Consolidated Water Co Ltd (CWCO) 2011 Q4 法說會逐字稿

Hello and welcome to the Consolidated Water Company 2011 operating results 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 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.

Now I would like to turn the conference over to the President and CEO, Rick McTaggart. Mr. McTaggart, you may begin.

Thank you, Andrew. Good morning, ladies and gentlemen. Thank you for joining David Sasnett and me on this call this morning. I'm very pleased to report that the Company's gross profit was 15% higher for the year compared to 2010, primarily due to the 50% increase in the gross profit of our bulk water business and a 3% increase in the gross profit of our retail business.

Our net profit for 2011, which was buoyed by improved operating profits, was relatively consistent with the net profit for 2010 in spite of incremental Mexico development costs of $1.3 million and a 32% reduction in earnings from our BVI affiliate.

Retail water revenues rose by 7% in 2011 due to the effect of a 2% increase to our base water rate, which was implemented in January of 2011 under the terms of our retail water franchise in Grand Cayman and was also affected by higher energy passthrough charges to our customers due to higher electricity rates last year.

We were also pleased to see a 3% increase in water volume sales in Grand Cayman to our regular customers after excluding the effect of one-off sales to Water Authority-Cayman which occurred in early 2010.

Tourism numbers continued to rebound in the Cayman Islands last year with government figures showing a 7.2% increase in stay over tours for the year and we believe that such increases have a positive impact on our sales volumes since we service the main resort area in Grand Cayman.

Additionally, we see signs of future water demand growth as at least one new condominium project at the Old Beach Club site is slated for completion this year and the Dark Corporations for Cayman development continues to move forward.

We understand that the proposed $1.3 [billion] for Cayman project has received the necessary government approvals to relocate the main coastal road, which currently runs through the project, and intends to convert an existing hotel property that has been closed since 2008 into a new five-star resort so all this will be hopefully added to our sales in Grand Cayman.

The Cayman Islands government informed us in mid-February that our retail water license had been extended until June 30, 2012 in order to allow us to continue to provide service to our customers while we negotiate the terms of a new retail water license in Grand Cayman.

We discussed in our 10-K and in our recent press release that the government's representative in these negotiations, Water Authority-Cayman, has not requested any further meetings since February 2011 and we believe that this lack of recent license negotiations results from government's focus on other matters including the government's publicly acknowledged intention to privatize certain government-owned assets including the Water Authority-Cayman. Although we cannot say with certainty when we will be granted a new license, we are confident that these negotiations can be completed to the satisfaction of both parties.

Revenues from our bulk water operations increased by 22% in 2011 due to increased volume sales and higher energy passthrough charges to our customers. These higher revenues as well as efficiency improvements led to a 50% increase in gross profit of our bulk water operations compared to 2010.

In early November, we commissioned a 67% expansion to our Blue Hills desalination plant in Nassau, which added approximately $770,000 in new sales to our Bahamas Company during the fourth quarter. The Bahamas government contracted with us to expand this plan in January last year with the intention of replacing more expensive imported water from Andros Island and we were able to bring the Blue Hills expansion online and deliver water to the water and sewage corporation in record time.

We are also pleased to see continued improvement in our bulk water operations in the Cayman Islands and Belize as their gross profitability improved by approximately 28% and 45% respectively. The increase in Belize was primarily due to the resolution of membrane fouling issues, which plagued the plant in 2010 but which were resolved by year-end.

Our services segment generated a gross profit of approximately $500,000 for the year as revenues decreased due to the termination of Bermuda operating agreement at the end of June and revenues were lower from our management contract with our BVI affiliate. Investors should expect our service segment to continue to generate modest losses until such time as we obtain a new BOOT type construction contract or management service contract.

Turning to projects, I am very pleased to report that we negotiated an agreement with one of the other shareholders in our Mexican joint venture and we now control 75% of the shares of NSC. With the resolution of this issue which delayed the project since last summer, we are again moving forward with the development of the proposed 100 million gallons per day seawater desalination plant in Rosarito, Baja California, Mexico.

We are enthusiastic about this project and its prospects for success given the growing need for water in Baja Mexico and Southern California. Recent natural events including a pretty severe 7.2 earthquake in Mexicali in April of 2010 and increasingly frequent droughts on the Colorado River system have highlighted the fragility of existing water resources and heightened interest in seawater desalination as a permanent solution to water problems in the region.

During the fourth quarter of last year, we deployed a full-time engineering and management assets to Asia to pursue several new projects in markets that have characteristics very similar to our traditional Caribbean market, which include tourism-based economies, stable political and economic environments, and obviously limited supplies of potable water. We have already identified potential plant sites and completed preliminary geotechnical work on one of these sites and we hope to initiate business in Asia by the end of 2012.

With the strength in management and technical team, we believe that we are well-positioned to capitalize on these very exciting growth opportunities and have greater capability to identify, assess, and develop new opportunities in an ever-thirstier world.

Now Andrew, I would like to open the call for questions.

(Operator Instructions). Blake Todd, Two Oaks Investment Management.

Good morning, Rick. Can you give us any color as to what's going to happen with the land parcel and whether or not you're going to need to identify new land or how you are going to do that now that you have lost the option on the land? Was that $400,000 included in the $1.3 million of expenses for Mexico?

