Consolidated Water Co Ltd (CWCO) 2017 Q2 法說會逐字稿

Good day, and welcome to the Consolidated Water Co. Second Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

The information that will be provided in this conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements regarding the company's future revenues, future plans, objectives, expectations and events, assumptions and estimates. Forward-looking statements can be identified by the use of the word or phrases will, will likely result, are expected to, will continue, estimate, project, potential, believe, plan, anticipate, expect, intend or similar expressions and variations of such words.

Statements that are not historical facts are based on the company's current expectations, beliefs, assumptions, estimates, forecasts and projections for its business and the industry and the markets related to its business.

Any forward-looking statements made during this conference call are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Actual outcomes and results may differ materially from what is expressed in such forward-looking statements.

Important factors which may affect these actual outcomes and results include, without limitation, tourism and weather conditions in the areas the company serves; the economies of the U.S. and other countries in which the company conducts business; the company's relationships with its government it serves; regulatory matters, including resolution of the negotiations for the renewal of the company's retail license on the Grand Cayman; the company's ability to successfully enter new markets, including Mexico, Asia and the United States; and other factors, including those risk factors set forth under Part 1, Item 1A, Risk Factors in the company's annual report on Form 10-K.

Any forward-looking statements made during this conference call speak as of today's date. The company expressly disclaims any obligation or undertaking to update or revise any forward-looking statements made during this conference call to reflect any change in its expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statements is based, except as it may be required by law.

I would now like to turn the conference over to Rick McTaggart, Chief Executive Officer and President. Please go ahead.

Thanks, Brian. Good morning, ladies and gentlemen, and thank you for joining us today to review our second quarter 2017 results and to provide an update on business developments. With me this morning is David Sasnett, our CFO.

Overall, our financial results for the second quarter reflected the consistent profitability of our core desalination operations. Our desalination business continued at a steady state with only slight variances compared to last year's second quarter, even in light of recent contract renegotiations.

Increased gross profit in our bulk segment was primarily due to higher incremental revenues in our Bahamas operations. This increase was offset by lower gross profit in retail and services. Retail experienced a 1% dropoff in volumes sold this past quarter. And the higher maintenance costs and services was compared against the period in which we had a higher gross profit from the onetime refurbishment in 2016 of the desalination plant that we operated in the Cayman Islands.

Manufacturing operations revenues dipped in the second quarter and continue to be cyclical. As noted in our press release, we are beginning to see some stabilization in Aerex' business, with farm orders increasing, providing better revenue visibility into year-end. Beyond its existing business, we believe that we will be able to leverage Aerex' extensive water and wastewater customer base to create attractive O&M opportunities in the Continental United States.

Earnings from continuing operations in the second quarter were $1.7 million or $0.11 per share, inclusive of $885,000 in Rosarito development expenses. Excluding Rosarito, earnings from continuing operations would have been $2.6 million. The year-on-year decline from a similar period last year was due to several factors: a modest reduction in gross profit dollars due to lower revenues and a drop in other income that resulted from reduced earnings from our OC-BVI investment. Also, in last year's second quarter, we benefited from a onetime gain on sale of assets of $272,000.

In the second quarter, we took the decision to discontinue our operations in Bali. The sales volumes from this plant have not been high enough to cover operating costs, and we have not been able to find a strategic partner for this operation that could help us to develop additional business. Based on our expectation of these operating losses continuing, we concluded that it is prudent to wind down our operations there.

A quick look at 2017 first half results showed a positive trend from the year ago levels, with gross profit and net income from continuing operations both increasing at a mid-single-digit rate. Importantly, our practically debt-free balance sheet remains very strong, with a significant cash balance to be able to fund the ongoing investments in Mexico, other business development opportunities and continuing to return capital to our shareholders in the form of a dividend.

Now I will provide an update on our business activities relating to existing operations and then an overview of the milestones associated with the Rosarito project.

Over the previous 9 months, we successfully negotiated extensions of 4 bulk desalination contracts. Last month, we began negotiations to renew our Cayman retail license with the newly formed OfReg, and our view is that talks are proceeding favorably. We recently were informed that our retail license has been extended through 2018 -- January 31, 2018, while negotiations with OfReg continue.

We expect medium- to long-term water demand in our Cayman Islands retail area to grow due to the impacts -- the favorable impacts of the airport expansion and planned addition of tourist properties in the area. As mentioned last quarter, the airport expansion, which is currently underway, is key to increasing airlift capacity in Grand Cayman and consequently driving the construction of new tourist properties in our license area.

