Consolidated Water Co Ltd (CWCO) 2018 Q1 法說會逐字稿

Good day, and welcome to the Consolidated Water Company's First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

The information that we've 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 using 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 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 the government it serves; regulatory matters, including resolution of the negotiations for the renewal of the company's retail license or in 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 statement 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. Sir, please go ahead.

Thank you, Stephen. Good morning, ladies and gentlemen, and thank you for joining us today for a review of our first quarter 2018 operating and financial results and to hear 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 the first quarter of 2018. Our desalination business continue to deliver consistent results while we saw a noticeable pickup in our order activity in our manufacturing business. Our Mexico project reached a major milestone this past quarter when in February, we signed a subscription agreement with 2 world-class global corporations to provide 75% of the equity funding required to construct and operate our 100-million gallon per day seawater desalination plant and delivery pipeline in Rosarito, Mexico.

Our core desalination operations continue to produce stable results with increased volumes in Retail segment and energy charges from our Bahamas Bulk operation driving revenue growth.

Our previously announced upgrade to the Windsor plant on the Bahamas is under way with an anticipated completion later this year. Negotiations to renew our Cayman Islands retail license continued during the quarter with progress being made towards bringing discussions to a conclusion.

We continue to have a bullish outlook on potential volume increases in our Cayman Islands market, driven by positive tourism industry trends. Tourism activity in the Cayman Islands has continued to benefit as tourists shift to destinations like the Cayman Islands that were not affected by last year's hurricanes in the Caribbean.

Tourist arrivals by air to the Cayman Islands increased by more than 20% this past quarter compared to the first quarter of 2017 with over 134,000 tourists visiting. Weather conditions in the Cayman Islands remained relatively dry, with rainfall in our license area at approximately 63% of the 30-year average for the first 3 months of this year.

Our retail water sales have historically been impacted by weather conditions and tourist arrivals, so these numbers that they hold going forward would generally indicate enhanced 2018 retail water sales.

And anecdotally, it's actually been difficult for us this year to find hotel accommodations for our visiting staff and directors during certain periods of the year due to significant increase in visitors to the Cayman Islands. The luxury hotel chain Hyatt has announced that it will operate a new 351-room, 5-star resort in Seven Mile Beach, Grand Cayman that will be constructed within our exclusive retail license area and is expected to open in late 2020. So hopefully that will help us get hotel rooms there. The project was granted full-town planning permission earlier this year.

Work on the $55 million-plus airport expansion project in Grand Cayman also reached another major milestone this week with the opening of the new departure lounge. This project will more than double the capacity of the Grand Cayman airport to support surging tourism numbers and is expected to be completed by the end of this year.

While manufacturing revenue declined during the quarter for reasons that David will explain in a minute, it is important to note our manufacturing operations saw a significant pickup in order activity during the quarter. Based on current orders on hand, we expect revenues generated by our manufacturing business over the remaining 9 months of this year to exceed those for the last 9 months of 2017.

Our Rosarito project maintained its positive momentum, 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 will 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 water industry and serves as a blueprint for future opportunities that we choose to pursue.

At this point, I would like to ask David to discuss some of the details of our 2018 first quarter financial performance.

Thank you, Rick, and good morning, everyone. Our total revenues for the first quarter of 2018 were $15.3 million, that's compared to $15.7 million for Q1 of last year. Our desalination business benefited from a 7% year-over-year increase in Bulk segment revenues attributable to higher sales volumes and energy pass-through charges in the Bahamas.

Our Retail segment revenues declined slightly despite a 3% increase in retail sales volumes due to a shift in relative sales volumes in Grand Cayman with larger customers with a lower effective water rate. Our manufacturing segment revenues for the quarter decreased by just over $800,000 from the first quarter of 2017 due to our decision to allocate a portion of Aerex's plant capacity during the first and early second quarters of 2018 due to production of key components for the refurbishment of our Windsor plant in the Bahamas. Were these components sold to third parties, they would have generated revenues of approximately $715,000 in the first quarter of 2018. However, because this business between Aerex and Consolidated Water Bahamas represents an intercompany transaction between 2 subsidiaries of our company, this $715,000 in revenues was eliminated for financial reporting purposes as required under generally accepted accounting principles.

