Consolidated Water Co Ltd (CWCO) 2017 Q4 法說會逐字稿

Good day, and welcome to the Consolidated Water Company's Full Year 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 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 in the industry and 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 condition 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 the governments it serves; regulatory matters, including risks resolution of negotiations or the renewal of the company's retail license of 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, Brandon. Good morning, ladies and gentlemen, and thank you for joining us today for a review of our 2017 operating and financial results and an update on our business developments. With me this morning in our Florida office is David Sasnett, our CFO.

We are pleased with the progress we made during 2017. Our desalination business continued to deliver expected results due to our attention to controlling operating costs and maintaining the high operating efficiencies of our plants and utility business. We also made significant progress with the Rosarito project, reaching certain milestones needed to bring this project to the construction phase.

Our core desalination operations continue to produce stable results, with increased volumes and energy charges from our Bahamas bulk operation driving revenue growth. We also have begun a major refurbishment and upgrade to the Windsor plant in the Bahamas, which will be completed later this year in 2018. This past summer, we began negotiations to renew our Cayman Islands' retail license with the newly formed utility regulator OfReg. And while discussions continue, we believe we are making important headway.

Also since last fall, tourist activity in the Cayman Islands has increased as tourists shift to destinations like the Cayman Islands that were not affected by last year's hurricanes in the Caribbean. In fact, a record 2.1 million people visited the Cayman Islands in 2017, with air arrivals hitting record levels for the 4th year in succession. 418,000 visitors arrived by air in 2017, which represents an 8.5% increase over 2016 full year. And these record numbers have continued into this year with a record 39,000 tourists arriving by air in January 2018, which is a 14% increase over the previous record year of January 2015.

And over 218,000 tourists arrived in January by cruise ship, which is a 20% increase over January of 2017.

Weather conditions remained dry in the first quarter of 2018, with a little less than 3 inches of rain falling in our service area during the first 2 months of this year. Since our water sales are affected primarily by weather conditions and tourist arrivals, these numbers bode well for Q1 of 2018 retail water sales.

Our manufacturing operations continued to recover from a low point in 2016. As expected, order flows picked up in the second half of 2017 and for the full year, manufacturing revenues increased considerably. While a significant amount of business development activity is still underway in our manufacturing segment, we believe that manufacturing revenue levels have stabilized.

Our transformational Rosarito project maintained its positive momentum during 2017 and into the early part of this year, culminating in our recent major announcement of an agreement for the equity funding of the project. As discussed in our March 7 press release, we are pleased to have attracted equity partners, SUEZ, a global leader in the water treatment industry, and Greenfield, an affiliate of a leading U.S. asset management firm. The agreement calls for us to retain a minimum equity stake of 25% in the Rosarito project. And based on the levels of expenses and investments already made by our company in the project, we do not expect our equity commitment under this agreement to require additional cash outlays on our part.

Under the terms of the agreement, SUEZ will design and construct the project in a 50-50 joint venture. Between us and SUEZ, we'll provide O&M services to the project. We believe that this project clearly demonstrates our ability to partner with some of the largest global players in the desalination industry and serves as a blueprint for future opportunities that we choose to pursue.

At this point, I would like to ask our CFO, David, to discuss some of the details of our 2017 financial performance.

Thank you, Rick, and good morning, everyone. Our total revenues for 2017 were $62.3 million, up 7.7% or $4.4 million from the $57.9 million we reported in 2016. This increase resulted from additional revenues generated by our manufacturing and bulk segments. Our gross profit for 2017 increased by 4.9% to $25.4 million as a result of these incremental revenues.

Our consolidated G&A expenses were $19.1 million for 2017, up slightly from the $18.7 million in G&A we reported for 2016, and this increase is due mainly, well, almost entirely to incremental employee costs that amounted to about $519,000.

Our G&A expense for the year also included $3 million in development expenses related to the Rosarito project. As a reminder, since inception of this project, we have invested approximately $23.5 million in development expenses and approximately $21.7 million for land and rights of way for the project. As Rick just mentioned, upon reaching financial close for the project and commencing construction of the plant, we expect our expenses related to the Rosarito project to decrease substantially.

Net income attributable to CWCO stockholders for 2017 was $6.1 million or $0.41 per share on a fully diluted basis, and this is after the inclusion of the $3 million in development expenses for Rosarito for the year.

Our net income represented a 55% increase from last year's net income of $4 million, which equated to $0.27 per fully diluted share. Consistent with prior years, we ended the year with a very strong balance sheet, one that is practically debt-free and with more than ample liquidity. Our cash and cash equivalents amounted to $47.2 million at December 31, 2017, as compared to the $39.3 million in cash and cash equivalents we held a year earlier.

Cash flows from operating activities increased just over 74% to $13.6 million for 2017 as compared to the $7.8 million we generated in 2016.