Tourist arrivals are already increasing due to an additional room capacity from properties completed late last year. Tourist air arrivals in Grand Cayman increased by 9.5% this past quarter compared to the second quarter of 2016. The impact of this increased tourism-based water demand was basically offset by higher rainfall this past quarter in our service area compared to the second quarter of 2016.

Also during the second quarter, we made considerable progress on our transformational Rosarito project and now expect to be in position to break ground before year-end. Rosarito represents the largest infrastructure project ever undertaken by the state of Baja California, Mexico. Our total investment in the Rosarito project to date has been $42.9 million. And during the quarter, we continue to work through financing and regulatory issues, making progress on both fronts.

With respect to financing, we made progress lining up debt financing for the project and have been working closely with the North American Development Bank and other interested lenders to develop the terms and conditions of the loan package. North American Development Bank has also been extremely helpful assisting the state, our client, to create and implement the necessary tariff payment guarantee structure for the project.

On the regulatory side, we are working with the client and federal regulators to assist to obtain -- to assist the client to obtain its seawater allocation permit for the project. Additionally, we have made good progress obtaining the rights of way for the Phase 1 aqueduct, a very important condition precedent of the contract. As you can imagine, this is a very complex project and one that we are convinced will be worth the investment and the time it is taking to line up all the various parties and regulatory approvals that we are -- that are required to move on with construction. And we look forward to breaking ground by the end of the year.

Of note, we are -- we were pleased to see that in May, the Otay Water District in California received a permit to build and operate a nearly 4-mile cross-border pipeline that could ultimately be used to transport potable water from Rosarito. The Otay Water District serves the San Diego metropolitan area and would be a good potential anchor customer for the second phase of the project.

At this point, I would like to ask our CFO, David Sasnett, to provide additional color on our second quarter and first half financial performance.

Thanks, Rick, and good morning, everyone. Some of these numbers I'll discuss have already been mentioned by Rick, but I'll run through our highlights quickly here.

Our total revenues for 2017 second quarter were $15.2 million, which is slightly below the $15.4 million we reported last year. We had higher revenues on our bulk segment, and they served to partially offset revenue decreases in our other 3 segments.

Gross profit for 2017 declined to $6.5 million, a slight decline from the $6.7 million we reported for the second quarter last year. And this decline is consistent with the small decrease in our revenues.

Our G&A expenses on a consolidated basis were $5 million, quite consistent with the $4.9 million we reported for the second quarter last year. The slight increase this year is due to incremental employee costs that were partially offset by a decrease in professional fees that we incurred.

A big portion of the variance in our results for the second quarter this year as compared to the second quarter last year was in the component of our income statement to be called net other income, which is below the operating line. Our net income for the second quarter last year was a little over -- excuse me, for the second quarter this year was a little over $21,000, which was significantly less than the $404,000 we reported for the second quarter last year. This year-on-year decline resulted from $49,000 less in interest income for 2017 due to lower interest earning balances and the loss that we reflected from our investment in OC-BVI of about $38,000 this year as compared to income from our investment in OC-BVI of about $100,000 last year.

Rick had already mentioned earlier that we had nonrecurring gain in 2016 of $272,000 from the sale of fixed assets. I just want to point out that the decrease in the income we recognized from our investment in OC-BVI for the second quarter is directly attributable to a 31% decrease in the rate OC-BVI is charging for the water supply from their Bar Bay plant under the 14-year extension of the water supply contract for this plant that became effective back in March of 2017. So if you're looking at our numbers going forward, we won't be reporting the same level of income from OC-BVI as we have in the past, at least not initially for 2017. But as this contract matures over its 14-year life, we expect the performance to improve for OC-BVI.

Our net income from continuing operations attributable to Consolidated Water shareholders for the second quarter was $1.7 million. That's 11% (sic) [$0.11] per share on a fully diluted basis as compared to the $2.3 million or $0.16 per share that we recognized last year.

As Rick had mentioned earlier, our board decided in late May 2017 to discontinue operations in Bali, and we recorded an impairment loss of $1 million as a result of that decision. After factoring in that $1 million impairment charge, our net income for this second quarter was about $625,000 or $0.04 per diluted share. We have about $830,000 of net investment in Bali still on our balance sheet, and we don't expect there to be recording any significant impairment charges in the future. However, to the extent we can't sell the remaining investment for $830,000, we are exposed to a loss on that investment.

I just want to point out that we continue to maintain a very strong balance sheet and excellent liquidity. At June 30, 2017, we had cash and cash equivalents of approximately $46 million after year-to-date dividend payments of $2.2 million and capital expenditures of $2.6 million.

For the remainder of 2017, we're expecting approximately $8 million more in CapEx. Our cash flows from operating activities were $9.6 million for the first half of 2017. We think that's a very healthy figure.

