Consolidated Water Co Ltd (CWCO) 2008 Q2 法說會逐字稿

Hello and welcome to the Consolidated Water Company second quarter fiscal year 2008 conference call. 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. An operator will give instructions on how to ask your questions at that time.

This conference call may include statements that constitute forward-looking statements usually containing the words belief, estimate, project, intent, 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 the jurisdictions in which it operates. The abilities to successfully secure contract for water projects in other countries, the ability to have developed 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 revision or changes after the date of this conference call.

If you should need assistance during the conference, (OPERATOR INSTRUCTIONS) Please note this conference is being recorded.

Now, I would like to turn the conference over to Mr. Rick McTaggart. Mr. McTaggert, you may now begin.

Thanks, [P.J]. Good morning, ladies and gentlemen and thank you for joining us this morning to discuss Consolidated Water's second quarter results. I'm joined here in Grand Cayman this morning by David Sasnett our Executive Vice President and Chief Financial Officer.

I will talk generally about the quarter and then David will speak a little bit more about the numbers. You can see from our press release and our 10-Q filing that the BVI dispute continued to affect our results in this past quarter and we'll talk about that a bit more in a moment.

I am pleased to report that during the second quarter of 2008, in come from operations increased across all of our operating segments when compared to the same period last year. And if you filter out the issues related to our BVI affiliate, the company's consolidated operations reported a 29% increase in net income in the most recent quarter when compared to last year.

Our retail sales in the Cayman Islands were again flat in the second quarter compared to last year and were impacted by reduced usage from two large commercial customers which we talk about in the 10-Q. The Ritz-Carlton golf course used water produced by its own plant to irrigate his golf course and consequently bought less water from us in the second quarter of 2008, compared to the same period last year.

Also the Turtle Farm, Cayman Turtle Farm continued to take much less water this past quarter when compared to last year. However, the good side is that these two customers represented $460,000 reduction in sales in the second quarter which was more than made up by a general increase in sales across the rest of our retail base. In our bulk segment, water sales grew nicely.

Again in the second quarter of this year, and benefited from increased sales both in our Bahamas and our Cayman Islands operations. Operating margins were still under pressure due to our Bahamas operation and in particular the Windsor plant which we've talked about before. We expect this pressure to continue through the third quarter until we finish a capital improvement project which is currently underway.

Work on this project continued during the second quarter and we did experience some delays related to the well drilling part of the project. But we do expect to finish it up during the third quarter. As I mentioned on previous calls, we're currently not able to pass through all of our energy costs of operating this plant to our customer, because the Windsor plant is using more energy than allowed in the contract. So until we finish these capital works and get that rectified, that will continue.

Our Cayman bulk operations performed very well and exceeded our expectations for the quarter for sales and profitability. All three of our Cayman bulk plants are operating within efficiency specs and to the satisfaction of management.

Sales increases generated by these plants are primarily due to increases in our fuel and electricity pass through charges to our customer, which result from higher energy prices and also an 8% -- the sales were also impacted by an 8% increase in the volume of water that we sold from these plants in the past quarter compared to last year.

And this is the Cayman plants. Income from plant sales in our services segment and management fees which we report almost tripled this past quarter compared to last year, due to the size and number of projects that we currently have underway. These include the 2.4 million-gallon per day North Side plant in Grand Cayman and the 1.2 million-gallon per day Tynes Bay plant in Bermuda.

Gross profit for the services segment increased, but was adversely impacted by the write-off of some rental equipment that was being used in the Bahamas and a modest increase in the cost to complete the Bermuda project. Both of these projects, the North Side plant and the Tynes Bay plant are proceeding on schedule and within budget. But as David will probably explain in a moment, we are required to re-estimate construction costs each quarter and determine that we should make an adjustment to the Bermuda estimate in this past quarter, which affected service results.

Now I'll turn the call over to David to talk a bit more about the financial results, and also to give you an update on the BVI issue.

