Consolidated Water Co Ltd (CWCO) 2009 Q2 法說會逐字稿

Hello and welcome to the Consolidated Water Company second 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 believes, estimates, project, intend, expect and 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 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 Rick McTaggart. You may now begin.

Thank you. Good afternoon, ladies and gentlemen and thank you for taking time from your busy schedules to join David Sasnett and I on this call today. I'm very pleased to report that our net earnings increased by 95%, compared to last year, and diluted earnings per share increased by 86% as a result of increased gross profits in dollar terms and also improvements in our gross profit margins in each of our business segments. However, our net earnings did continue to be adversely impacted by our loss from our equity investment in our British Virgin Islands affiliate which incurred an equity loss of $589,000 in the second quarter.

The BVI dispute is now in the courts and arguments were heard in the Eastern Caribbean Supreme Court in late July, after which the matter was adjourned until late September, early October while the court is on vacation. However, we understand that the judge may issue a preliminary ruling before the court reconvenes in September but as yet have not been advised of a date for such ruling and we will advise investors of any material developments regarding this matter as they occur.

Looking at operations, our retail segment posted an 11.8% increase in gross profit dollars, compared to the prior year, on lower overall revenues. Although revenues decreased because of reduction in energy pass-through charges to our customers, we were able to increase gross profit margin by 55 -- from 55% to 61% because of cost containment and higher base rates resulting from our annual rate adjustment for inflation that was implemented earlier this year. Although tourist arrival data showed a 12% decline in stayover tourist numbers in Grand Cayman in the second quarter, we were pleased that our water sales by volume remained relatively flat from the previous year, probably due to lower rainfall in the second quarter of this year.

Construction of our new 1 million-gallon per day Governor's Harbor's Sea Water RO plant in Grand Cayman was recently completed and we have decommissioned four temporary containerized units which are now available to be used if required for potential new projects. Our bulk segment gross profit in dollar terms increased nicely by approximately 67% and gross margin increased from 12% in 2008 to 23% in the second quarter of '09, continuing a trend that began in the first quarter of this year. At the end of 2008, we completed improvements to our feed water system at our Windsor plant which eliminated a chronic membrane filing problem and we've now replaced all of the RO membranes at the Windsor plant. These capital works have resulted in better energy efficiencies and lower maintenance costs at that plant which we expect to continue.

Also, in 2008, we implemented changes to our chemical pretreatment at the Blue Hill plant in Nassau and altered the engine cooling system in order to reduce electrical power usage and these projects have also been successful in reducing our bulk segment operating costs. We're not yet satisfied with the level of equipment maintenance expense at the Nassau plants which continues to be a drag on our gross profits, but have undertaken a program to further improve our staff skills and preventative maintenance at these plants which we hope will positively impact gross margins in 2010.

Now, looking at our Cayman bulk operations, in June we signed a new seven year contract with the government owned Water Authority Cayman to rehabilitate the 22-year-old Red Gate desalination plant and this project is now under way. We expect to complete this project in December and we'll operate the plant under the new operating agreement through 2016.

In Belize we learned last month that the government has passed legislation to regulate our Belize subsidiary under the Public Utilities Commission which means that there is a possibility that the PUC may establish new rates for our services that are different from the rates in our present water supply contract with the government-owned water utility in Belize. We've not had any discussions with the PUC to date and we'll keep investors advised of any material developments regarding this matter. However, investors should be aware that this operation has not materially contributed to our earnings so far this year.

Our service segment gross profit compared to the second quarter of 2008 more than quadrupled to $2.3 million, again on lower revenues. This increase in gross profit was due to downward adjustments and estimated cost to construct the Bermuda and Frank Sound desalination plants, both of which were completed in the second quarter and are now in operation. Service segment revenues reflected lower project construction activity in the second quarter but benefited from the commencement of operations at the Times Bay plant in Bermuda which we expect to operate at least through April of next year. Although Phase II of this project is substantially complete, final commissioning has been delayed indefinitely until the government can provide sufficient power to the site.

Our BVI affiliate's new desalination plant at Bar Bay in Tortola has been operating satisfactorily at about 30% of its design capacity since the beginning of this year and we're finishing up this month a delivery pipeline to the BVI governments reservoirs which will allow us to operate the plant more efficiently and deliver more water to the customer. Our affiliate has been producing and selling water from the Bar Bay plant under a binding heads of terms agreement that was signed in December last year and we're currently involved in negotiations to finalize a definitive agreement with the government for this plant. Now I'd like to turn the call over to David just to talk a bit more about our financial position.

Thanks, Rick. Rick's already discussed our operations so I'll briefly add a comment or two about our cash flows and financial condition as of the end of the most recent quarter. Unlike other less fortunate businesses in these very challenging economic times, we've continued to improve our liquidity and our financial condition since the end of our last fiscal year, December 31, 2008. Our cash flows from operations for the first six months of 2009 have exceeded $8.1 million. That's an increase of almost $3.3 million from the same period of last year. Overall our cash balances have grown by $4.7 million from year end.