In 2017, we returned $4.5 million to shareholders in the form of dividends. Capital expenditures for 2017 were $4.6 million. Our CapEx for 2018 will increase from this level, primarily due to the Windsor Bahamas plant project that Rick mentioned earlier and the expansion of our Governor's Harbour plant in Grand Cayman.

And notably in 2017, we increased our quarterly dividend from $0.075 per share to $0.085 per share. We believe this dividend increase reflects our board's confidence in our existing cash position and our future cash flows. And with that, I would like to turn the call back to Rick.

Thanks, David. So in summary, 2017 represented the steady performance of our core desalination operations, a pickup in our manufacturing business and a large step forward in moving the transformational Rosarito project closer to the construction phase. Our continued strong cash flow and balance sheet puts us in a position to be able to return cash to our shareholders, while continuing to pursue organic and acquisitive growth opportunities.

Brandon, I'd like to now open the call for questions.

(Operator Instructions) Our first question comes from Michael Gaugler with Janney.

Congrats on the progress with Rosarito. That's pretty much where my question lies. Just wondering when you expect to close on the project. And then how much in additional development expenses we could expect in 2018 related to it?

Well, from the first question, Mike, I mean, we hope to close this year. We're still, as we've mentioned, still negotiating the financing agreements. And there's a couple of things that the government still needs to do to finalize the security package for those financing agreements. So we're working hard to do that, and I would hope that we could close this before the end of the year.

Okay. Any idea on what further development expenses could be perhaps arranged?

Mike, this is David. Ultimately, the amount of the development expenses we incur will be dependent upon when we close the project. There's a certain G&A carry associated with the project in our part. And if you look back at our financial statements for the last 2 or 3 years, I mean, there's pattern there that exists, if you can derive from what we've incurred over the last 3 years. So I mean, taking an historical average and figuring if we close the project 6 months into the year, we'd incur probably close to half of what we historically cover and concurred. So I mean, really, it's dependent upon when we close the project. There's a certain amount of fixed overhead that we just -- that we're committed to until we close. If you take a look -- we don't -- we haven't provided any projections on anything going forward, but if you take a look at what we've done in the past, I think our historical results will give you some indication -- a good indication of where we'll be going forward. And I think you can presume a certain closing day for the project.

Okay. That's helpful. And then also, Rick, just wondering what you need to get in terms of any potential permits, if any, to start construction.

Yes. We still -- we mentioned that we're still waiting on -- well, there's a few federal permits, there's one that the state has to obtain for the use of the seawater. And then we have to obtain a concentrate discharge permit from the federal government, and those 2 are really the main ones, I think, that we're still waiting on. And those are hopefully in their final stages.

(Operator Instructions) Our next question comes from Steve Percoco with Lark Research.

Your manufacturing operations improved both with respect to revenue and operating profit. Yet, you booked a gain again on the -- or a gain on the put/call option, including an amount taken in the fourth quarter. Could you just kind of give us a sense on where the manufacturing operation is? Are the 2017 results indicative of what you expect that business to realize going forward? What changes, if any, do you see down the road?

Steve, the put/call option that we gained and we booked has been direct. It's just exactly opposite to the impairment charge we took for this business in the fourth quarter. During -- once a year, we evaluate all of our businesses, which have goodwill to possible impairment. And quite frankly speaking, in the fourth quarter of this year, we had decided to take a $1.4 million impairment charge because the revenues for Aerex were not consistent with the revenues that we used when we originally -- when we projected for the company when we bought it. I think it's fair to say that our expectations for Aerex are higher than what they'd done so far with us. And when we bought the business, the company was doing about $19 million in revenues, and since that time, it hasn't approached that revenue level with us. There are some factors that have to do with Aerex's customers that have caused that decline. It has nothing to do with Aerex. But really, our expectations for the business are higher than the $3 million we reported revenues for 2016 or the approximate $6.5 million we reported for '17. However, when that business will return to a level consistent with our prior expectations, we can't say. Because of what's happened with Aerex's customer base, they've had to retool the business somewhat and change their sales and marketing approach. And we think we acquired a very good company. We're very confident in the management of that company, especially the president, Tom Donnick. But I think it's fair to say their expectations are higher than what we've done so far, but we can't say for sure when they'll approach the revenue levels that we saw before we bought them. And that's about it. It's a business that's full of a lot of small contracts and we have to continuously market that business. So I mean, we're -- like I said, our expectations are higher than what we've seen so far.

I understand that. But I guess what I'm more focused on is the 2017 level, is that indicative of your expectations now going forward with the business?

Well, we don't -- Steve, we're very careful not to project. I mean, our company doesn't give earnings guidance, we don't give revenue guidance, we don't give -- we don't project going forward. So if you're looking for some kind of number for 2018 as far as the revenue is concerned, we don't provide it.