Our gross profit for the first quarter of 2018 amounted to $6.6 million as compared to $6.8 million for the first quarter of 2017. This marginal year-over-year decline in gross profit stems from the comparable underlying marginal decline in our revenues from the first quarter of 2017.

Our consolidated general and administrative expenses amounted to $4.8 million, an amount that was consistent with the G&A expenses incurred for the first quarter of 2017. It's important to note that this amount includes approximately $650,000 in development expenses for our Rosarito project, expenses that we will cease incurring once we close on this project. To date, we've incurred approximately $23.7 million in development expenses and invested approximately $21.7 million for land and rights of way for our Rosarito project.

First quarter 2018 net income attributable to Consolidated Water stockholders was $2.1 million or $0.14 in earnings per share on a fully diluted basis. This compared to $2.6 million or $0.18 per share on a fully diluted basis for the first quarter of last year.

We continue to maintain a very strong debt-free balance sheet with cash and cash equivalents of $43.7 million and working capital of $58.6 million at March 31, 2018. Our 2018 first quarter cash flows provided from operating activities were almost $700,000 as compared to the first quarter last year when operating activities used approximately the same amount of cash.

During the quarter, we returned $1.3 million to our stockholders in the form of dividends. Capital expenditures for the first quarter of 2018 totaled $2.9 million and were driven primarily by the refurbishment and upgrade of our Windsor plant in the Bahamas and expansion of our Governor's Harbour plant in Grand Cayman. We believe these improvements will generate (inaudible) efficiencies in future periods.

We expect total CapEx for the remainder of 2018 to be approximately [$40.4 million] as we complete these 2 projects and purchase other capital items in the ordinary course of business.

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

Thanks, David. So Stephen, we'd like to actually open the call up for questions.

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

In the press release, you -- there's a line in regards to Mexico and you talked about the equity funding, et cetera, but it also talks a little bit about the land sale to the group. Could you expand on that? And is that more imminent in terms of the time frame and what that would do in terms of cash outlay or change the balance sheet or anything like that in terms of your financial statements?

Well, Jerry, this is David. The APP contract we signed with the Mexican government contemplates the sale of that land to the project, but that will not occur until financial close first for the project. So all this happens at once, there won't be a sale of the land in advance at the financial close.

Okay, got it. That's really makes sense. And then with the retail revenue down slightly and, I guess, it was due, as you said, the allocation to some customers with, I guess, lower water rates. With all the influx of tourism and tourist into the area and even full hotel rooms, would you expect an increase in the revenue going forward? I mean, there's a little bit of mismatch, we talk about more tourism coming in, but then we also saw lower revenue because it was allocated to different customers. How do we work that out on a go-forward basis?

Well, you have another factor here that's not predictable, Gerry, and that's rainfall, because nothing drives the use of our water more than the rainfall.

All things being equal, right?

We give the statistics on that. We talk about tourists that arrive by air because they're the ones that obviously stay in the hotels. We get -- the Cayman Islands gets in large number of tourists that come in on cruise ships. It's very difficult to predict quarter-to-quarter what's going to happen because you don't know what's happening with the rain. But I think the increase in tourism shows overall that we expect revenues to increase in Grand Cayman. That's a very positive trend. It's just hard to predict from quarter-to-quarter because you really don't know about the rain.

No, that's fine. Directionally, it's fine, just over time. I mean, we should expect higher revenue over time with increased tourism.

Exactly. I think that the customer -- the shift to a lower rate customer has happened. And I don't think you're going to see any further change. That should be stable going forward because they're using more water than they were last year essentially. So...

But, hopefully, if retail revenues increase relative to more purchase by the customers, that shift will start to mitigate.