Thanks, Rick. I'll touch on just a few of the numbers that we reported Friday afternoon when we filed our 10-Q. Our consolidated revenues for the quarter grew to $16 million as Rick mentioned earlier, this is primarily due to increases in our bulk and services segment.

We had a substantial increase in revenues in bulk due to the billing of the nonrevenue water or the amount that's previously were not billed to water and sewage Corporation Bahamas under our nonrevenue water agreement and also through a pass throughs of diesel and electricity cost. As we mentioned in the Q, our Bahamas operations continued to be impacted by the lack of efficiency of our Windsor plant.

We are drilling two new wells and replacing membranes there. The way our contracts work we pass through energy and diesel costs through adjustments each month. When our plants work at or better than the design efficiency those numbers actually work in our favor, but in cases where the plants don't meet the required efficiency, we end up eating those incremental fuel costs and electricity costs, as is the case in Windsor.

We're optimistic that e can correct this problem by the end of this year and improve the profitability in our bulk services segment. As far as service revenues are concerned, we had a substantial increase this quarter due to the ongoing construction projects. Rick mentioned earlier the requirement to adjust our profits downward when we have to re-estimate the construction costs for some of these projects.

This quarter we came up with a new estimate for the cost of the Bermuda construction which was approximately $200,000 more than our previous estimates. The project is around 80% complete, so we adjusted our net profits down for that project by about $167,000 this quarter. When we do that we have to book everything cumulatively in one quarter, so that affected the profitability of the services segment. Overall, our net income was about $1.9 million for the quarter. Cumulatively for the year, it's around 3.7.

As we mentioned earlier. The biggest impact in comparing the numbers to last year was the affect of BVI. I'll talk about BVI in a moment but it's important to note that last we recognized both profit sharing and equity in the earnings that amounted to $600,000 for the quarter. And we had the exact opposite this quarter last year where we had to recognize a loss of about $600,000, due to our adjustment to the accounting method and that swing was about $1.2 million.

If you look at our results from operations, just income from operations, 2.7 this quarter as compared to two million last year, we reported an increase of about 35% in income from operations and 29% in net income, if you carve out the BVI numbers. Turning to our balance sheet, we still have a very healthy balance sheet of about $40 million in cash as of the end -- June 30. It is important to note that we did have an increase in our receivables. Included in the balance sheet is $7.8 million in receivables that due from the Water & Sewage Corporation of the Bahamas.

We've had discussions with WSC. We met with them in April. They're comfortable and pleased with our services. It's not a service issue on our part as to why we're not collecting that receivable. They have some things they're dealing with and we're optimistic they'll be able to put us on a payment schedule and bring that receivable more in line with what we would expect in the future.

I would like to turn briefly to the BVI situation. We continue to adjust the results for this affiliate as if they were on the -- the affiliate were recording revenues on a cash basis. If you remember we had a very substantial receivable as of December 31, 2007 on the books of OC-BVI that was due from the BVI government. And since that time any monies they have paid to BVI, we've accounted for them as collections on the receivable and not as revenue.

So consequently, there were very little revenues reported in our adjusted results for OC-BVI for this quarter and we recorded a $600,000 loss. There is some good news however, we have been contacted by the government. They would like to start negotiations on the Bar Bay plant. We believe that's due to the tremendously pressing need for water on Tortola.

And this week we expect to be meeting with the delegation from the government three ministers to discuss the possible opening of the Bar Bay plant and selling the water to the BVI government. Of course, all of this is dependent upon reaching a mutually acceptable agreement, but we are encouraged by the fact we'll be talking to them shortly.

And with that I'll turn things back over to Rick.

Thanks, David. I'll just mentioned a couple of the projects that were recently awarded. And things that we also have in the pipeline.

We were very pleased that the Turks and Caicos government selected our proposal for the privatization of water supplies on five islands within the Turks and Caicos group and we're currently negotiating the definitive terms of the privatization agreement.

