Consolidated Water Co Ltd (CWCO) 2012 Q1 法說會逐字稿

Hello and welcome to the Consolidated Water Company first-quarter 2012 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 may include statements that may constitute forward-looking statements, including -- 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, or 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 Rick McTaggart. Mr. McTaggart?

Thanks Catherine. Good morning, ladies and gentlemen. I'm joined on the call today by our Chief Financial Officer David Sasnett. We appreciate you taking time from your busy schedules to call in.

I am very pleased to report that the Company's net profit was 18% higher for the first quarter of 2012 compared to the same quarter in 2011. This was due primarily to a 20% increase in revenues, combined with higher margins in our bulk water businesses.

Retail water revenues rose by 3% this past quarter, due to the effect of a 4% increase to our base water rates which was implemented in January 2012 under the terms of our retail water franchise in Grand Cayman, and also due to higher energy pass-through charges to our customers during the first quarter. This was partially offset by a 5% reduction in the number of gallons sold during the first quarter -- or compared to the first quarter of last year.

In spite of a 2.5% increase in tourist arrivals during the first quarter, our water sales and number of gallons declined, and we have not identified any specific reason for the decline other than generally conservation by our customers. 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 a new retail water license in Grand Cayman. We discuss in our 10-Q that the government's representative in these negotiations, Water Authority Cayman, has not requested any further meetings since February 2011. We believe that this lack of recent license negotiations results from government's focus on other matters, including the privatization of the Water Authority. Although we cannot say with certainty when we will be granted a new license, we believe that these negotiations can be completed to the satisfaction of both parties.

Now, looking at our Bulk segment, Bulk water revenues increased by 41% in the first quarter, primarily due to increased volume sales from our expanded Blue Hills plant in Nassau, Bahamas, and higher energy pass-through charges to our customers. These higher revenues, as well as efficiency improvements, led to a 54% increase in the gross profit of our Bulk water operations compared to the first quarter of 2011. Along with higher overall profits, the gross profit margin in our Bulk water operations ticked up nicely from 22% of sales last year to 24% of sales in the first quarter of 2012, reflecting more efficient operations.

In early November 2011, we completed a 4.8 million gallon per day expansion to our blue Hills desalination plant in Nassau, Bahamas in record time. This plant is now the largest seawater reverse osmosis plant in our portfolio and is the largest seawater desalination plant in the Western Hemisphere that utilizes seawater intake wells. At a combined capacity of approximately 15 million gallons per day among our Blue Hills, Windsor and Bimini desalination plants, the Bahamas now represents the Company's largest geographic market when measured in terms of volume of water produced and delivered to customers.

Our Services segment generated revenues of approximately $100,000 for the first quarter compared to about $400,000 in the first quarter of 2011 due to the termination of the Bermuda operating agreement at the end of June 2011 and lower revenues from our management contract with our BVI affiliate. Investors should expect the Service segment to continue to generate modest losses until such time as we obtain new boot-type construction contracts or management service contracts.

Now, looking at project opportunities -- I'm sorry. David, at this point, I'd like you to discuss our balance sheet and our cash flows for the quarter.

Okay, thanks Rick. If you look at the March 31 balance sheet, you'll notice that we had a decline in cash from about $37 million at the end of the year to just a little over $24 million, almost $25 million at the end of March. This is attributable to the fact that we paid off $8.5 million of bonds related to our Bahamas operations this quarter. That should save us approximately $0.5 million a year in interest expense.

You'll also notice from reviewing our balance sheet that our Accounts Receivable increased significantly from year-end, almost $7 million. Apparently, the expansion of our Blue Hills plant and incremental billings that we are now sending the Water and Sewage Corporation of the Bahamas caught them a little bit by surprise and they fell behind in their payments to us, which created the increase in Accounts Receivables at of the end of March. However, the Bahamian government has sent us incremental payments of over $6 million in the month of April to catch things up. We have been assured they will contemplate the use of additional billings in their budgeting process for this year, so we would expect the Accounts Receivable levels for our Company and for the Bahamas operation to return to more normal levels very quickly here.

We would like to point out the fact that we have one of the healthiest balance sheets, we think, in the industry. We have a significant amount of cash available for investment. For those of you who follow our Company, you'll notice that we put about $8.5 million into marketable securities. These securities are very short-term in nature and high-grade, but it's very tough to earn anything in the banks these days with respect to term deposits. So while we aggressively pursue other projects, we put these funds into a marketable security account in search of a higher yield. These securities are highly liquid and we can dispose of them within a day or two if we need them for capital projects.

So once again, I'd like to emphasize the health of our financial condition, and our availability of investment capital. We are very proud of the steps we've taken to deleverage our balance sheet and put ourselves in a position to take advantage of opportunities in the future.

With that, I'll turn things back over to Rick.

Thanks David.

Now, what are going to do with this healthy balance sheet? I'd like to just discuss some of the project opportunities.

