Consolidated Water Co Ltd (CWCO) 2009 Q1 法說會逐字稿

Hello. Welcome to the Consolidated Water Company first quarter 2009 conference call. All participants will be in 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 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 accept Alliance of the Company's products and services in the marketplace, changes in its 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 this conference call. (Operator Instructions) Please note this conference is being recorded.

Now I would like to turn the conference over to Mr. David Sasnett. Mr. Sasnett?

Thank you. Good morning and welcome to our conference call. You'll notice that Rick McTaggart will not be joining me on the call this morning. Rick typically conducts this call but he is in the British Virgin Islands today. Specifically he's in court this morning attending a preliminary hearing relating to our affiliate OCB gas receivables planning against the BVI government. This is a big week in court for us at OC-BVI and Rick felt it important to be there with our OC-BVI partners and with their attorneys in court and getting an update on the situation firsthand. 'm sure all of you who follow our Company can understand Rick's decision to be in BVI.

With respect to our overall results, our net income increased by 52% for the first quarter compared to the first quarter of last year and our diluted earnings per share increased 50%. These improvements in both profits and EPS are attributable to the increased gross profits we had in each of our business segments, but unfortunately as this is been the case for quite a period of time now, our net earnings continue to be adversely affected by the loss we're required to record from our equity investment in OC-BVI. I will have more to say about the BVI situation later in this call.

Now I would like to turn to each of our segments and talk a little about the operating results for them for this quarter. Our retail segment posted a 12% increase in revenues compared to the first quarter of last year. This is attributable to a 7% increase in our water sales by volume and also to rate increases. We are allowed under our contract, our license, to adjust our operating cost -- excuse me, adjust our prices for increases in operating costs annually. And we made this computation in the fourth quarter and implemented price increases in January. These increases more than offset a slight decline in energy pass-through costs that resulted from lower energy costs for the first quarter of this year as compared to last year. Our retail segment generated high gross profits as a result of higher plant utilization, much of our costs with our plants are fixed so as we product more we improve our gross margin as a percentage of sale.

Our retail sales by water volume increased almost 37% compared to the fourth quarter of 2008. On our sales were adversely impacted by wetter weather and two hurricanes that passed close to Grand Cayman. It's clear to us now that the biggest impact on our sales and retail segment, clearly is the weather patterns in Grand Cayman. We believe that the tourism is actually down in the first quarter of this year as compared to last year but volume sales were up. Which we attribute to the weather.

The first and second quarters of this year -- of each year have historically been our strongest retail sales quarters and we're encouraged to see that the first quarter of 2009 fell back to the pattern that we've experienced after our weaker 2008. Construction of our new 1 million gallon (inaudible) seawater plant in Grand Cayman was delayed for about three months while we focused our efforts on the completion of the Frank Sound plant and Grand Cayman for the Governmental Water Authority. We now expect to complete the Government's Harbor plant in the second quarter which will then free up four 250,000 gallon per day containerized seawater units for other smaller projects that are in the early development stages. Specifically (inaudible) and also possible the (inaudible) Islands.

Turning to our bulk segment, bulk segment gross profit in terms of dollars increased by 38% and our gross margin increased from 15% in the first quarter of 2008 to 22% in the first quarter of 2009. These increases are due to improved energy and other operating efficiencies in our Bahamas operation. As we had previously disclosed in the fourth quarter 2008 we completed improvements to our feed water system at our Windsor plant to eliminate an ongoing chronic fouling problem. We also replaced the auto membranes in two of the four production units at the plant. These capital works have resulted in better energy efficiencies and lower maintenance costs at that plant. We are completing the replacement of all our membranes in the final two Windsor production units this quarter and we expect further energy efficiency improvements although not to the same extent as we've experienced so far with the well replacements. In addition to the Windsor improvements we've also made changes to the diesel engine cooling system at our (inaudible) Hills plant in the Bahamas, which has reduced energy consumption at that plant. And we expect it see modest operating cost reductions as a result of this project starting in the second quarter of this year.

Turning to our services segment, our service segment revenues grew from approximately $1.5 million for the quarter ended March 31, 2008, to $2.9 million for the 2009 quarter. This was primarily due to construction revenues from the 2.4 million-gallon a day Frank Sound plant that we're constructing for the Water Authority Cayman under a contract that includes a ten-year operating agreement. The Frank Sound plant is currently being commissioned. We expect to begin generating revenues from this plant later this quarter.