We expect these negotiations will take a few months to conclude after which we'll begin taking over the existing water supply operations on these islands where they exist. We're very optimistic about the long term opportunities in the Turks and Caicos market and we'll initially be taking over facilities that produce about 500,000 gallons per day. We believe that demand on these islands is greater than the present production capacity.

So that we would expect demand and sales to grow nicely as we build out new facilities and distribution systems on these islands over a period of years. This type of retail project is really right up our alley. It's really the business that we started off in in the Cayman Islands over 30 years ago. And we feel fortunate to get this opportunity because government privatizations like this in a really good affluent market are few and far between.

We're looking at another opportunity, I've mentioned before, to expand our retail business into the island of Roatan and Honduras and discussions with government on terms are still continuing there. We've also submitted proposals on several bulk water projects over the last couple of months.

In particular, in the WDR industry newsletter this morning, you'll see that we were one of the bidders on a large industrial project in Trinidad, along with six other bidders. So it's very competitive project, but we hope that things go our way and we'll certainly keep you advised as things progress there.

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

Thank you sir. (OPERATOR INSTRUCTIONS) And sirs, our first question comes from Michael Gaugler from Brean, Murray, Carret. Please go ahead with your question.

Good morning, everyone.

Good morning, Michael.

Rick, I was wondering if you could give us a little color on other new opportunities out there, particularly, I know that the Bahamas, they in the past had been looking at adding capacity and I know Barbados hangs out there and you have some things going on in Roatan. Maybe if you could just give us a little color on what the pipeline looks like.

Well we have been -- well the engineering department and sales department certainly have been busy over the last few months. We've had a variety of different projects from sort of highland resorts to this Trinidad industrial project, which was quite a big exercise to bid.

You'll probably get some more details on that project in the WDR and the Trinidad Press. The Barbados market, there is still opportunities there. It's been a while since we've heard how the new government is going to move some of these water projects forward, so we're just waiting to see what happens there.

In the Bahamas, again, they had a government change last year and that seems to have affected some of the plans that they had to expand their water supply. So we're just keeping in close touch with those two markets just to see what develops. In the meantime there are other things that are coming up.

We're looking at opportunities outside of the Caribbean right now in Central America and South America. Again, you probably see in the WDR, some of these projects that are being contemplated in some of the other Latin American countries.

So Mike, we're keeping busy. That's what I can tell you right now.

All right. That's all I had, Rick. Thanks.

Our next question comes from Ryan Conners from Boenning & Scattergood. Please go ahead with your question.

Good morning.

Hi, Ryan.

Good morning Ryan.

First off Rick, just following up on Mike's question.

At least in theory, you would think that the energy prices having done what they've done, the last year or six months or however you want to measure it, at least in theory given how energy intensive RO is that might lead some islands to say let's hold off on some of these projects until things stabilize.

Is there any line out there that energy prices and how far they've run or are sort of impacting demand at all?

We haven't -- well we're actually not aware of any projects that have been shelved or canceled because of energy price increases. The ones we've been working on recently, as far as we know, are still good projects or good bids. We certainly are aware of the pressure that the increasing energy prices are putting on the customers and they -- some of them have indicated that.

So I think it's going to take the industry getting innovative again and trying to develop technologies that further reduce the cost of RO. I saw an article this morning about the project in California and I think energy consumption, electricity consumption is a big issue out there given the higher energy prices.

It's sort of an a -- on a related issue. Obviously the macro environment right now, being what it is, not being ideal. In theory that would sort of impact tourism related demand for water across the Caribbean. If you could just talk for minute about how you're numbers are tracking kind of on an organic demand basis over the same store sales, kind of some color around that -- how that's tracking?

Well I mentioned earlier in our retail market here in Cayman, our sales to the general market have actually gone up since second quarter last year. If you discount the affect of these two large commercial customers that reduced demand. So that's encouraging.

I mean our general market, the other hotels and condominiums and again that's impacted by seasonality, weather, the second quarter was at least two months of the quarter were a bit drier than the first quarter of this year. So that helped to boost our sales.

