Consolidated Water Co Ltd (CWCO) 2007 Q4 法說會逐字稿

Good morning, and welcome to the Consolidated Water Company Ltds fourth quarter earnings conference call. For your information all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS) This conference is being recorded. Consolidated Water Company Ltds fourth quarter earnings conference call March 18th, 2008, 11:00 a.m.

Forward-looking statements to be recited by course call operator. 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 risk and uncertainties that could cause actual results to differ materially from forward-looking statements. Factors that would cause or contribute to such differences, include but are not limited to, continued acceptance of Company's products and services in the marketplace, changes in it's relationship with the governments of 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 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.

I would now like to turn the call over to Mr. Rick McTaggart, President and CEO, of Consolidated Water. Mr. McTaggart, you may begin.

Thanks, Denise.

You're welcome.

Good morning, ladies and gentlemen, and thank you for taking time from your busy schedules to join us this morning to discuss Consolidated Water's fourth quarter and full year financial results. I'm joined this morning from our Florida office by David Sasnett, our Executive Vice President and Chief Financial Officer.

I'd, first of all, like to express our sincere condolences on behalf of the Company to Steve Carr and his family whose father Hal Carr passed away two weeks ago and whose mother passed away over the weekend. Hal Carr was one of the founding directors of Consolidated Water and served on the Board from 1980 to 2000, when failing health forced him to step down. His son, Steve was appointed to the Board shortly after Hal's retirement and has served as a Director for almost 10 years. Our thoughts and prayers are with Steve and his family in this difficult time.

I'd like to give you, first of all, a general overview of our business activities in the fourth quarter. Then I'll turn the call over to David to talk in more detail about the numbers. Change in the order of my presentation a bit this time, and we'll start off first by discussing recent business activities of our British Virgin Islands affiliate. Since September 2006, our affiliate ocean conversion BVI has been involved in a dispute with the Virgin Islands Government over ownership of the Baughers Bay plant in Tortola. This ownership dispute took on an additional dimension in January last year when the Government advised our affiliate that they would start by paying an arbitrary rate for water delivered from that plant, which is actually less than our production costs, and began building a significant receivable balance during 2007. Consolidated and its BVI partners have diligently pursued an amicable resolution to this dispute, and have been encouraged by recent discussions with the new BVI government that took power in August of last year.

As a result of high-level meetings with Government late last year, we received a substantial payment of $3.5 million in January, which we applied to the receivable balance. We've had further meetings and believe that the government is now prepared to negotiate a mutually satisfactory solution to the Baughers Bay plant dispute and to contract with our affiliate to purchase water from the idle 600,000 gallon per day Bar Bay plant on Tortola. Our investors should know that our BVI affiliate supply is over 75% of the water consumed on Tortola and has always recognize the responsibility that goes along with supplying a essential commodity like drinking water to the public. We've endeavored to exercise patience and determination to resolve this dispute without inconveniencing the BVI public, and I believe that the powers that be have given us credit for this. We'll keep the investing public apprised of our further progress, and hope to be able to report to you that we have resolved these issues within the next several months.

From an operational standpoint, the BVI affiliate performed very well in 2007. Sales in terms of gallons were up by 14% over 2006, while we contained direct costs in dollar terms below the total for the entire prior year. These cost reductions were achieved through improved maintenance techniques and energy efficiencies at the Baughers Bay plant. In 2006, we implemented a computerized maintenance management system, or CMMS for short, at several of our operations, including BVI. This system helps us to easily track equipment maintenance and logs useful data that helps us to diagnose the root cause of the inevitable equipment failures. The BVI and Belize operations in particular have embraced the new system and have benefited the most from improved operations in 2007. We intend to roll out the system across all of our operations over the upcoming year and expect similar improvements.

So far, in 2008, sales from the Baughers Bay plant have continued to increase their rapid pace, and the plant has been consistently running at more than 95% of its rated capacity over the past three months. This growing demand for water in Tortola bodes well for reaching an agreement to sell water from the Bar Bay plant sooner rather than later.

Our retail sales in the Cayman islands were up in the fourth quarter when compared to the same period in 2006, but were flat when compared to the third quarter of 2007 and fell below our expectation. October and November were much rainier than in previous years, and our sales to large irrigation customers like golf courses and hotel properties, were lower than expected as a result. Un fortunately, this trend has continued into the first quarter of 2008, and we do not expect to see the large increases in retail sales in 2008 that we saw in the first two quarters of 2007, primarily because of wetter weather in our service area in Grand Cayman.

However there are several large condominium projects that are currently under construction, and we expect to be using water later in the year. The 500-acre Camana Bay project, although ramping up more slowly than anticipated, continues to complete new units and plant the lush landscaping that is the hallmark in this development.