Now I'd like to talk briefly about OC-BVI. Our affiliate OC-BVI's Barbados plant in the British Virgin Islands begin delivering water to the BVI government in January under the terms of binding term sheet that was signed in December of last year and presently the plant is operating satisfactorily and to our expectations. As of today OC-BVI is delivering about 200,000 gallons of water per day to the government and we expect this volume to increase when OC-BVI completes the construction of a water delivery pipeline to the government's reservoir later this quarter. According to the term sheet the government will they be required to purchase minimum water volumes of 600,000 gallons per day from the plant.

As I mentioned earlier, our affiliate's dispute with the BVI government over Barbados Bay plant continue to adversely impact our net earnings this quarter and we reported a $609,000 loss on our equity investment in that affiliate. However developments over the past several weeks indicate that we may now have a timetable for resolution of this dispute.

First, the courts have established a trial window for the ownership lawsuit of June/July this year and our affiliate is currently preparing its case. And second, the receivables lawsuit is scheduled for a case management hearing later this week. We're hopeful that a trial window will be set for that lawsuit at that hearing. We certainly will continue to update investors and the public on this matter as any material events unfold. Looking forward to possible new projects, we understand a new Premier and Cabinet is now in place in the Turks and Caicos islands. We're hopeful that negotiations for our retail water franchise and the five islands in the Turks and Caicos group will be -- will recommence shortly.

Grand Turk, one of the islands that was hit very hard by Hurricane Ike last year is still suffering from severe water problems and we believe this water shortage will be a catalyst for starting our negotiations with the new government. We're pleased to report that we recently received a key government approval for our proposed retail water operation in Roatan, Honduras. We're in the process of preparing detailed design drawings for the project for submission to various governmental authorities. We are hopeful that we will be in a position after receiving the remaining government permits and approvals to commence construction of this project later this year.

We reported in March that we had submitted a bid for a large seawater salination plant in Trinidad for the Petro Trend petroleum refinery. We understood from the bid documents that this project was to be awarded in April this year, but we have not been advised of any decision by Petro Trend so far, therefore we are uncertain as to the status of this project and our bid but we will advise investors in the future of any developments that affect our Company. And that ends my formal remarks. I would like to turn the call back over for questions.

Thank you. (Operator instructions) Our first question comes senator [Michael Rumberg] from Boenning & Scattergood.

Good morning, David, how are you?

Good morning, Michael.

Just wanted to obviously start out with the BVI situation, you mentioned that it will be going to a trial in the June/July time period. Can you give a sense how long that will take to play out once the trial commences?

I don't think it will take much more than a month. I'm not sure exactly how much time the case will take because -- I mean, I'm not an attorney and I don't know what kind of case that the opponents' counsel will present but the impression that we have is that it is probably about four to five weeks for trial at most.

Right. And is there any sense that it will settle prior to that now that it has been formally set that it will go to trial?

I would say at this point in time in our estimation it will go to trial. We believe at this point in time there's been a lot of time to reach a settlement and we have pursued that avenue, our affiliate has. Our partners have. And nothing has happened. So I think it's -- we believe that we're going to court on this.

Okay. And then just one last follow-up related to that. You guys have obviously been incurring or OC-BVI has been incurring legal fees related to this being an arbitration and so forth over the last couple of months. Now that it goes to trial, is there going to be a step up in legal fees that you can expect to see on that line?

Yes, yes, there will be. Remember we take a 43% interest in OC-BVI. So we're not paying for those fees directly, the affiliate is. Our impact is 43% of those. And then also quite frankly speaking attorneys in the British Virgin Islands are not as expensive as they are in the US so while it is not an immaterial amount, Michael, I don't think it is something that's a huge dollar so.

Okay. Thanks, Dave. I'll jump back in queue.

Okay.

Our next question is doctor Debra Coy of Janney Montgomery Scott.

Thanks, hi, David.

Good morning, Debra.

Just one more follow-up question on that. If the trial takes four or five weeks and a decision is reached, is that then appealable; in other words, can we hope for this to be resolved one way or the other or would it likely go -- drag on further on appeal?

My understanding is that, I guess with all cases, you have to have a basis for appeal. But the legal system, as I understand it, in the Caribbean is British and it is very similar to US. So I would presume that there -- if there are grounds for an appeal, it could be appealed, yes.

Okay. So we wait and see. And on the -- on the receivable separate litigation, similar kind of time line, whenever they set a window then a similar kind of trial and similar process?

Yes.

Does it go before the same court on the receivable?

I believe so, yes, it does. And the actual case management hearing is Thursday this week where I believe they will set a trial window or trial date for it.

Okay. And you would -- would you announce that to us separately or would you wait until the next quarterly filing?

