Consolidated Water Co Ltd (CWCO) 2011 Q3 法說會逐字稿

Welcome to the Consolidated Water Company third-quarter 2011 conference call.

All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity 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 or 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 that this conference is being recorded.

Now I would like to turn the conference over to Mr. Rick McTaggart, CEO of Consolidated Water. Please go ahead, sir.

Good morning, ladies and gentlemen. Thank you for joining David Sasnett and I on this call this morning.

Very pleased to report that the Company's operating income increased by 122% this past quarter compared to the same period last year. This significant increase was primarily driven by improved gross profit in our Retail and Bulk Water segments as well as reduced administrative costs.

Such a large improvement in the results of our core businesses is indeed very gratifying. At a time when new project opportunities have been somewhat slower to materialize than in the past, we have focused on improving the efficiency of our existing operations. This focus has paid off by reducing our direct water production costs, primarily in our Bulk Water businesses.

Additionally, the reduction in administrative costs this past quarter is due to lower project development expenses related to the Rosarito project. These expenses may be fully eliminated if we exit the project within the next one to two months. We have given investors a full update on the status of our investment in NSC Agua in our quarterly SEC filings. I will briefly go over that discussion later in the call.

Net income for the quarter remained essentially flat compared to 2010 due to lower equity earnings from our BVI affiliates which offset the strong increase in our core business profits this past quarter.

We were advised by our BVI attorney that the two outstanding legal appeals were heard by the Eastern Caribbean Court of Appeal on September 30. We would hope to receive the court's decisions before the end of this year. Hopefully that will close off that issue, that legal issue.

Investors will recall that both our BVI affiliate and the BVI government appealed certain parts of the 2009 court judgment, effectively ordered our affiliate $10 million for water produced from the Baughers Bay plant over a period of several years. Investors will also recall that the Baughers Bay plant was turned over to the BVI government last March in accordance with the court judgment, and we will advise investors of the outcome of these legal matters as soon as the court has issued its decisions.

Retail revenues increased by 14% last year due to a 7% increase in volume sales as well as a 2% inflation-related base rate adjustment effective January 2011 and higher energy pass-through charges to our customers due to higher electricity prices this past quarter. Retail gross profit increased modestly by 4%, which we would expect to see since inflation-related adjustment -- since the inflation-related adjustment in January and the energy pass-through charges are designed to compensate the Company for higher direct production costs.

We believe that the higher retail sales volumes this past quarter are reflective of relatively drier weather in Grand Cayman this summer, as well as a 6.1% increase in stay-over tourists during this past quarter compared to last year. The Dart Corporation, which is a private developer in Grand Cayman that developed the Camana Bay project, recently started the redevelopment into a four- or five-star resort of an existing hotel property within our license area which has been closed for more than three years due to hurricane damage.

The [Four Caman Project], as it is called, has received the necessary Cayman government approvals to relocate a main road which currently runs through the property. This will enhance beach access to the hotel. We expect this development project, when completed, to positively impact water sales in our license area.

On July 19 we were advised by the Cayman Islands water regulator that our retail water license had been extended to January 31, 2012, to enable the Company and the regulator to conclude negotiations for a new retail water license without interruption of water production and supply services within our license area in Grand Cayman. We subsequently met with the government representatives to discuss our concerns regarding legislative changes that were passed earlier this year which we believe impact the negotiations. We are currently awaiting a reply from the government regarding this issue.

Revenues from our Bulk Water operations increased by 18% last quarter when compared to the same period in 2010, reflecting incremental quantity-based fees from the Red Gate plant in Grand Cayman which was refurbished in July last year. Bulk segment gross profit increased by 55%, reflecting these higher revenues and reduced repair and maintenance costs in all three of our bulk water businesses in the Bahamas, Grand Cayman, and Belize.

I am very pleased to announce that our new 4.8 million gallon per day expansion of the Blue Hills plant in Nassau was designed, constructed, and commissioned in a company record time of less than nine months and began delivering water to our customer last week. We continue to finish up construction and punch list items, including a new product delivery line from the Blue Hills plant to our customer's reservoirs, and we expect this project to be fully completed later this quarter.

This expansion represents a 67% increase in water production capacity at this plant and the additional production capacity will allow our customer to provide much more efficient and reliable service to the people of Nassau by replacing the water barge operation between Andros Island and Nassau.

Gross profit also increased in both our Cayman Islands and Belize bulk water businesses by 21% and 58%, respectively, this past quarter due to higher revenues combined with cost controls. Our Services segment generated a negative gross profit of approximately $55,000 this past quarter as revenues decreased due to the termination of the Bermuda operating agreement at the end of June and lower revenues from our management contract with our BVI affiliate. Investors should expect our Service segment to continue to generate losses until such time as we obtain new BOOT type construction contracts or new management service agreements.

