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Edited Transcript of CWCO earnings conference call or presentation 9-Nov-18 1:30pm GMT

Q3 2018 Consolidated Water Co Ltd Earnings Call

George Town Dec 18, 2018 (Thomson StreetEvents) -- Edited Transcript of Consolidated Water Co Ltd earnings conference call or presentation Friday, November 9, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David W. Sasnett

Consolidated Water Co. Ltd. - Executive VP & CFO

* Frederick W. McTaggart

Consolidated Water Co. Ltd. - CEO, President & Director

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Conference Call Participants

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* Gerard J. Sweeney

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* John Bair

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Presentation

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Operator [1]

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

The information that we provide 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 on 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 expectation 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, sir.

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [2]

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Thank you, Sean. Good morning, ladies and gentlemen, and thanks for joining us today to review our third quarter operating and financial results and to receive an update on developments in our business. Joining me on the call is our CFO, David Sasnett.

We're pleased to report that each of our business segments posted significant year-on-year growth in gross profit, reflecting improved performance across our desalination and manufacturing operations. Our core desalination operations delivered a 19.3% increase in gross profit dollars this past quarter compared to the third quarter of 2017, reflecting higher volume sales and higher energy pass-through charges.

Our retail sales continued to benefit from the increased tourism in Grand Cayman. The number of tourists arriving by air in Grand Cayman in the third quarter of this year was up by 5.2% compared to the third quarter of last year. And their arrivals for the first 9 months of this year were up more than 13% compared to the first 9 months of 2017.

Regarding our ongoing negotiations for a new water utility license in Grand Cayman, we continue to meet and correspond regularly with the Cayman Islands utility regulator, OfReg, as we negotiate all remaining open issues. While some of these open issues are certainly challenging, we believe that it will ultimately be resolved.

In August, we successfully retained, through a competitive bidding process, an operating and maintenance contract for 2 water plants in Grand Cayman owned by Water Authority-Cayman with a combined production capacity of 2.9 million gallons per day. This new contract commences in January next year when our existing operating and maintenance contracts terminate and continues through January of 2024.

In October, we commissioned the newly renovated Windsor plant on New Providence Island in The Bahamas. This plant produces 2.6 million gallons per day for Water & Sewerage Corporation of The Bahamas and is one of the most energy-efficient plants in the world for its size. And like its sister plant in New Providence, the Blue Hills plant, it utilizes diesel power for the high -- the main high-pressure pumps to provide the lowest possible water rate and highest reliability to our customer there. This extended contract now continues through October of 2033.

In our manufacturing business, sales improved this past quarter due to higher value orders compared to the third quarter of 2017. Investors should note that we sourced a meaningful amount of the equipment needed for our Windsor refurbishment in the Bahamas and our Governor's Harbour project in Grand Cayman from our manufacturing business during the first 9 months of this year. And these intercompany revenues were eliminated in consolidation. As the equipment manufacturing activities for Windsor and the Governor's Harbour plants are now complete, our Aerex business is utilizing a greater portion of its production capacity to manufacture equipment for third parties.

Work on our 100 million gallon per day seawater desalination project in Rosarito, Mexico continues. We and our advisers are working closely with the Baja, California state authorities to assist and to overcome delays in achieving their conditions present. And these delays resulted from political changes at the state and federal levels over the summer.

It is extremely important that the state meets its obligations in relation to the establishment and funding of the water tariff payment trust before the existing congressional authorization expires on December 31, 2018. And we must do this in order to avoid any additional delays, which would result on the reauthorization process.

These state and federal authorities recognize that this project is of paramount importance to the region of Mexico, as rapidly growing coastal cities in Baja, California are heavily dependent on the overtaxed Colorado River. The Rosarito plant will diversify the region's water sources and secure drinking water supplies in Baja, California for decades to come.

Now I'd like to ask David to discuss the financial results in more detail.

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [3]

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Thank you, Rick. Our total revenues for the third quarter of 2018 increased by $2.3 million or 13.6% to $18.8 million. This increase was a result of the 3% volume increase of our retail segment, along with increases in energy pass-through billings of both our retail and bulk desalination businesses. As Rick mentioned earlier, revenues for our manufacturing segment increased by $245,000 or 9% quarter-over-quarter due to an increase in the average dollar value of project contracts.