I do not know if it is material enough for a 8-K filing but I will check with our attorneys.

Or we'll call you.

Yes. You know, if it is--.

If it is material you will disclose it?

Exactly.

Okay. That's fine. Turning to the -- turning to the core business, the -- kind of the trend in operational improvements, very impressive on the retail business this quarter. It sounds like you had a pretty nice weather benefit. We would expect on a more normalized basis for the margin to subside a little going forward? Is that a fair assessment.

Well, any time -- yes, we had a substantial increase in volume, 7%, in the first quarter of last year. And there must have been a very dry season in Grand Cayman and so as -- our margins drop as well because we can't spread those fixed costs over as many sales.

It has just been a little harder to understand the trends there given the restatements but suffice it to say the 61% is an unusually high margin?

Yes. It's much cleaner now, Debra, because it's a straight pass through almost of energy costs so it doesn't really have much of an impact on the margins. It increases revenues. And I think to a certain extent it was difficult -- it was more difficult to analyze margins when those were noted against cost of sales.

Right. So as we go forward we'll be able to see that more clean?

Yes.

And it sounded like on the bulk side that based on the operations that you are seeing thus far, very nice margin improvement in the quarter is sustainable. Is that--?

We would expect, yes. I can't say we'll do exactly 22%. But we believe that we've resolved the issue at the Bahamas at Windsor and tweaked the Blue Hills plant as well so we think you should see higher margins than what we saw last year consistently but the proof is in the pudding, so they say. So -- but certainly we would expect improvement over the 15% we had from last year.

So far, so good. That is encouraging. And then on the -- on the development pipeline, you mentioned hoping to go to construction in Roatan later this year. Can you just remind us or give us an update on the -- the size of facility that you are contemplating there in terms of--?

I think initially we're talking about a 250,000 gallon a day plant. There is really no supply of water on Roatan but it is a prime tourist development island so initially I think the size plant we're talking about is 250,000 gallons per day but it would be expandable. We're trying to build a market there. It would be a retail market for us at relatively high margins but initially low volumes as we establish a demand for the water there. But we think it's a very good market for us. It just won't have much of an impact the first year but year two and three it should.

Thank you. (Operator instructions) We do have a follow-up question from Michael Rumberg of Boenning & Scattergood.

Hi, David. I just had one follow-up question it is a little bit more of a big picture item. Water reuse has gained considerable traction in the last few years in the US and Europe. Do you see water reuse as technology that would potentially be applicable for Caribbean water needs and if so is that a business that you guys have considered entering?

Yes. Wastewater treatment is something that we have -- first of all the technology is very similar to what we do now, it involves filtration using poly-EMI membranes and it is something that we've looked to get into. As a matter of fact we've actually proposed a wastewater treatment projects in the past to the government of Grand Cayman and they decided not to act on it. All of these islands will need to address reuse issue and we think that is something that we could certainly do in the future -- and it is something that is very complementary to what we do right now.

Okay. All right. Appreciate your detailed remarks. Thanks very much.

Thank you. And we do have another follow-up from Debra Coy of Janney Montgomery Scott.

I promise to limit it to one. On Trinidad, David, you mentioned that you haven't heard anything on the -- on this most recent bidding with Petro Trend. I read somewhere recently that the government is looking for program managers and is still considering a number of other desalination plants that would be sponsored by the government, as well as the Petro Trend project. Can you give us any update on the overall market opportunity that you are seeing out of Trinidad?

Well, initially I think the -- the WASA, which is the Trinidad Water Authority, had announced they were looking to build six, 20 million-gallon per day plants. And then there was a bit of a shake-up in WASA. I think they got rid of a couple of people. There were allegations of corruption, I believe. I'm not sure about that. Anyway, I don't know where they stand on those other six projects and we -- we haven't notified anyone of anything -- haven't anything -- excuse me, they haven't said anything official about Petro Trend so we're -- we don't really know exactly what's going on down there at the moment, Debra.

So nothing else that you are bidding on actively?

No, no, nothing at all.

Any place else?

No. It is like we said earlier. We're hopeful that the Turks and Caicos will -- we can start negotiations again there. They've been in turmoil because of the recent government inquiry. But I think they've replaced everybody pretty much and now we have some parties we can deal with. So we're reaching out to them and hopefully we can start negotiations again with them and close the deal that we almost had closed before all this happened.

All right. Thank you very much.

You're welcome, Debra.

We show no further questions at this time. I would like to turn the conference back over to Mr. Sasnett for any closing remarks.

Well, I want to thank all of you for joining us this morning and we look forward to talking to you again about three months from now. Goodbye.

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