an issue? And if so, given your experience here, is that something you would -- a service you would consider including again as part of your proposal?

Well I mean certainly, if it benefited us, we would see it as a value-added service that we can offer to potential customers and we used it as I mentioned earlier to get the Blue Hills project. So, I think it's something we would consider in the future if it benefited us.

Okay. So, the fact that it's -- there's been a little bit of an issue in terms of it hasn't worked exactly as planned doesn't scare you off from offering similar service in the future?

I think we've learned a lot in this project and we could certainly employ that to remove some of the uncertainty in future projects.

Sure. And secondarily on the service business, obviously the service business is doing very well right now. I wondered if you could just talk kind of at a high level about what direction the market is taking in terms of design-build transfer versus design-build operate.

I know your preference in the past has been to retain ownership where possible. But, are you kind of seeing a shift towards projects like Tynes Bay where the customer wants to own the assets or is that -- or should we not expect that to be a more prevalent type of project for you going forward?

I think that sort of project is going to be the exception more than the rule. We actually see continued interest in the design-build operate and finance projects more than the DBOs.

Okay. And then just one last one quickly if I could. David, you talked about the cash flow. Obviously the cash flow generation is impressive. I guess cash is well over $40 million now. Obviously, there are projects out there that are taking up capital. But I wondered if there's been any talk or consideration about a substantial increase on the dividend side in addition to the debt paydown now that cash does seem to be accumulating.

We have looked at the dividend at our Board meetings. We continue to discuss it each quarter when we approve the interim dividends. There's got to be some conclusion from our perspective that it really would improve the share price. Right now, our dividend is relatively small and if you look at its impact on our market cap, I don't think it's that significant. I'm not an investment investment banker so perhaps I'm not -- maybe someone can point out something different to me. And we are not sure that increasing the dividend would necessarily do much for our stock price. We will certainly consider it.

We like the fact that we have this cash available because we do think that over the next two to three years there will be a lot of opportunity in the Caribbean, either for new projects or to acquire assets and things like that. And, the purpose of our offering was to put us in a position to take advantage of those opportunities. So, we always try to balance the dividend against having cash to pursue new projects. We do look at the dividend -- I just can't -- I couldn't say at any point in time that we would be about to increase it.

(Operator Instructions) There appear to be no further questions at this time. I'd now like to turn the floor back to Rick McTaggart for any closing comments.

Thanks, Jessica. I just would like to thank everybody again for listening in this morning and wish everybody a happy holidays and we will be talking to you again sometime in March of next year. Thank you.

Thank you. This concludes today's Consolidated Water Company conference call. A replay of this call will be available through November 19, 2007 using dial-in numbers 877-519-4471 or 973-341-3080, with a pin number of 944-2680. You may now disconnect your lines and have a wonderful day.