Now looking at project opportunities. Because our Mexican affiliate, NSC Agua, has not been able to raise the additional capital required to complete the development of the Rosarito project in a timely manner and has not been able to address the remaining uncertainties associated with this project, we have given an option to a third party who is related to our partner in NSC Agua to purchase our interest in the JV. This option is exercisable through November 21, and if exercised, we expect to exit this project by the end of the year or in early January.

Although I am personally very disappointed that this particular opportunity has not developed as planned, we have acquired a great deal of knowledge and expertise regarding the water markets in Mexico and Southwestern US and expect to explore other opportunities in these regions in the future. I am also hopeful that our exit from the JV may allow the remaining shareholders to move forward with this project, which is very important to the region.

As I mentioned in the press release, new project opportunities in the Caribbean market continued to develop at a much slower pace than in the past, although we continue to work hard to obtain these projects that are available to us, such as the Blue Hills expansion. However, because of the continued softness in our primary market, we have looked to new fast-growing areas in the world where desalination might be a viable and profitable source of water. In particular, Asia where we have been evaluating certain business prospects for the past 18 months.

We believe that some of these projects are very promising and we recently hired a regional sales and engineering manager to pursue them. We do not currently have any customer contracts and have not allocated any capital to a particular project. However, we will keep investors informed if and when these opportunities develop.

Jill, I would like to now open the call up for questions.

(Operator Instructions) Chris Purtill, Janney Montgomery Scott.

Good morning, Rick. Just wondering if you could talk maybe about any of the specific drivers in the bulk water send out. You talked about demanding being up 8% year-over-year. I am curious if this -- is it more a return to normal usage after a difficult 2010 or are you seeing any kind of broader pickup on the bulk side?

Well, as you know, Chris, the bulk contracts are essentially limited to what they have contracted to buy from us. So some of the plants were underutilized and they have picked up a little bit in Grand Cayman.

I think the main story is on the cost side that we have been able to reduce our costs of production, and that is really what has driven the increase and the profitability of those businesses. There has been some pick up on the revenue side, but a much more important cost reduction.

Okay, great. And then just a final question. Just on the affiliate line, I believe that includes just Bar Bay at this point; can you talk about the sequential pickup that we saw there from the second quarter? I am just trying to get a sense of what the normalized contribution from Bar Bay is going forward if we exclude any kind of assumptions on payments received on Baughers.

Last year we had a big payment from Baughers Bay in the third quarter, so that is why you saw that drop in the equity pickup between the two years. I think probably what you have seen this past quarter is a more normalized pickup from just Bar Bay.

Right. But on a sequential basis, if you go from the second quarter to the third quarter the affiliate earnings jump from $89,000 up to $160,000. So was there anything, I don't know, unique maybe in the second quarter that drove that number down or unique in the third quarter that drove that number up?

I can't think of anything in particular. I think it's probably just some variations in demand between the two quarters, because again, at some point -- sometimes they don't take the full capacity of that Bar Bay plant.

Okay. But $160,000 that you booked in the third quarter, that is kind of the level that you will be looking at going forward?

Subject to David's comment on that, I think that is probably about right.

Okay.

Chris, the Bar Bay plant itself is a much smaller volume than what we had from the Baughers Bay plant, so really when you look at the contribution of our equity investment in OC-BVI going forward, unless we receive a significant amount of money under this settlement it's just not going to be significant to our profitability.

I hate to say that $159,000 is either indicative or not indicative of what we have going forward. I will say that it's just not going to be a big impact on our earnings though. The Bar Bay plant itself is greatly reduced volume and because of the arrangement we now have when we bought our investment in OC-BVI we put on the books a management services and intangible assets.

Now because of the loss of the Baughers Bay plant we are now advertising that asset over a defined seven-year period, which is the term of the Bar Bay contract. So that is impacting our earnings as well.

So you know, --

But that has been in place since last year, so that wouldn't explain any variance between the two quarters, Chris.

No, it wouldn't Chris, but it is impacting our profitability. $159,000, without predicting exactly how much in volume the government is going to take, it's just not going to be a big contributor to our earnings going forward.

Got it. Okay, great. Thanks, guys.

(Operator Instructions) Showing no further questions at this time, I would like to turn the conference back over to management for closing remarks.

Just real quickly I would like to thank everybody for joining us on the call today, and I look forward to speaking with you again early next year. Thank you.

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.