Our consolidated gross profit for the third quarter of 2018 increased 19.3% to $7.5 million as compared to $6.3 million in 2017. Our consolidated general and administrative expenses remained relatively consistent for the third quarters of 2018 and '17 at $4.9 million. It's important to remember that these G&A expenses included approximately $846,000 in legal, accounting, engineering, consulting and other costs related to our Rosarito plant development activities in 2018. We also spent $864,000 in the third quarter 2017 on the same activities.

Our operating income increased by $1.7 million in the third quarter of 2018 due to the increase in our gross profit. And in fact, the 2017's operating income was reduced by a $569,000 impairment charge recorded for our Bali operations. As we've written off most of the Bali offsets and lowered our activity there, our Bali operations did not have a significant impact on our 2018 results.

Our net income for this quarter also benefited from the resolution of the last open matter of the litigation that commenced back in 2006 between our equity investee, OC-BVI, and the British Virgin Islands government with respect to OC-BVI's former plant located at Baughers Bay. To settle this litigation, during this latest quarter, the BVI government agreed to a value of $4.4 million for the plant, which were paid to OC-BVI in early September.

This litigation settlement income received by OC-BVI resulted in equity earnings and profit sharing income for us from OC-BVI for the third quarter of 2018 that was approximately $1.8 million more than what we've recorded from this investment for the third quarter of last year. Due to this incremental income from OC-BVI and the increase in our operating income, 2018 third quarter net income attributable to our shareholders increased to $4.5 million or $0.30 per share as compared to $1.2 million or $0.08 per share for the third quarter of 2017.

Now I'd like to speak briefly about our liquidity and cash position. For the 9 months ended September 30, 2018, our cash and cash equivalents decreased by approximately $12.8 million. This decrease arose from 2 primary factors, the first of which was capital expenditures of approximately $13.7 million, almost all of which related to the refurbishment of our Windsor plant in The Bahamas and the expansion of our Abel Castillo Water Works in Grand Cayman.

The second factor affecting our cash position was the increase in accounts receivable balances from the Water & Sewerage Corporation of The Bahamas. It's important to note that the Windsor refurbishment project is substantially complete and the Abel Castillo plant should be finished in the first quarter of 2019. And based upon the recent conversations with The Bahamas Ministry of Finance, we expect the collection of our accounts receivable balances in The Bahamas to improve in the coming quarters.

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

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [4]

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Thank you, David. Sean, I think we're ready to open up the call for questions.

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Questions and Answers

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Operator [1]

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

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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I dare to ask if you could give any maybe color on the water tariff authorization maybe getting done by the end of December deadline.

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [3]

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Well, we're working as hard as we can and I think the state is as well. And obviously, there's a number of practical issues around the holidays, but we're working through a program and we seem to be making progress, Gerry.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Okay. And then that O&M contract that you bid and won and that's replacing the existing one, is there any material change in terms of volumes, pricing, profitability, so we can have that in our model?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [5]

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Yes, we've disclosed that. So the pass-through energy charges that were charged into these contracts are now going away. The Water Authority is going to pay those bills directly so that impacts revenues, not necessarily profitability. And the base water rates, as we disclosed in the Q, were reduced by 31% in order to retain the contracts.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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Okay. And then the Abel Castillo plant, I think in the press release you said that you're enlarging it. Is that -- can you give us an idea of -- is that for that -- that's not for the O&M contract, that's -- I believe that's just for your other operations. How much larger can we assume that, that's going to be more volume, potentially more revenue?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [7]

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Yes. That's for our retail business to meet growing demand through putting in 1 million gallons per day and the plant is capable of being expanded to 2 million gallons per day when the need arises.

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Operator [8]

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At this time -- our next question comes from John Bair with Ascend Wealth Advisors.

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John Bair, [9]

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Can you clarify the -- your comments about the manufacturing aspect of the business being able to pick up more third-party orders? Does that mean that you have a lot of demand coming outside? What I'm trying to get at is now that you've completed those upgrades and so forth, is that going to -- will your activity back off? Or do you have firm orders or increased order intake from third parties?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [10]

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The plant is still running at capacity, essentially. We had to manage the workflows, I suppose, earlier this year, when we're doing the internal jobs. And now these other orders for third parties are underway. I mean, the visibility for, say, past the first quarter next year is difficult to project. I mean, these are orders that come in, they're not long-term orders or anything like that, John. So we feel pretty sure that we'll be utilizing the majority of the plant capacity at least through the first quarter of next year.