In January, we completed an upgrade to our West Bay plant, which included the installation of the calder DWEER energy recovery system on the second production train at that plant. This upgrade has increased the production capacity of that plant by 210,000 gallons per day and has more importantly improved the energy efficiency of the plant, which is expected to reduce production costs by more than $130,000 per year. The upgrade was completed on time and within budget.

We're continuing to work on an expansion of another one of our retail production plants on Grand Cayman to replace four containerized units that are temporarily located at our Governors Harbor site. This permanent plant will produce 1 million gallons per day by the end of the year, and will be capable of expanding to 2 million gallons per day when we require additional capacity. The containerized plants have already been earmarked for our Belize operation and for our startup project in Roatan if and when that develops.

Sales from our bulk water segment have continued to grow nicely in the fourth quarter of 2007 and have consistently grown quarter-over-quarter in 2007 due mainly to the completion of the NRW project in the fourth quarter of '07, which allowed us to invoice our customer for the full production from the Blue Hill plant in the Bahamas, and from fourth quarter organic growth in our Cayman and Belize bulk operations of 8.5% and 22.7% respectively. Profitability also improved in our Cayman and Belize bulk operations due to improved maintenance and cost control. In Belize, for example, we produced 14% more water in 2007 than in 2006 for about the same production costs in dollar terms.

In the Bahamas, we believe that we completed the NRW project effective March 1st, 2007, but have only received sign-off from our customer from July 1st. We're currently in discussions with our customer to obtain sign-off for the period from March 1st to July 1st, and have therefore, reserved about $333 ,000 in revenues which we have billed to the customer for NRW water, but which-- and will be booked when we receive final sign-off. We believe that our calculations justifying the March 1st completion date are correct, and are awaiting technical support from our customer for the later completion date. In the meantime, we've closed out the NRW project and have discharged all of our remaining obligations to our customer.

The Bahamas operation struggled a bit in the first-- fourth quarter due to unfortunate and unacceptable maintenance issues at the Windsor plant, which caused us to incur over $300,000 in water quality penalties for that quarter. Bahamas operation has been slower than others to embrace improve maintenance and quality control procedures and late in the year we made key changes to local Management team and other staff. We are pleased that we were able to recruit a qualified Bahamian engineer as our new General Manager, and his knowledge and depth of experience have already yielded operational improvements. We've also embarked on a modest capital improvement program at the Windsor plant, which involves RO membrane replacement and feed water system improvements which we believe will improve profitability of the Bahamas bulk operation when completed in the second half of 2008.

During the year, we also continued a modest capital expansion program in Belize and increased production capacity to San Pedro plant to 470,000 gallons per day than the previous 420,000 gallons per day. We expect to complete further modifications this year that will take the capacity up to 500,000, and more importantly we've reduced energy consumption from a high of more than 23 kilowatt hours per 1,000 gallon to about 17.4, and we expect to gain a further 1.5 kilowatt hours per 1,000 gallons with these final modifications of the plant's energy recovery system. This has translated into reduced operating costs and improved operating margins, as I explained earlier. The Government in Belize changed in early February as a result of a general election, and this seems to have temporarily stalled our discussions to assist our customer, which is a government-owned utility company with its plans to expand water distribution system to the Northern parts of Ambergris Caye. We hope that this project will continue later this year, which when completed, is expected to generate additional sales for our bulk operation by serving residential and tourist properties not presently connected to the Ambergris Caye public water supply.

Our Cayman subsidiary, which provides bulk water to the government-owned water authority on Grand Cayman has benefited in the fourth quarter from higher sales of approximately 8.5% when compared to '06 and from cost reductions, which improve the gross margin of the operation by about 30 basis points compared to 2006. While the sales increase was part due to higher production volumes and also incremental operating revenues from the expansion of the North Sound plant, which was completed in the second quarter of 2007. In July the water authority in Grand Cayman awarded us a contract for what will be our seventh large sea water desalination plant on Grand Cayman. This 4.2 million gallon per day plant will be completed by the end of this year and is slated to supply water to the authority's customers in the Northern and Eastern areas of Grand Cayman, while the authority continues its pipeline expansion project through these new service areas. Plant construction sales and associated costs from this project will start impacting the services segment this quarter and will continue through the year. Operating sales are expected to impact our bulk segment late in 2008 or early in 2009.

Our fourth quarter services segment results were positively affected by sales from the construction of the Tynes Bay plant for the Government of Bermuda. This project has progressed well throughout 2007, and is expected to be completed in June 2008 because of some additional pipeline and other works that were incorporated into the project by the Government during the course of construction. Originally we had expected to finish this in the first quarter of 2008. We're extremely pleased with this project so far and believe that there may be an opportunity to expand the plant in future given the severe water shortages that residents of Bermuda have experienced recently. David I'd like to turn the call over to you now to talk a little bit more about the numbers.