As previously reported, we have resolved all outstanding issues with the other shareholders in our Mexican joint venture. We now control 75% of the shares of NSC Agua, giving us effective control of the company and the project. With the resolution of this issue, which delayed the project for more than six months, we are again slowly but surely making progress on the development of the proposed 100 million gallon per day seawater desalination plant in Rosarito, Baja, California and Mexico. We are committed to this project and enthusiastic about its prospects for success, given the growing need for water in Baja, Mexico and Southern California. We are presently finishing up some important foundation work for the project, including again securing rights to key pieces of land in the Rosarito area and obtaining contracts with Mexico's Federal Electricity Commission for access to feed water for the project.

In addition, we expect to have seawater monitoring and pilot scale water treatment equipment operational at the project site by the end of the summer.

In addition, we are presently pursuing several new project opportunities in Asia, and you'll know we incurred about $165,000 in development costs in the first quarter this year for that project. These projects are in markets that have characteristics similar to our traditional Caribbean market, including tourism-based economies, stable political and economic environments, and limited supplies of potable water.

We've already identified potential plant sites and completed preliminary engineering work on one of these sites using resources that we deployed in the region late last year. We hope to initiate business in Asia by the end of this year.

We have other opportunities that we are pursuing. We have an opportunity to get a new retail franchise business in one of our existing markets, and we are well down the road with that project. We are also working on a second smaller project opportunity in Mexico.

I'll just finish up by saying we have a highly qualified sales and technical team. We believe that we can continue to leverage our nearly 40 years of experience desalting seawater to take the Company into new and profitable markets around the world.

At this point, I'd like to open the call up for questions.

(Operator Instructions). Ryan Connors, Janie Montgomery Scott.

This is actually Tim Feron filling in for Ryan. Just a question on the Mexican project. I'm just curious where you guys are, or where you -- when you would expect contracts to start rolling through with that facility. Have you talked to any of the local municipalities in terms of when those negotiations could start? If so, when could we start to see some of those popping up?

We have talked to the customers, Tim, and as you know, we've had these delays for, as I said, the last six months. So in that period, we haven't focused on the customer contracts. We intend to get back in discussions with the customers. Probably by mid-summer I would think we will be in a position to do that.

Okay. Thank you. That's very hopeful. Just in terms of funding both the new projects in Asia and the project in Mexico, do you guys think you'll have to pursue any additional funding, or will you be able to generate everything internally?

At this point, we believe that we can fund these projects internally. Specifically with the Mexican project, we have noted in previous disclosures that we would entertain the idea of bringing in additional investors, particularly Mexican investors, in the project. So, we haven't ruled that out, but if it turns out that we have to fund these ourselves, we are in a position to do that.

Let me just add some clarification on what Rick said. Based upon the scope of the Mexico project, we've been very upfront in telling people that, at some point in time, we will have to go through the debt or equity markets to obtain the final financing required to build that plant. 100 million gallons per day is a tremendous amount of capital investment.

But with respect to the other things that we are doing, we feel like we have sufficient available funds plus cash flows that will be generated from future operations to enable us to fund the opportunities we see in front of us at the moment. That's the good thing about having those marketable equity -- marketable securities on the balance sheet, all that cash. We've really positioned ourselves so we don't necessarily have to go to the street for either debt or equity financing to take advantage of some of the things that we see in front of us now.

Yes. Just to clarify, Tim, I think, in terms of a development project, my comment just related to taking us through the development phase. Obviously, to build a $600 million plant, we would need to take a smaller position in the total picture after we complete the development. So we would bring in additional people after the development phase.

Michael Gaugler, BMC.

Good morning everyone. I'm going to focus on the balance sheet and cash a little bit with my questions. First, I guess the first way to look at this, on the situation in the BVI and how that's kind of playing out, I went through the Q last night, I was only able to get through it. If I made any errors in my thought process, please let me know. But as I look at that, you're looking at receiving $5.4 million on what's outstanding, plus legal fees, $1.42 million for the original purchase price, and the difference between the improvements and the original settlement, which would be about $3.3 million. I'm guessing somewhere in the neighborhood of like $11 million you are probably due BVI. Is that a good approximation?

It would be the $5.4 million plus. The other amount for the improvements of the plant hasn't been determined yet. But it would be the amount that the judge said the plant was worth when we turned it over in March of 2010 versus the $1.42 million original payout price. So it's hard to say what that value would be. Then you need to consider that's to the BVI affiliate, and we would get 43% of that basically.

I hope the disclosure in the 10-Q was clear. The value of the plant will be determined by the court. Whatever that value is, the judge says we get -- or excuse me, OC-BVI gets that amount less the original $1.4 million that was the purchase price for the plant. So for just for example purposes because we have no idea what the court would rule, if they said the plant was worth $2.5 million, then we would take out the $1.42 million and that would be approximately $1 million going to OC-BVI.

Got it.

So you threw out an $11 million figure. I don't know how you quite got to that. It would be $5.4 million plus the legal fees plus the excess of the value of the plant over $1.42 million. As Rick had pointed out, that goes to OC-BVI. The impact on us would be about 43%.