It's not a number. I mean, you've booked a gain and the impairment charge, and I guess what I'd like to know is having taken those charges and the gain on the put/call option, is the business the way it was in 2017 now indicative of what you see going forward?

Going forward, our -- I'm not sure if I know how to answer that, Steve. We certainly reduced our revenue expectations going forward and that's because that's how we took the impairment charge. So I think that we think that if you're asking is 2017 indicative of going forward, we would hope that's the minimum case going forward. But we can't say for sure.

Okay. Could you give us any color on the license negotiations in Grand Cayman? Is there anything that's beyond what you stated that you can say?

I don't think so at this time, I mean, we're -- negotiations with the new regulator have been much more productive than prior to 2017. And we continue to meet with them on a regular basis to finalize the terms of the new license. So once those terms are established, then we'll make the appropriate disclosures to The Street.

Okay. Can you give us an update on Bali and what your expectations there are for 2018?

Well, go ahead, Dave.

Well, we disclosed in the second quarter of 2017 and it's our intention to get out of Bali and to discontinue those operations. And the original plan set forth by the board was to exit Bali end of the first quarter this year. We have since been engaged in a lawsuit by Bali's sole customer. They're suing us and saying that we need to continue to maintain this nonprofitable operation just so we can provide them water. And we're in a position now where we're litigating that matter in courts in Denpasar. Assuming we get a favorable ruling, it’s our goal to be out of Bali completely. And I think, based upon the impairment charge we've taken to date, I wouldn't expect Bali to have a significant impact in our results of operations in 2018.

All right, do you have operating cost, I mean, as long as you're…

They're not -- they're relatively insignificant to the company. And I think the biggest cost right now is the legal cost that we have, just for the lawsuit. They have been more than we anticipated, but the operating cost are -- their operating cost there run about $300,000 a year. So it's not major.

Is there a court date set for the lawsuit?

What's happened so far is there've been filings of various documents with the courts. And I'm not sure exactly when the court will render a preliminary decision. I would expect it won't take too much longer.

Well, Steve, it's in the courts. I mean, it's been actively dealt with over the last few months. So it's not like we're waiting on a date for the first hearing. I mean, it's underway.

Okay. And then finally, you said upon closing that you would be looking for potential acquisitions going forward. Can you give us any idea of what you see, what you'd like to add, where you're looking, any color that you're willing to share?

Closing of what? I'm sorry?

I guess, unless I heard wrong, I thought you said that you would be looking at additional acquisitions going forward.

We always are, Steve. I mean, we're always looking at businesses that could complement our business and be accretive. I mean, sometimes they're smaller projects, sometimes they're bigger ones like Rosarito. I mean, we don't discuss any particular list of targets that we're working on, but we're always looking at potential additions to the business.

Our next question comes from John Bair with Ascend Wealth Advisors.

You answered a question about Bali that I was going to ask about operating costs and continuing to produce some volumes of water there. My other question was regards to your 10-K indicated limited ability to -- I'm not sure the proper terminology, but move money out of -- convert Belize dollars out. And I noticed in the 10-K that there's a pretty high dollar amount in Bahamian dollars, and I'm wondering if you have the same restrictions there and how that kind of affects your operations overall, the ability...

Now we've never had -- John, we've never had any problems with Bahamas. They have a free flow of dollars back and forth. They have a very healthy tourism economy. And the central bank has never given us any issues with repatriating money from there, so it's a very different situation than what exists in Belize.

And how does the -- in Belize then, how does that -- I mean, if I recall, when I read this over the weekend about a little more restrictive in Belize. Are conditions there improving? David, if I recall, you were able to convert more than you were in '16. Is that, right?

Yes, slightly more. It doesn't really have anything to do with us, it has to do with whether or not there are dollars available for us to convert. And to not get into a big discussion about how foreign currency works, it's just that things have to get better in Belize for us to be able to get that money out. The government's aware of the problems. They're working on it. I mean, this is not good for them. It limits investment in Belize. It's important. So they're working on that issue and we're trying to work with them and hopefully things will improve. This is a -- we didn't have this problem with them 4 or 5 years ago. It's just over the last couple of years this has popped up.

Is that a function of tourism change? Or just general -- what shift in their economy, I guess, would be probably the more appropriate?

The economy has not done well. They have some issues, I think. I don't have all the facts, but there are some things that have made Belize a less attractive investment alternative for people over the last few years, and they've had some economic issues and things like that. And I'm not sure, but there might have been a problem with 1 or 2 of their banks and some of their compliance or regulations, but I'm speculating here. I mean, we haven't done an in-depth analysis of why this problem exists. We're just aware that it does.

(Operator Instructions) It appears there are no more further questions. This concludes our question-and-answer session. I'd like to turn the conference back over to Rick McTaggart, CEO, for any closing remarks.

Yes. Just like to thank everybody for calling in today, and we'll keep you updated on our further progress. Take care.

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