You should note that this increase was achieved without any significant cash flows from our investment in OC-BVI which prior to late 2007 was a significant source of cash for us. Readers of our financial statements will also note a $3.3 million reduction in our current accounts receivable. This reflects payment by the government of the Bahamas of approximately $8.7 million on their overdue accounts receivable to our Bahamian subsidiary. The other major change in our balance sheet from year end was the $10.2 million increase in loans receivable. This increase reflects the completion of the Frank Sound plant on Grand Cayman and the reclassification of the construction project cost and billings for this plant, effective with its commissioning on June 4. This long-term loan receivable from the Water Authority Cayman will be repaid over 10 years, consistent with the term of the underlying operating contract.

As we look at our business today, we're very pleased to be able to say that we are where we need to be with respect to cash flow and financial position. Our liquidity and our existing borrowing capacity put us in position to aggressively pursue new projects and new opportunities, should they arise. And with that I'll turn things back over to Rick.

Thanks, David. I'll just mention a couple of these projects that possibly could come our way. We've been talking for quite some time about the Turks and Caicos islands. The status of this project continues to be in limbo, while the government has been focused on transitioning to interim British control as a result of findings of a commission of inquiry into government corruption earlier this year. We've had intermittent communication with the new government but have not yet been able to meet to discuss the status of our proposal to provide water supply on five islands in the Archipelago.

In Rotan, we've been working to obtain our required environmental permits and further planning approvals for the project and we would hope to commence construction of a retail water supply system there before the end of this year. We've been watching the political developments in Honduras closely over the past few weeks, which so far do not appear to have had much impact on businesses in Roatan. However, we will be guided accordingly as the Honduran presidential crisis continues to unfold.

We've been evaluating two new substantial projects, one in the -- sorry, one in the US Virgin Islands and a second in Aruba that are expected to be bid in the next few months and we will advise investors if and when there are any material developments with those projects. But in any event, we are very encouraged to see that regional governments are still proceeding with these relatively large desalination initiatives in spite of the state of the world economy, and we believe that this underscores the fact that seawater desalination is a necessity in the region and not something that can easily be put off in bad economic times. Now I'd like to open up the call for questions.

Thank you. (Operator Instructions) Our first question is from Michael Gaugler of Brean Murray, and Carret. Please go ahead. Sir, please go ahead with your question.

Good afternoon, everyone.

Hey, Mike.

Hey, Mike.

Rick, I'd like to start with the services segment first. Big improvement in profitability there. Perhaps you could give us some color as to your expectations going forward with regard to profitability levels. Will they approximate 2Q '09's? Track more towards historical norms or be somewhere in the middle?

Well, as you know, Mike, the service segment certainly the revenues and the profits are spotty. They depend very much on projects that we have under way. We finished up two large projects this past quarter, which positively impacted earnings in the second quarter. We have one project that's under way at the present time in Cayman which will be finished in December this year. The service segment will see some benefit from the Bermuda operating agreement, as we go forward through the rest of the year, but as we said in the Q, the construction revenues from these two large projects are pretty much done. So it's difficult. I think overall margins, you should see some consistency there, but from the standpoint of profitability in dollar terms, it depends on which projects we have under way and when they're finishing up.

Mike, let me add to Rick's comments. At least for the remainder of this year, we had a great second quarter with respect to gross margin dollars for the services segment. We don't expect to see that kind of performance in the future.

Okay.

That was an excellent quarter for us, thanks in large part to the ability of our engineering department to bring the projects in under budget. So we don't have projects of that magnitude going forward, so I doubt we would approach the kind of gross margin dollars we did this quarter in the future.

And just one other question. With regards to Bermuda, any idea when power's going to be made available there?

It's difficult to say. I mean, the plant is substantially complete. We just haven't fired it up, the Phase II of the plant and we've been paid most of the money for that project as well. So that's not delaying any payments to us. It's really up to the government to get the power supply in so we can start the plant. Not clear.

Listen, congrats, guys, on a great quarter.

Thanks a lot, Mike.

Thank you. Our next question is from [CJ Partel] of Janney Montgomery Scott. Please go ahead.

Good morning, gentlemen. Congratulations on the quarter.

Thank you.

Just a follow-up on the services side of the business, not necessarily on the profitability, but on the top line. I believe the Red Gate plant upgrade is currently ongoing, sounds like that will end in December. Is that correct?

That's correct, yes.

Do you have any type of outlook on new projects that could be coming into the segment, maybe other than the Roatan construction that could happen at the end of this year?

The Roatan construction won't generate service revenues. It's only when we're developing plants for sale to third parties. We will own the Roatan facility.

That will roll into retail when we get that online.

The last six months of this year really will be impacted from a project standpoint only by the Red Gate construction at the moment. We didn't recognize any significant revenues for the first two quarters for Red Gate. That construction, those revenues will appear in the third and fourth quarters of this year. That's the only project related revenue source that we have going forward for the rest of this year.

Okay. Great. And just lastly, is there any type of information you can give us on the possible appeals process stemming from the BVI litigation? It's good to see that we have a time line developing and with a final decision expected in September or October. Do you have any idea of the time line of an appeals process, if one were to come about?

We don't have any information at this time on that.

Okay. Great. Thank you.

(Operator Instructions) At this time, we show no further questions. I would like to turn the conference back over to Mr. McTaggart for any closing remarks.

Thanks. Just like to thank everyone for joining us today on the call and I look forward to speaking with you next quarter. Thank you very much.

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