Firstly, yes, it was included in the write-off and the land we believe and we intend to continue to pursue agreements to get that particular parcel of land. We think that it's important for the project and we are taking steps to try to secure that land going forward.

Real pleased that you guys took control of that because I would love to see that thing progress and a nice growth piece for the Company.

Thank you, we are very excited about it.

Ryan Connors, Janney Montgomery Scott.

This is actually Tim Feron filling in for Ryan. I was just curious what the main driver was behind the decision to kind of reverse course on the Mexico Project. It seems like in the third quarter you guys were backing away. Now it looks like you might go forward with it.

I think it was purely a business decision. We've invested a significant amount of money in the project already. We looked at various options to recover that investment and we thought this was the best way forward.

Okay, just going forward, what kind of additional CapEx do you guys see associated with the project and what would you consider a more normalized run rate for the SG&A as activity picks up with that growth initiative?

At present we are reassessing the capital needs for the development part of the project. We have some very rough estimates on construction which will be down the road. I don't see any material difference in what we have been spending over the last two years on the project. I think you can probably work that into your figures.

Okay, thanks.

(Operator Instructions) John Bair, SKA Financial Services.

I have a question on your services revenue. Do you anticipate that that -- those numbers will stay fairly steady over the next year or so or can we expect those to fluctuate? How might those be impacted to increase?

Well, most of the projects that we are following now would not affect the services revenue segment. So I think you could probably assume that it's going to continue as it has. We are looking at a couple smaller projects that may provide some revenue to that segment but those are in development stage.

Okay, and another question with regards to your Asian efforts there, what can we kind of expect as far as your expenses, SG&A type expenses that you would be working on for that?

I will turn that one over to David since he has been intimately involved in the Asia stuff.

Okay, thank you.

Our projects in Asia are in the development stage, just as Rick has mentioned. At the moment we have allocated management and engineering resources, but we have managed to keep those relatively low. There's a lot of groundwork that has to be done in Asia in establishing companies and bank accounts and making sure that we are positioned to do business there. We are presently negotiating with customers.

At some point in time, if the Asian developed expenses become material we will disclose them separately in our filings. Right now they haven't been that material. They could be material by the end of the year. As we've said in our public filings, we hope -- and in our press release -- we hope to be able to announce that we have landed a project in Asia by the end of 2012.

At that point in time, obviously the amount of money we would spend there would greatly increase.

Okay, so that would be in relation to the plant site that you had referred to in the opening comments?

Plant site I think in the early opening comments related to Mexico.

Okay, I'm sorry.

I did mention that we added -- identified a site in Asia. You are correct.

So you would anticipate being -- releasing more information on that as the year unfolds then I take it?

Yes, that's correct.

Is something really does come to fruition on that?

We're actually pursuing more than one project in Asia at the moment. We hopefully will be successful with one or more of these. We're at the point now where clearly we think there -- the potential is there or we wouldn't be spending the money.

There are a lot of countries in Asia that have situations very similar to what we see in the Caribbean. They have tourist economies. They need water. They have a shortage of portable water and they are beginning to realize that desalination is the only solution they have.

We've made contacts with various people in the area and potential partners and things like that, so we are pursuing three or four projects at the moment. We have engineering and sales and marketing people pursuing them and hopefully we will be successful in landing one by the end of the year.

Okay. I will get back in the queue in case somebody else -- thank you.

[Charles Landsberg], Financial Technologies.

Good morning, guys. One quick question. Compare your fourth-quarter results from '10 to '11.

Gosh, we don't normally do that kind of analysis. So I really haven't prepared any comments on it. I would have to go to the K and pull out those fourth-quarter results, take a look at them in detail. If you would like to give me a call back, I'd be more than happy to talk about the reasons for the significant fluctuations from quarter to quarter.

So you don't have the fourth-quarter results for '11 as compared -- or even compared to '10?

We have them -- if you look in the financial statements in our annual report, we provide our quarterly results. If you want to give me a moment, I will pull up our numbers on the 10-K and I will tell you what they were.

In the meantime, we could probably get to another question if you had one.

No, I don't have one. Good luck in Mexico, guys.

I will have an answer to your question in just a moment here. Okay, for the fourth quarter of 2011, we had total revenues of $13.6 million, gross profit of $4.5 million, and our diluted earnings per share was $0.06. In the fourth quarter of this year -- excuse me of 2010, our revenues were slightly less at $11.6 million. We had $3.1 million in gross profit and we also earned $0.06 a share.

So in essence the fourth quarter of this year we generated more in the way of revenues and gross profits but our general and administrative expenses were higher in part because of the write off we took with the land deposit in Mexico and the other incremental expenses for Mexico. Last year we didn't have those expenses.

So increased gross profit sales for 2011 were offset by SG&A but our results EPS-wise and earnings-wise were very consistent at $0.06 and just over $900,000 for both quarters.

(Operator Instructions). We show no further questions at this time. I would like to turn the conference back over to Rick McTaggart for any closing remarks.

Thank you, Andrew. I would just like to say thanks to everyone again for listening in and I look forward to talking to you again in May. Thank you.

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