Consolidated Water Co Ltd (CWCO) 2010 Q4 法說會逐字稿

Hello and welcome to the Consolidated Water Co. 2010 year-end conference call. All participants will be in a listen-only mode. (Operator Instructions)

After today's presentation, there will be an opportunity for you to ask questions. Instructions on how to ask your questions will be provided 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 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. Please note this conference is being recorded. I would now like to turn the conference call over to Mr. Rick McTaggart. Mr. McTaggart, you may begin.

Thank you, Jamie. Good morning, ladies and gentlemen. Thank you for joining us this morning on this call.

In spite of our soft economy last year in our primary market of Grand Cayman, as well as reduced plant construction activity which resulted in lower operating income, we were able to improve our full-year net earnings slightly from $0.43 per diluted share to $0.44 per diluted share. This improvement to net income was primarily attributable to improved equity earnings from our investment in our BVI affiliate and the absence of impairment charges related to that investment which had significantly reduced our net income in 2009.

The good news regarding 2010 is that the operations of our BVI affiliate were stabilized by the affiliate, obtaining a profitable operating agreement for the Bar Bay plant in early March and the cessation of operations of the loss making Baughers Bay plant at the end of March last year.

Our retail water sales declined by 6% during the year due to a 7.2% inflation index related reduction of our base water rates in January 2010 and to a lesser extent from a 1% decrease in volume sales for the year. After a very soft third quarter in our retail segment, fourth-quarter sales slightly exceeded our expectations and so far in 2011, we're seeing retail water sales from our Grand Cayman franchise area exceeding prior year levels by about 17%. With tourism indicators in Grand Cayman showing positive gains this year over 2010 and drier weather conditions in the first quarter of 2011, we are hopeful that our retail sales will recover in 2011.

We continue to negotiate with the Cayman Islands Government for a new retail franchise in Grand Cayman and although progress has been slow, we are optimistic that a satisfactory conclusion to these negotiations will eventually be forthcoming. We've previously advised investors that the new water rate model proposed by the Cayman government is more complex than our present inflation index adjustment model and includes a guaranteed profitability range based on the Company's invested capital.

The government's proposal includes a number of variables and conditions that directly impact our water rates and profitability and this has significantly expanded the scope and timeframe of these negotiations. As disclosed in our recent 10-K filing, although the most recent extension of our franchise license expired on January 4, we continue to supply water to our franchise area in accordance with the terms and conditions of our original 1990 license.

Because we provide a vital service to a large portion of the resident population, as well as the prime resort areas in Grand Cayman, we see no reason why the government would not allow us to continue to operate while negotiations continue. Our bulk segment revenues declined by 2% in 2010 primarily because of an inflation index related reduction of the base water rates of our Cayman Islands subsidiary, Ocean Conversion Cayman Limited, which went into effect also in January of last year and to a lesser extent, by a 2% decline in the volume of water sold by our bulk operations.

In June last year we completed the rehabilitation of the Red Gate plant in Grand Cayman which was originally constructed in 1988 and obtained a seven-year contract extension for that plant until June of 2017. This was a particularly difficult project because it involved the rehabilitation of an older operational plant and we did incur some liquidated damages in the second quarter of last year which impacted our service segment profitability.

However, I am pleased to report that the rehabilitated Red Gate plant is operating satisfactorily and is in fact operating at a specific energy efficiency which is well below design. In our Bahamas operations, we continue to benefit from reduced energy costs due to improved operating procedures in the fourth quarter and we actually made a small gain from our energy pass-through charges in the fourth quarter, and this is in contrast to penalties we've incurred in the past in those operations.

Early last year, we implemented further initiatives relating to our diesel engine maintenance in the Bahamas which we believe will significantly reduce mechanical breakdowns and associated repair costs and we are optimistic that this particular initiative will yield very positive results for our Bahamas business in 2011. We were very pleased to announce last month that we had been awarded a contract to increase the production capacity of our Blue Hill plant in Nassau by 67% from 7.2 million gallons per day to 12 million gallons per day.