Thanks, Rick. I think Rick's given you a good overview of exactly what happened from a business and operational perspective with respect to Consolidated Water for this year. I'd just like to touch on a few highlights on the balance sheet, income statement and cash flows. This year we generated more than $9 million in cash flow. I think that's an impressive number. If you look at cash flows historically for our Company, traditionally we've generated anywhere from $7 million to $11 million in the last three years. Coupled with this increase in cash flow we generated increased working capital, which was up about $8 million over last year. The balance sheet of our Company, I believe is the healthiest it's been in it's history. We continued to pay down debt during the year. From an income statement standpoint, if you look at each of our segments, they all grew in terms of operational margins and in terms of sales.

Rick touched on earlier the increasing demand for water in our retail segment. Our bulk segment improved primarily due to the incremental sales from the Blue Hills plant in the Bahamas, and slightly increased demand in Grand Cayman. And our services segment benefited this year from two construction contracts and we recognized revenues for those under the percentage of completion method. From a margin standpoint and a gross profit standpoint, our margins were consistent with those realized in previous years, and we expect them to remain consistent in future periods from what we've done for this year.

From an SG&A standpoint we did have an increase this year, but I would like to point out some of these increases relate to accrued management bonuses and also to an increase in Board and Committee fees. And our Board and Management is committed to controlling these costs. In our filings we have disclosed and in our 8-Ks we have signed new employment agreements with our Executive Management team and the bonus arrangements under these contracts will provide for what I believe to be smaller in the aggregate bonuses next year. Our Board's also taken steps to reduce the size of some of it's committees and is looking at other ways to control Board and-- Board fees and expenses. We are committed to controlling SG&A cost, and we think that's one way that we can improve the overall profitability for our Company.

If you look toward results for 2008, I would like to point out that the Frank Sound contract we were awarded in Grand Cayman will affect revenues next year as we progress with the construction of this plant. We'll recognize revenues and costs in accordance with the percentage of completion accounting methodology. This year only saw approximately six months of sales from the NRW portion of our Blue Hills contract. Now that our NRW obligations have been fulfilled, we will be charging for all water sold from the Bahamas operation next year. We still have about $332,000 reserved, and as Rick mentioned earlier, we'll be able to resolve this outstanding NRW issue and look at that amount as additional revenue next year, although there are no assurances that we'll be able to actually record this revenue. And with that I'd like to turn things back over to Rick.

Thanks, David. Looking forward for the Company, we're in various stages of involvement in a number of new business opportunities both within and outside our Caribbean market area. In December, we responded to a request for tender by the government at Turks and Caicos islands, and submitted a proposal in relation to the government's initiative to privatize water supply on five islands within the Turks and Caicos group. This is a very dynamic market and although we're competing against other entities for this project, if we are successful in obtaining a franchise for these five islands, it would be a similar business to our Cayman retail operations, although initially on a smaller scale. We hope to hear from the government regarding our proposal in the coming weeks.

In Roatan, which is an island off the Northern coast of Honduras, we continue our discussions with the local government regarding a retail franchise for that island, and have purchased land in anticipation of developing a public water supply which would initially be on the western end of the island, which is a primary tourism and resort area.

In Barbados, we prequalified with our new water partners for two desalination initiatives on that island. And although desalination project opportunities have been slow to materialize over the past several years in Barbados, we understand that the new government which took power in December of last year, is focused on water issues and we should see some positive movement in this market during 2008. In addition to the new project opportunities mentioned above, we've also been asked by one of our bulk water customers to provide a proposal to upgrade an older 1 million gallon per day plus plant in conjunction with an extended operating agreement, and we're currently developing a proposal for that customer.

In general, the desalination market in the Caribbean continues to provide many opportunities for us to expand our business, and we're looking at potential projects both inside and outside our traditional market area. In January, we reorganized the Executive Management and placed one of our most senior and knowledgeable engineers in the position of Vice President of Sales and Marketing. This was a strategic move for us to really attack some of these new markets and we expect it to potentially yield some projects even outside the Caribbean, in areas like South America. I'd like to, Denise, open up the call for questions now, please.

Okay. (OPERATOR INSTRUCTIONS) Our first question is from Debra Coy. You may go ahead, ma'am.

Yes, good morning.

Hi Debra.

A couple of follow-ups. The Turks and Caicos tender sounds interesting. Understand that that's in progress now, but can you give us any sense of the size of it? You said smaller than Cayman retail, but in terms of the population or the MGD capacity, some sort of a sense of the size of it?

Well, Debra initially, and it's a fast-growing market, and there are some big projects slated for these, a couple of these islands, initially we think it'll be sort of around the one MGD level. And -- I mean, really it's --it's-- we've been following the market for a number of years, and we see it sort of progressing as the Cayman Islands have over the past 25 years. There's a lot of big resort properties that are interested in building on some of these more remote islands, and we hope to take advantage of that.