The other projects, I think I've answered this before, the bulk contracts, it's difficult to track that sort of consumption on a per tourist basis or population basis because all of these contracts are fixed delivery quantities. They're take or pay contracts.

So we do not distribute right to the end customers. We'll distribute to government utility or a private utility. So I can only say our Cayman experience is somewhat encouraging, based on the numbers we're seeing here for our retail business.

Great. Well that helps a lot. Thanks, guys.

Yes.

(OPERATOR INSTRUCTIONS) Our next question comes from Heike Doerr from Janney Montgomery Scott. Please go ahead.

Thank you. Good morning.

Hi.

I noticed in the 10-Q that there was additional information that we hadn't seen previously about your investment in OC-BVI and the revenues that you would be booking. So thank you for that. That's helpful.

I'm wondering if we look into the third quarter and we assume that Baughers that you're going to continue to book revenues that about 10% -- you're going to I guess distribute water that is about 10% higher or more than it is year-over-year.

If we assume you run that plant at capacity, what kind of an equity hit do we think you're going to take? I know it was 650,000 in the second quarter.

Should we be looking at a comparable result going forward as well until this gets resolved? I don't know if I asked that clearly?

Yes, you did. We have discretionary expenditures that we may have to make in the plant, repairs and maintenance, things like that, we're trying to keep those to a minimum if we can until the situation is resolved. I would say that the $600,000 that we recorded as a loss this year, is not out of the ordinary.

I can't tell you exactly what our results will be for last half of the year, but if you look for the six months we've recorded a net loss of about 1.1 million. So that's what, 550 a quarter.

Roughly, yes.

So it's somewhere in the 500, 600, 650 range.

Okay.

It will vary from the quarter depending on the actual output of the plant.

That's helpful. And at what point does there start to be a cash crunch issue?

Well today there isn't one because they've paid us enough money to continue plant in operations. Obviously we'll need more payments on the accounts receivable in the upcoming quarters otherwise we would have to come up with the funds ourselves.

I think we're committed, as we've said in our previous filings, to providing enough money to keeping that plant open, because we do not want to put the people of the British Virgin Islands through any type of hardship.

We feel committed to continue to provide water to them. We think that's a thing we should do at this moment. So we'll put enough funds in there to keep the plant operating.

Okay. That's helpful. And to switch gears for a moment. The gross margins on bulk, I know this has been a bit of a trouble spot. I wonder if you can talk a little bit about at what point we can expect to see margins north of 20% in this segment and if that's a realistic goal for 2009?

Yes. I mean I'm not going to set a level there, Heike at this point. I mean we are doing modifications to the plant, which I had mentioned earlier. In particular this Windsor plant has been problematic. We expect to have those changes done this quarter, third quarter and hopefully be enjoying some benefit for at least in the fourth quarter of this year from those changes.

I mean what has really hurt us there, and we've said in a couple of the Q's, is that we've actually been making some improvements on efficiency at the plant, but the fuel prices have just been going up so quickly that they've been eroding that improved margin there.

Just on that incremental -- those costs that we can't pass through to the customer. So as soon as we can get relief from all of that, then you should start seeing some margin improvement in bulk.

Heike, we disclosed an amount that we can't pass through to the government in our 10-Q. And any improvement in efficiency will lower that amount and improve margins for the bulk segment.

Really the on going [falling] issue at Windsor and the inefficiency of that plant is what's really killing the margins in bulk at the moment. And we would like to say when we could return to a certain level of profitability, that's dependent upon whether or not we have this problem solved.

We'll find out soon.

Thank you. As a reminder. (OPERATOR INSTRUCTIONS) Please pause as we allow questioners to poll for questions. And sirs, we show no further questions at this time. I would now like to turn the conference over to Mr. Rick McTaggart for any closing remarks.

And I would just like to thank everybody again for joining us this morning and I hope that you join us again in November for the third quarter call. Thank you and have a nice day.

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