This plant was originally commissioned in July of 2006, and with the expansion of capacity, we will receive an extension of the water sale agreement until 2031. We are proceeding rapidly on this project to meet a very tight commissioning deadline and expect to be producing water from the expanded plant in October of this year. I would like to ask David just to discuss the results of our services segment and our working capital.

Good morning, everyone. Our services segment revenues were approximately $3.5 million in 2010. This compared to almost $9 million last year in 2009.

And the difference is attributable to project activity. Last year in 2009, we had construction projects underway for the North Side Water Works project under construction for the Water Authority Cayman. We're also finishing up the construction of our Bermuda plant and as a result, we recorded significant plant construction revenues in 2009.

In 2010, our plant construction activity was limited to the refurbishment of the Red Gate plant on Grand Cayman on behalf of the Water Authority Cayman. And with a decline in the plant construction revenues, obviously our services segment had the corresponding decline in gross profit.

Our gross profit was also impacted by the renegotiation of our [banishment] services agreement for the [remeter] plant and as a result. we made about $600,000 less on that agreement in 2010 than we did in 2009. The services segments had a loss of operations of $1.1 million which is not necessarily attributable to the decline in the plant construction revenues, but rather the incremental expenses we elected to incur in connection with a perspective venture in Mexico. These expenses totaled $1.7 million for 2010 and Rick will discuss this project in greater detail later in the conference call.

We're pleased to be able to report however that we continue to strengthen our balance sheet. As of 2010 December 31, we had $46 million in cash and increased the balance from December 2009, but also managed to increase our working capital from approximately $50 million as of the end of the year 2009 to just about $57 million as of December 31, 2010.

In looking at our balance sheet going forward, we would expect to continue to generate cash flows from operations, pay down our existing debt. The two things that could impact the structure of our balance sheet, one of which certainly will, the first and foremost is the recent expansion of the Blue Hills plant in the Bahamas that we were able to obtain. We would estimate or expect that we would incur approximately $10 million in incremental debt to fund the construction of this project.

And then the other pending matter that could impact our balance sheet in 2011 would be the resolution on the issue in the British Virgin Islands. Our affiliate there has a pending appeal underway relative to the Baughers Bay litigation that was actually we thought completed last year in 2010.

What's happened here is there's been an appeal in process for some time now. Approximately $5.4 million in funds under the original court ruling remain to be paid to our affiliate. Assuming those monies get paid, we would realize about 43% of those amounts in cash and dividends to us.

However there's always the possibility that the appellate court will come back and rule different from the original court which could impact the amount of cash received both positively and negatively but ultimately has the possibility of adversely impacting our investment in OC-BVI. And with that I'll turn things back over to Rick.

Thanks, David. Now looking at new project opportunities, we've continued to follow a project in Ensenada, Mexico which comprises a 5.5 MGD desalination plant and a very long [product] water aqueduct through the city of Ensenada. The bid process for this project was already canceled once this year and was restarted in late February, and the project unfortunately has a long history of delays and cancellations.

However, if the project proceeds, we believe that utilizing the technical team that we have assembled for the Rosarito project on the Ensenada bid will greatly enhance our ability to successfully compete for this project which contains many elements and a scaled-down version of the larger Rosarito project which I'll talk about now. In addition to the Blue Hills plant expansion, our engineering team has been very busy on the development of a large seawater desalination plant in Northern Baja California Mexico, the Rosarito project.

This project comprises a 100 million gallon per day seawater desalination plant and an approximately 25 miles long water aqueduct to deliver water to customers in Mexico and across the border in the United States. Since we last reported, we and our partners have made meaningful progress to secure a strategically important 44 acre site for the project and to obtain concessions from the Mexican Federal Electricity Commission which relate to access to power and feed water for the Rosarito project.

It should be recognized that this is a very complex and long-term project and while we're still in early development process, we believe based on our experience to date that this is a viable project that has the potential to significantly change the face of the Company. To complete the Rosarito project, our Mexican affiliate has engaged Carollo Engineering, a leading engineering group with extensive regional experience, and partnered with Doosan Heavy Industries and Construction who are the global leader in engineering procurement and construction of large seawater desalination projects.