Got it. That's great clarification, Dave. I think a couple other things. I saw that you could -- you had mentioned that the deadline to appeal I think passed on May 8. But then later in the filing you'd indicated the government could still appeal to the Privy Council of England. Maybe I can get a little color on that.

Greg, would you like to handle that?

Yes, I mean basically --

If I read it wrong, correct me.

We are not aware, at this point, whether government appealed anything. We actually had to put in an appeal as a placeholder because there was an error in fact in the judgment, and not a legal error. The government was concerned about that. So we have put in the paperwork what we need to do to hold our position with privy Council and we'll see how it all works out.

A couple more just on the balance sheet. At the end of the quarter --

Please restrict yourself to two questions. We're going to go through. (Operator Instructions).

No Problem.

[John Blair], SKA Financial Services.

Good morning. A question on the bulk volume -- or bulk water volumes were up, so if you -- somebody must -- or there is another side to that. If you've gotten much higher volumes, somebody else must not have. I don't know whether that's from them bringing the waters in. I guess the question is can you -- do you think you're at -- the levels that you were at in that first quarter will be pretty much the same going forward, or is there room for additional volume growth?

John, the water -- the additional volumes we are getting in the Bahamas replaced the barging operation that was discontinued back in December of last year, so it will be basically taking over that demand. It's a fixed take or pay bulk contract, so unless the Bahamas wants to contract for additional capacity, then those volumes would be relatively fixed under the existing contracts.

Okay. Do you see any possibility of improving the margins any further, or are you pretty much where you think you can -- should be at?

I see some opportunity to improve margins in the Bahamas a little bit more. We've struggled with filing problems there for many years and we have them under control. But we think there still is some incremental improvement there just on the energy usage of the plant. That's (inaudible) with the -- to the Bahamas government, any improvements over the guaranteed energy pass-through charge.

Okay? I'll jump back in the line for some follow-ups. Thanks.

[Blake Todd]. (Operator Instructions).

Good morning gentlemen. As I look at your plan going forward, we're looking at a company right now that has roughly $28 million -- or 28 million gallons of water a day capacity. The projects you've outlined for the next three, four years are significant multiples of that. Have you worked with enough of the investment bankers so far to be sure that the access to the public markets is going to be there for these projects when you get to the point where you actually have to build them?

Blake, the only big project that we are looking at is the Mexico Project. And yes, we have had discussions with large project finance groups. This project is a development project, and we have the capabilities to take it through the development phase. We believe that the type of project and the type of contracts that we can achieve in the development phase will make it attractive for investment banks and project finance groups. But we have had discussions certainly early on in the game with large international banks regarding financing for the project. There is a very favorable view of the project.

Are you planning, in this Mexico Project, to be the operators of it after the development phase?

Yes, we would like to operate the plant after it's completed.

John Blair, SKA Financial Services.

Just a follow-up on the -- your Asia project. Do you hope to be able to announce anything by year-end? It sounds like that something is moving along there. What's kind of the time line? (multiple speakers)

(multiple speakers)

We've had discussions with potential customers in Asia. And we are in the process now -- some of these customers have never purchased desalinated water before -- potable water. So there is a bit of a learning curve for them. They are doing their own investigation as to the technology and as to what a proper price would be. But so far the response has been positive, and we can't guarantee anything, but we've put significant time, effort and money into this. We are feeling pretty good about the opportunity and we would expect to be able to perhaps announce a project by the end of this year, yes. Of course, that is somewhat dependent upon being able to close things with our customers, but we think we are in a very good position to do that.

Okay. Is it -- without asking, obviously a certain area, is it something that there would be other possibilities in nearby areas to where -- I don't know if you're thinking about cruise ships and that kind of thing going through the Pacific area, Pacific Rim area, that you could capitalize on that aspect? In other words, if you get one deal, does that possibly open up a neighbor, so to speak, that would be interested in doing that?

We would not be entering this market or these markets if we didn't think they were scalable. We are not interested in doing just one plant in Asia. That would become logistically difficult and wouldn't really justify a significant presence or investment there.

In every market that we approach, be it Mexico or Asia, we look for the possibility of growing that market significantly. So yes, we are not just looking at one project in Asia. Hopefully, this initial project or the initial project will be the basis for growing our business substantially.

Asia is a very large market. Obviously the Pacific area, a lot of those economies are in better shape than perhaps Europe or even the Caribbean or the United States. It's an area of significant growth, significant population growth. There is a demand for potable water there just as there is a lot of other places in the world where you have population growth in growing economies. So we've looked at several different markets in Asia, and we found a couple of them we think are very attractive. The reason why we are so aggressive in trying to get business here is we do think it's very scalable but we think we could grow and have a significant presence there within three or four years.

Great, thank you. I appreciate that.

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

Thanks Catherine. I just wanted to thank everybody for joining us today, and I look forward to speaking with you again in August. Thank you.

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