That's what I was going to say. I mean, it should just be upside going forward, as the hotels and other properties, condominiums use more water to cater to the higher tourist numbers, the restaurants, all that.

And then switching over to the manufacturing side. I understand the allocation of some of the equipment towards intercompany-related aspects, but you also mentioned order activity is picking up from existing and new -- as well as new customers. Any details on that new customers pipeline? How you feel about the business, visibility? How much? How little? Anything along those lines.

Yes. Two of the new customers that we've got orders from are segments that we think will bode well for the future. I mean, one of them is a large piping order, which we're really pleased that we were competitive on this. And we hope to get more of these. It's a much bigger market than just the municipal equipment market. And the other project is a municipal project and a little bit different than what we've been used to doing, but we think again it opens up a new market, a new sales channel for us at Aerex. So we have the types of equipment that we've made historically for municipality's membrane-based treatment. They have this new piping order channel, and we have a municipal -- it's a wastewater project that we're working on. So I think it's very positive and I congratulate our sales guys for opening up this new market.

And Gerry, I would just like to add that when we purchased Aerex, they were doing a business with extremely significant customer and that business dropped off due to issues with the customer at Aerex. And we've seen a return of some of that business. So we're also very encouraged about that too. That was a very valuable customer for Aerex and they seem to be increasing their purchase activity from Aerex. As we said all along, it was never an issue with our company, it was an issue with the customer itself, so.

I know you've never told us who the customer is or -- but always curious what end market they play in. Was it customer specific? Was it end market? Is that end market returning?

It's a very, especially -- well, out of deference to our customer, we don't really talk about -- we don't give their name. We're not required to, so we don't. But it's a very specialized product that's used in water treatment and it requires a lot of expertise, very detailed high-quality manufacturing. We're very proud of Aerex's ability to get this work to begin with. It's not something that everybody can do, but really, beyond that, at some point in time, they've become significant enough, Gerry, we'll have to disclose them because the SEC requires us to disclose them with any customer that constitutes more than 10% of our revenues. But until that time, we'd rather just not talk about them in to much detail.

(Operator Instructions) And our next question comes from Stephen Percoco with Lark Research.

Can you give us any additional color on the license renegotiations in Cayman? I take it from your comments that you're looking towards bringing the negotiations to a close, that you should have something for us on the next conference call one way or the other.

Well, we would hope so. I mean, everything continues to move in a positive manner. Obviously, we don't want to talk about too many details of the negotiations. I mean, we are in the, we believe, the final stages of the negotiations, which are really centered mainly on the tariffs and the adjustment mechanism going forward for the utility tariffs. So I'd really like to say for sure that we have something definitive by August, but of course, it's not totally within our control. I mean, we are dealing with the regulators, so.

Yes, there's been a marathon the last -- as we all know, the last couple of miles of the marathon is the most difficult to run. So there are certain issues that have to be addressed with the regulators. We are optimistic we can do that. I think they're -- they want to finish this as well. So there's reason -- there's initiative on both sides of the table to wrap things up. We're hopeful we can get it done, but we can't guarantee anything at this point. It does look positive, like Rick said.

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

I want to circle back to the land sale, if you could refresh our memory here. Once you get the financing in place for Rosarito, then will you recover your full land costs or how does that work?

Well, yes, we'll certainly sell the land for more than we paid for it, or at least it will be our cost out. The way this transaction works is we will put the -- we'll sell the land into the project company and we will receive funds for that. In turn, we'll turn it around in invested capital as needed to do the project. But we expect there -- we're hopeful that there will be some net cash coming back to the company after this transaction occurs.

Okay. So the full land value and whatever on top of that isn't coming directly back to the company itself, right?

A portion of it. We get the cash back for the land and we in turn will invest money back into the project. And we think the whole financial close will be able to pull some cash under this transaction.