If the affiliate is successful in executing this project, we intend to operate the plant and retain a minority position in its ownership. Finally, we bolstered our sales and marketing resources in late 2010 with the addition of a new Director of Sales and Marketing who has extensive experience in our market and industry, and this has allowed us to expand our sales and marketing activities in a much more meaningful way to markets outside of our historical Caribbean footprint.

And although the economies in many of the countries in which we presently operate remain soft, we've demonstrated that we are able to capitalize on new project opportunities as they occur to grow our business in these areas and we see significant opportunity for our Company in other water short regions such as Mexico and the Southwestern United States, and we are encouraged by the apparent willingness of these regions to utilize the vast water resources of the oceans to meet the water demands of their growing populations. So with that, I would like to just open the call for questions.

(Operator Instructions) Michael Gaugler, Brean Murray Carret.

Rick, we have seen the retail segment gross margins decline a bit two quarters in a row here year over year. Maybe you could add some color as to what's causing that and how you're thinking about that going forward.

Well as I mentioned earlier, primarily it's due to the rate adjustment that was implemented in January of last year. It was a 7.2% reduction of our base water rates, and that was attributable to reductions in the inflation indexes that are linked to these rates.

So, this year we are actually getting a slight increase to our rates and we -- going forward we see more demand. Tourism seems to have picked up on the island somewhat and we have seen as I said a 17% increase in our demand volumewise so far this year in 2011. So, hopefully we start picking back up some of that margin that we lost last year through the rate reduction.

Good. And then just one issue on fourth quarter. Taking a look at OC-BVI's results, had a very minor positive impact in the quarter. Any particular reason (inaudible) levels I would have guessed much better given water supply issues there.

Well, if you're looking at say the third quarter compared to the fourth, because we're still booking revenues from the court judgment on a cash basis, we picked up a $2 million payment in the third quarter of 2010 which obviously made that quarter look much better. We didn't get any payments in the fourth quarter on the judgment, and so far this year we have received a $1 million payment which will impact the first quarter's results. So fourth quarter was just revenues and profitability from the Bar Bay plant.

All right, Rick, thanks. I appreciate it.

(Operator Instructions) John Bayer, SKA.

Yes, I would like to know what your timeframe might be -- I realize it's pretty squishy right now with regards to the Rosarito project. How many years would you generally think that this -- if things were to move along on a reasonable schedule, when that project could be completed and be in place?

Well, we are in the development phase right now and I think we have indicated in the 10-K that we're looking at probably the end of this year before we would even commence -- or early next year before we would even commence construction. And then you're probably looking at a two to three year construction period after that.

Okay, and are you looking at other opportunities in Central and South America also?

There's a couple of smaller opportunities in Central America that we have been working on for some time now in Roatan, Honduras. Other than that, we're not looking at anything at this time.

Last question. Are you seeing a general improvement in tourism in your operating areas and any signs of increased construction activity overall?

Certainly in Grand Cayman we are seeing tourism figures pick up. I think I had mentioned in the press release that you have seen a pickup of about -- I think it was about 6% in the Grand Cayman market.

Other areas -- the tourism numbers primarily affect our retail business in Grand Cayman and they don't necessarily impact our boat businesses in some of these other countries. So you'll see more consistent revenues say in the Bahamas or Belize even though there's a downturn in tourism there.

Okay, thank you very much.

(Operator Instructions) At this time, I'm showing no additional questions. I would like to turn the conference call back over to management for any closing remarks.

Thanks a lot, Jamie. I would just like to thank everybody for joining us today and I look forward to speaking with you again at the end of -- in May on the first-quarter conference call. Thank you.

To access today's digital replay of the conference, you may dial 1-877-344-7529 or 412-317-0088 beginning at 12.30 Eastern time today. You will be prompted to enter a conference number which will be 449-244. You will also be asked to record your name and company when prompted.

Today's conference is now concluded. We thank you for attending today's presentation. You may now disconnect your telephone lines.