I wanted to just comment that you should be aware that our strong financial position gives us significant flexibility, and it allows us to pursue both organic and acquisition growth opportunities.

And with that, I'll turn the call back over to Rick.

Thank you, David. In summary, second quarter results represented a steady performance of our core desalination operations. We see a pickup in our manufacturing segment orders, which should favorably impact our financial results in the second half of the year. And our key development project, Rosarito, continues to move closer to the construction phase.

Now Brian, I'd like to open up the call for questions.

(Operator Instructions) The first question comes from Gerry Sweeney with Roth Capital.

On Rosarito, sounds like you have a high degree of confidence that construction will start by year-end. It sounds like there's movement on a couple of key components, the financing, right of ways, et cetera. What would potentially be out there to push back that start date? And then also if -- how long would it take for revenue to start hitting the income statement post-start up construction?

On the first question, I mean, we've listed these conditions precedent that we need to achieve. I mean, any one of them could delay it at this point. I know that -- as I mentioned, the government has been making progress putting together the guarantee package, which is quite complex. Hopefully, that is more or less resolved by the end of the summer, and that is really the big one that is out of our control. I mean, the things that the client is responsible for -- the seawater allocation permit, that's another one that they're responsible for, that could be delayed. But other than that, I mean, everybody is very committed to moving the project to financial close. And the financing institutions, we had a big kickoff meeting in July, and everybody seemed enthusiastic. But there's still a number of conditions that we need to meet.

Got it. And then how long would construction to sort of start up take?

3 years.

3 years, okay. Got it. And then now switching gears a little bit back to the Caribbean. Volumes in the Bahamas, was -- a new plant or you're updating a plant, a new -- I guess, new contract there recently with one of the facilities. And is there an opportunity to see growth in the Bahamas that you could potentially -- that you're looking forward to similar to -- I'm sorry, opportunity to see some growth in the Bahamas similar to what you're seeing in the Caymans, increasing tourism, et cetera?

Those contracts are more or less fixed-quantity contracts. And we see growth by them going to tender maybe on a new contract or asking us to expand capacities on one of the plants there at Nassau, which we've done in the past. I mean, we essentially doubled the capacity at the Blue Hills plant back in 2011. So the potential for growth in the Bahamas, I think, is different. They have a lower connection rate on their public utility there. And the Water and Sewerage Corporation, which is a government-owned utility, has been pressing to get more people connected up to the public utility. A lot of people still use well water and maybe rainwater catchments and that sort of thing there. So there is some potential for that. And it's a much bigger population base, 200-odd thousand people there. So that's the type of potential we see, not necessarily the tourism growth but the connection rate growing.

Connection growth, got it.

And Gerry, I also would like to point out, we've expanded our Blue Hills plant there to meet the additional demands of the -- demand of the Bahamian government. So in the future, I mean, if they did have an increased connection rate, it would seem logical they would come back to us to ask for further expansion of existing plants and contracts we have with them. I mean, that will be the most cost-effective solution for them.

Got it. Okay, that's helpful. And then finally, it sounds like you're gaining a little bit more confidence in Aerex. I know orders dried up pretty quickly there. At some point, are you going to be able to provide some backlog figures or even maybe some qualitative -- if you could provide even some qualitative views today as to how much of that return in contracts that you're seeing or return in activity or RFPs, et cetera, just so we can get a better feel for how that's going to trend the next 2 to 4 quarters.

Gerry, this is David. I don't think we'll ever provide backlog information. I don't think it's necessarily indicative of what's going to happen. Aerex receives the purchase orders really just a month or a 2 before they expect some of this production to take place. So I don't think providing backlog information will be particularly useful. What we have seen with Aerex is when we bought them, they lost orders from their biggest customer through no fault of their own. And what we're seeing now is that we're seeing that this customer is starting to order again from Aerex, which is very encouraging. And we're very optimistic about the second half of the year for Aerex. We think it'll be better than the first half. And Aerex is beginning to approach sales volumes that are more consistent with what we thought they would have when we bought them. They're not quite back yet, but it's been very encouraging. We've also decided to pursue some additional business for Aerex outside of what they had done traditionally. I mean, we think it's a great company, and we provide additional sales and marketing resources to help them. So we're still bullish on Aerex. I mean, we've had a hiccup there right after we bought them. But we think it's a very sound business. We think the guy who runs it, Tom Donnick, is very professional, very confident. So I mean, we think things will turnaround for Aerex. We're very encouraged about their prospects for the second half of this year.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Rick McTaggart for any closing remarks.

Well, thank you very much for joining the call today, and we look forward to speaking with you again in November. Thank you.

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