Okay. Very good. And my next question is, I'm assuming that the Bali operations are essentially wound down, unless you can update us on the stance -- status of that. And if you are having any other -- looking at other -- any other areas where you might be considering a Rosarito-type project or you kind of putting that on the back burner until Rosarito is really up and running and ground broken and so forth.

Well, with respect to Bali, we've written the assets down where they essentially have no carried value. We probably would have exited the operation by now, but as we disclosed in our filings, Bali's lone remaining customer sued us. We had to take that lawsuit through court. We recently received a favorable ruling from the court in that the court looked at the contract and said this can't be litigated in Bali. This is a contract that was written with the intention to arbitrate any disputes in Singapore. So they pretty much said they don't even want to hear the lawsuit. Of course, the customer filed an appeal. And so that appeal could take up to a year to resolve, and we're good corporate citizens, so we're going to continue to provide water until we get clearance from the court. But it's not going to have much of a financial impact on us. Our net cash out for the company is probably less than $300,000 in total for the year. So we're all looking to sell the assets at some point in time to a part, anyone who'd be willing to purchase it. But really, we have to deal with those sales in conjunction with the existing appeal. With respect to looking at things outside of Bali, we are -- we're really interested in adding on to our business to what we consider to be intelligent acquisitions that complement what we do now and put us in markets where we'll have synergies. Unfortunately, we are sort of -- our hands are tied a bit until we close this Mexico deal. We have significant amount of capital invested there. But once we close Mexico, we'll be back on the acquisition trail, I think, and we've been seeing some interesting things in the market. So we're always eager to go to business. We just need to close Mexico first, I think.

That makes sense. It's kind of where I thought kind of what I thought you would -- how you would respond on that. So that's good. What's the objective of the entity that's suing you in Bali? I mean, what do they get out of this by dragging this out? Just continued water supply?

That's all. We've warned them. We told them for years that the operation wasn't making money. And typically in most jurisdictions or most areas, you just bankrupt the company and you're done. This customer sued us, and even though we don't think the lawsuit has any merit, we still -- it hasn't been totally dismissed because of the appeal. So they're just trying to maintain the water supply as long as they can and they've actually slightly increased the amount of water they bought from us because I think they're doing some additional development. But that's it. It's just a tactic on their part to try to maintain the water supply as long as possible.

So ultimately, you recover some the cost of delivering the water if you prevail on this? Will they end up having to?

No, well, they're paying us at the moment. They're paying us. But the problem is the volume that they purchase is not enough to make the plant profitable.

It's a very small amount of water, John.

So they're paying us on time. They don't want to have an issue in that regard, but they just don't buy enough water for us to turn a profit.

(Operator Instructions) And our next question comes from Thomas Hiller with Tortoise Capital.

I was curious. After the completion of the Rosarito project, what percentage of the annual revenue do you think that would constitute for the company? Because I know that it's only partially owned. I was just curious if you had a general idea as to where that would lie.

Well, our 25% investment in the project will be accounted for as an equity investment. So the revenues that will -- in our income segment is similar to the way our investment in OC-BVI is handled, but we also have an incremental revenues associated with the management -- operations and management agreement we'll have with the project. We loaned(inaudible) 50% of the company that actually runs the plant. We've been very careful not to disclose those numbers. They're still under negotiation with all parties involved. But obviously, we think it's going to be the operating revenues will be significant to our services segment. And we think that obviously this equity investment will generate a nice return for us. We've worked 10 years on this project, and we're -- as I said, upon completing and I think we'll get a nice additional return on the money we've put in. But we are very careful not to really talk about those numbers until we have something finer we can really talk about.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. McTaggart for any closing remarks.

Thanks a lot, Stephen. I'd just like to sum up that our core desalination assets continue their steady performance while our transformational Rosarito project progresses toward groundbreaking, hopefully, later this year. The company also is well capitalized to take advantage of other organic or acquisitive growth opportunities. I'd like to thank everybody for joining us today, and I look forward to answering your questions again in August.

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