Consolidated Water Co. Ltd. (CWCO) Q2 2013 Earnings Report, Transcript and Summary

Hello, and welcome to the Consolidated Water Company Second Quarter and First Half of 2013 Operating Results Conference Call. [Operator Instructions] This conference call may include statements that may constitute forward-looking statements 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 relationships 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 and 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 Mr. Rick McTaggart, President and CEO. Please go ahead, sir.

Thank you, Denise. Good morning, ladies and gentlemen. Thank you for joining us this morning for our second quarter earnings call. I'm pleased to announce that the company's net income increased by 46% or approximately $900,000 compared to the second quarter of last year that was due primarily to improved operating margin in our bulk water segment plus slightly higher retail water revenues. Retail revenues increased by about 5% or $300,000 this past quarter due to a 4% increase in the number of gallons sold in our Grand Cayman operations. We believe that this sales volume increase is probably due to drier weather condition this past quarter compared to the second quarter of last year, when our sales were adversely impacted by nearly 2 feet of rain that fell over that 3-month period last year. Gross profit of our retail segment increased by 11% or about $300,000, reflecting higher volume sales and flat production costs compared to last year. Generally, there's some signs, some positive signs, and development in our water utility franchise area on Grand Cayman they start kicking up again with the completion of the new road corridor in the 7-mile beach area to West Bay, which has improved accessibility among developed properties and has opened up a large area of beachfront land for commercial development. A new hotel-condominium property with 250 hotel rooms and 62 condo units in 2 10-story towers is currently being constructed on this beachfront site. This new hotel will carry the Kimpton flag, which is a high-end boutique hotel group, and media reports indicate that the $170 million property will be opened in 2016. We look forward to having Kimpton as a new customer and believe that this property will use more than 18.5 million gallons of water per year from our system.…

[Operator Instructions] The first question will come from Philip Shen of Roth Capital Partners.

So you guys gave us a brief update on the Cayman situation. I was wondering if you might be able to give us a bit more color. It sounds like things might be progressing nicely and you're having long engagement from the new government. Any color there would be helpful.

Yes. Well, Phil, I would say that we've had more engagement. [Technical Difficulty] Yes, Phil, I wouldn't say that it's progressing well. I mean, the new government has just taken power, and we're meeting with them to find out what their views are about the negotiation. So it's not been going badly, but it will take some more time, I think, to work with the new group and see what their positions are.

Okay. In terms of the Bali opportunity, can you give us some more color on how the business development activities are going there, give a better sense of timing and when revenues could ramp? I know your VP of Sales is there, but an update there could be helpful as well.

David, you want to talk about Bali?

Sure. We're running through a little bit of pushback from the customers relative to pricing in Bali, Philip, because right now, there's not been a big shortage of water. So we're continuing to educate the people there, the resorts about the value of buying water from us. We have -- we're talking to a substantial potential customer this week, and if that deal were to close, then we could possibly be selling all the capacity that exist today at that plant. It's just a -- we really feel it's just a matter of timing. We've had the plant operational for a few months now, and people are beginning to visit it and understand that we have that specially available to them. As to when, for sure, Phil, the water start ramping up the revenues, I can't say. We could sell out all the capacity at this plant when they come on and then have to expand it, or it may take us a little bit longer. We're confident, though, that within, let's say, a year, we'll have the productive capacity of this plant sold.

The next question will come from Hasan Doza of Water Asset.

I was looking at your 10-Q, Page 13. So on the Rosarito project, it looks like so far, as of the end of the second quarter, you've spent about $1 million on development expenses. And I believe you had mentioned, beginning of the year, that you plan to spend an incremental $4 million on developing expense in 2013 versus last year. So should we expect the remaining $3 million to be spent during the second half of this year?

Yes, I think that's what we disclosed in our 10-Q, Hasan, $3.1 million through the end of 2013 in additional development expenses.

Got it. So the incremental $4 million has not changed. It's just the timing of when the money is going to be spent.

That's correct.

The next question will come from Alexander Renker of Sidoti & Company. Alexander Renker - Sidoti & Company, LLC: I actually have the same question on Rosarito. I just didn't manage to withdraw it in time before my name got called in the queue.

Our next question will come from John Bair of Ascend Wealth Advisors.

Two questions. One is, what do you expect the life of your depreciated assets -- how much additional life do they have before you might have to do some kind of replacement? Or can you kind of give us an idea of what type of assets those are and whether you'd have to spend a considerable amount of money to either retrofit them or replace it or so forth?

Well, it's a tough question. Some of those assets are related to the Bahamas Windsor contract, so we will continue to use them as long as that plant is producing water. I think some of the other assets are related to the Cayman retail system. I don't have this sort of detailed information on the individual plant and asset that comprised that, so I'm sorry I can't give you too much detail on that. But we continue to maintain them, and we hope that they'll last as long as we need them to.

Okay. So this is more of a large -- it's more of a total plant-type situation as opposed to specific equipment that may or may not need to be replaced. Is that a fair statement?

I think it's the other way around. I think it's probably the specific equipment that comprise the plant in most cases.

Okay. And my other question was with regards to that Lower Valley contract. Is that something that you might be able to get back? Or what's the situation there?

Well, we don't have any sort of proposals on the table to take it back and operate it again. We know that the customer -- or the former customer would like to do some work on that plant. So hopefully, we'll have the opportunity to at least make a proposal to do some capital works on it in the future.

[Operator Instructions] The next question will come from Gerard Perez [ph] of Two Oaks Investment.

A couple of questions. Any other prospects kind of in Southeast Asia that will allow you to kind of leverage your time in the area? If so, would you envision them being the build at first and kind of sell the water second, kind of similar to how Bali is?

Well, there's one other prospect we're looking at in a different country. Again, we had the opportunity of connecting with a lot of these resort owners in the area, and they have resorts not just in Indonesia but in other places in the region. So hopefully, those leads will develop, and we'll have to just determine at the time what the risks and the rewards are of a particular project to determine whether we build the plant first.

Okay. And any guidance kind of on revenues or operating income of the Bali plant at the kind of 250,000 or 500,000 gallon a day run rates?

I told you -- the number people is not going to be material [indiscernible] in 2013.

I'm showing no additional questions. This will conclude our question-and-answer session. I would like to turn the conference back over to Rick McTaggart for his closing remarks.

I'd just like to thank everybody for joining, and I look forward to speaking with you again in November. Take care.