So essentially the government would privatize water supply across that group of islands, and then additional resorts would hook into the centralized government, or at least centrally managed government supply rather than doing their own projects?

That's what we're hoping, yes.

Okay and that's part of the proposal process?

Yes it is, Debra.

Debra I want to point out, and this is David. I wanted to point out that the proposal does not include the, I guess, Provo-- Providenciales, which is the largest island.

(Inaudible), so these are the islands outside of Provo?

That's correct. It's--

Okay. Got it.

Essentially all the islands other than Provo.

Okay. Got it. And looking at the retail business in Grand Cayman, obviously a good year in '07. You noted in the press release some concern about potential slowing of tourism at least from the U.S. relative to the economic situation here. Is that something you're starting to see so far as we go into '08? Kind of what's your sense of how that's playing out, at least based on what you can see so far?

Yes, I don't see the tourism numbers looking bad so far. I think, more importantly to us, what's affected our sales is the weather here.

Is the weather.

It's been unusually rainy. So, in certain parts of the island.

Debra, I don't have statistics to give you, but the last time I visited Grand Cayman, I did talk to some of the people who work in the service industry there, and they did indicate, they thought that business was off somewhat, and they blamed it on the U.S. economy. How to quantify that, I'm not sure. We don't have the statistics, but it does seem that the economy is having some impact on tourism there.

Right. Well, I know Cayman does keep some tourism statistics, but they're-- I'm sure they're lagged as I recall by a couple of months. So we'll keep an eye on that. And looking at BVI, congratulations on making progress on the negotiations down there. That's very good news. Can you just explain to us how you are looking and recognizing revenues there currently? Because there's been the ongoing dispute over the level of-- the level of revenues versus what you had been billing them versus what they had agreed to pay. Now they've paid part of the outstanding receivable. As we've started into '08, how are you looking at booking revenues there so far when we go through this ongoing negotiation process?

I'll take the question, Rick. Debra, we took a very hard look at the situation in BVI before we issued our numbers this year as did our auditors. And if you look back at the origin of this dispute, they arbitrarily started paying us a reduced amount. There's really no, in our opinion, legal basis for it. I mean I'm not an attorney, but we've had discussions with legal counsel, and we believe we're contractually entitled to all of-- everything we've billed them. In recent discussions with the BVI government, our partners down there have indicated that they seem to be amenable to working all this out and paying us.

But I did add a disclosure, we added a disclosure in the 10-K that talks about the possibility of continued collectability issues there. And at some point in time, if we don't start receiving these payments, then we will be forced to defer or even reserve for the amounts that are billed in excess of what's actually collected. But at this point in time, based upon what we know today, based upon Management's best judge-- best estimate and judgment, we feel that it's appropriate to recognize the revenue under the belief that we will be paid in full for those revenues. So hopefully --

But you're still -- so the revenues that you're recognizing there are still based on the full historic price?

That is correct.

Okay. And the-- that will be true up until contract negotiations are resolved and there's a new price or some further assessment is made to give you a more negative view?

That's correct.

Okay.

That's what we expect right now, yes.

Okay. And finally, my last -- my last question for the moment is, looking at CapEx, you mentioned a couple of items, additional, additional costs beyond what you had initially expected at Tynes Bay and then some other things you're doing to improve efficiency across your operations. Are the additional costs covered under the Tynes Bay contract, first of all?

Yes, they are.

Yes, just-- they're extensions, yes.

There are pro-change orders for those.

Okay. And then, looking across at CapEx, can you give us a sense of how this new computerized maintenance installation will play out? Will we see the-- a significant increase in CapEx related to that? It sounds like you're going through and doing a few efficiency related upgrades across your portfolio.

Yeah. Those are -- that's just the operational systems improvement, Debra. That-- you're not going to see any CapEx impact from that system. Hopefully we see--

Okay.

Further operational improvements in some of our other businesses.

But it's not like you're having to spend to significantly upgrade your computer systems or whatever?

No, no. It's not nothing like that, no.

Okay. All right, thanks. I'll get back in line.

Okay.

(OPERATOR INSTRUCTIONS) Gentlemen, at this time we have no further questions. Would you like to make some closing remarks?

Yeah. I'd just like to say in, closing, that I believe Consolidated Water is a well seasoned and experienced desalinated water provider. We have a deep understanding of our primary market and our customers' needs, and we've consistently delivered increasing value to our shareholders. I believe that the Company continues to be an excellent opportunity for investors to participate in the growing Caribbean desalination market, and potentially around the world. I'd like to thank the Company's Board of Directors, the Management Team and the staff for all their guidance, hard work and dedication that is yielded another year of excellent performance for the Company. And of course, I'd like to thank our shareholders for their confidence and support in what has recently been a difficult market. Thank you.

That concludes today's call. Thank you for your participation. You may now disconnect.