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John Bair, [11]

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Okay. And along similar lines, just was wondering if after a number of storms and so forth, these products, do you have any kind of pickup in order activity that might have been related due to storm damage and meaning to rebuild or repair projects or facilities as a result of storm damage?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [12]

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Not that I'm aware of, John. No.

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Operator [13]

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Our next question is a follow-up from Gerry Sweeney.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [14]

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Guys, just another quick one on -- how much CapEx do you have left for some of the -- the expansion that's going through January, I believe you said?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [15]

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We put that in the liquidity section, Gerry. I'm not -- right off the top of my head, I don't remember. Maybe David can jump in there. Maybe, David?

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [16]

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Well, I think I can -- well, what we've disclosed that, Gerry, is for the remainder of this year, our CapEx is going to be about $2.6 million. And we haven't given any projections for next year yet.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [17]

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Okay. And then just final, final question, really. So manufacturing running at capacity likely, I'll say, through Q1. Is capacity somewhere in the same type of revenue that we saw this quarter? I know there's different projects and values, et cetera, but maybe a ballpark.

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [18]

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Well, if you're looking to project revenues, Gerry, it's hard to do. Because we get these big contracts come in and Aerex is a specialty manufacturer. So the projects we get next quarter may not be exactly the same as what they got the previous quarter. At one point in time, Aerex was giving us not just $19 million a year, but -- so yes, I don't want to mislead you and tell you, you can project out current period revenues into the next year, but...

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [19]

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No. I was just saying through Q1, it sounds like you had revenue or you had some visibility. So that's all...

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [20]

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Yes. As Rick mentioned earlier, our visibility to orders is about 3 to 6 months, depending on who's placing orders with us. And things look okay for the first quarter next year based on what we're seeing. But we'll...

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [21]

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No, I get that. And I was just curious if that $3 million and change we saw this quarter was sort of the plant running at capacity. That's all. I'm just sort of...

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [22]

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No. It could be more than that, but it depends upon -- I mean, you could fill that plant out with a lot of low-dollar projects. And you saw their capacity is mixed there. We want to focus on higher-margin, higher-dollar items to put in there.

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [23]

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That's it, yes.

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Operator [24]

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Our next question is a follow-up from John Bair with Ascent Wealth Research -- Advisors.

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John Bair, [25]

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Could you provide a little bit more information perhaps on the Belize dollars and kind of where that -- those payments showed up in your release here today and kind of where we're going beyond, what -- if you can have anything further related to your news release recently?

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [26]

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So the Belize payments will show up in our operating cash flows. I mean, it's just collection with accounts receivable. But for the last couple of years, we experienced a lot of problems trying to get money out of the Belize. The economy there is not great and they're short of cash balances. So the situation we disclosed in our 10-Q regarding a possible sale of Belize is directly associated with that difficulty in getting our money out. So we're working with BWSL. They provided incentive for us to look at a transaction with them and they're working with the Central Bank to facilitate the repatriation of cash to us.

And there's a number of things that have to be accomplished before we proceed with the sale of that business. But BWSL seems to be doing their part in helping us getting the cash out. And they're working on their financing for a transaction. So this whole deal with Belize is not something that we're looking to do. They approached us recently. But given all the problems we've had in getting our money out, we thought it was something we should seriously consider.

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John Bair, [27]

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All right. So the account -- the balance that you're due left, if I recall, you've got about roughly half of what was due. The balance that's due you is in your accounts receivable. That's where you record that?

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [28]

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Well, no, no, no. That -- when we collect accounts receivable, it goes into our cash. But when that money is actually repatriated from Belize to our Cayman Island operations, it doesn't show up anywhere in the financial statements because it's still all included in the cash line. But the issue is if it's trapped in Belize, we don't have the opportunity to use it for our other businesses. So what's important is to be able to take it out.

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Operator [29]

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And this now concludes the question-and-answer session. I would now like to turn the call over to Rick McTaggart for any closing remarks.

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [30]

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Yes, just real quick, thank you very much for joining us today, and we look forward to hearing from you in March for our year-end results. Take care.

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Operator [31]

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