Consolidated Water's (CWCO) Q2 2016 Results - Earnings Call Transcript

| About: Consolidated Water (CWCO)

Consolidated Water Co. Ltd. (NASDAQ:CWCO)

Q2 2016 Earnings Conference Call

August 10, 2016 11:00 AM ET

Executives

David Sasnett - Executive Vice President and Chief Financial Officer

Analysts

Gerard Sweeney - ROTH Capital Partners, LLC

Operator

Good day and welcome to the Consolidated Water Companys Second Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After todays presentation, there will be an opportunity to ask questions. [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 Companys future revenues, future plans, objectives, expectations, events, assumptions and estimates.

Forward-looking statements can be identified by use of the word or phrases well, will likely result, are expected to, will continue, estimate, project, potential, belief, plan, anticipate, expect, intend, or similar expressions and variations of such words. Statements that are not historical facts are based on the Companys 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 involves 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 Companys relationships with the government it serves, regulatory matters including resolution of the negotiations for the renewal of the Companys retail license on Grand Cayman.

The Companys ability to successfully enter new markets including Mexico, Asia and the United States and other factors including those Risk Factors set forth under Part one item 1a Risk Factors in the Companys Annual Report on Form 10-K.

Any forward-looking statements made during this conference call speak as of todays 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 there to 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 o David Sasnett, Executive Vice President CFO and Director. Mr. Sasnett, the floor is yours sir.

David Sasnett

Thanks, Mike. Good morning, everyone. Thanks for joining me on our second quarter conference call. In a departure from our usual procedure, Ill be the speaker today rather than CEO, Rick McTaggart.

Rick will not be able to join us on the call this morning because hes presently in Mexico and engaged along with officials from the state of Baja, California, various Mexican governmental agencies and our consortium partners in the process of finalizing the public-private partnership agreement for our proposed Rosarito project. Kind of this project is of great interest to all of our investors, and Ill update you – where we stand at the end of this call.

Gross profit dollars for each of our three business segments this quarter increased as compared to 2015, which resulted in a total gross profit increase of about $627,000 for the quarter over 2015 or 11% compared to the same period of last year. I think the gross profit dollars this quarter emphasizes the testament to the quality of our core operations.

However, we incurred higher legal costs this quarter as a result of litigation in Mexico, and we have non-cash amortization charges related to our February 2016 acquisition of 51% of the equity of Aerex Industries. That resulted in net income this quarter that was relatively consistent with that of the second quarter of 2015 at $2.2 million or $0.15 per diluted share.

Turning to the performance of each of our segments. Our retail segment contributed just over $700,000 to our income from operations this quarter compared to about $760,000 in the same quarter last year. Our revenues in the retail segment increased 2% despite a 4.4% downward rate adjustment that was made the first quarter this year to our rates due to the downward movement in the price indices that are used as a basis for such rate adjustment.

The increase in our water volume sold was about 10% for the retail segment this quarter, but about 40% of this volume increase is due to unusually high demand for one customer. We are not sure if this demand is recurring or its just a one quarter situation.

And with respect to our retail license, weve been greatly encouraged with the progress weve made with respect to our negotiations for the renewal of this license with the Cayman Islands Water Authority since those negotiations recommenced during the third quarter last year. While there are a couple of important differences that have yet to be resolved with the water authority, we believe these negotiations could be concluded by the end of this year.

With respect our Bulk segment, our Bulk segment contributed about $2.2 million to our income from operations this quarter, about the same amount as the second quarter of last year. Youll note that our Bulk segment revenues were down approximately $800,000 this quarter, but that decrease in revenue is strictly due to changes in energy prices.

Our bulk contracts are set up so that we pass energy charges through to our customers. And as those charges drop, our revenues drop. But its important to note that our gross profit is very healthy at about the same level of last year, $2.6 million. And our gross profit as a percentage of revenues has actually increased to about 35% as compared to 31% of last year.

With respect our Services segment, our newly acquired Aerex subsidiary contributed approximately $1.3 million in revenues to our Services segment this past quarter. Aerex is an original equipment manufacturer of a wide range of products and services applicable to the water industry. But as a result, its revenues and earnings are dependent upon the timing and size of its purchase orders, and while their financial performance during the four months following our acquisition of Aerex is not being consistent with what theyve did in 2015.

We remain very positive about the contribution that Aerex will make in our Company. Its also important to note that our Services segment generated incremental revenues and gross profit during the quarter from project to refurbish the Grand Caymans Islands Water Authority North Sound plant.

Now I would like to turn things to a discussion of the Rosarito project. We are very pleased to announce that on June 15 of 2016, the state of Baja California designated the consortium comprised of our subsidiary, N.S.C. Agua S.A. de C.V., NuWater and Degremont S.A. de C.V., The Consortium, as the winner of the tender process for the project that weve been pursuing, literally, for the last six years and set August 15, 2016, as the deadline for the negotiation of the definitive public-private partnership agreement for the consortium.

While we still have several tasks to complete before we can start construction on the project, and these tasks include finalizing and executing an acceptable definitive public-private partnership agreement with the state, and also finalizing the funding arrangements for the project. We obviously are very confident and optimistic that well be able to proceed with construction. I do think its important to know that there are certain things that are sort of out of our control with respect to this project, things that have to be done, sort of, by the state, that arent in our control.

Weve pointed these things out in our public filings. They include the fact that the state must establish and register various payments for us and guarantees the bank credit lines for the specific use by the project. That the CEA in Mexico must retain the rights from the relevant federal authority to take in and desalinate the sea water and distribute it for municipal use.

Various water purchase and sales agreements between CA, The Payment Trust, and the Tijuana, Mexico municipality have to be executed and a permit has to be obtained from the relevant federal authority to discharge the residual water from the permits – from the projects desalination plant. And, of course, we have to raise the financing. But obviously, were very optimistic that all these conditions will be met and that well be able to proceed with the project.

And with that, Id like to turn the call over to questions. So, Mike?

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gerry Sweeney of Roth Capital.

Gerard Sweeney

Hey, good morning David. How are you?

David Sasnett

Good morning, Gerard.

Gerard Sweeney

A quick question on the retail. You said it was up – Bahamas was up about 10%, 3% coming from one customer. The other 7%, is this driven by increased tourism? I dont want to say permanent, but do you have some clarity on is this volume going to stay in place as we go forward? You know, the seasonality aside, but want to see, what was the driver of the increase was?

David Sasnett

Gerry, the biggest determinant of our retail sales really is the weather. If we have a lot of rain on Grand Cayman, people dont use as much water. But if it doesnt rain as much, obviously, theyve got to buy water from us. The secondary factor in determining retail sales is tourism and the level of activity on the island and, of course, thats seasonal. So really, its very difficult to project whats going to happen with our retail volume, because you really cant predict the weather.

Gerard Sweeney

Okay, thats fair enough. And then switching over to the services side. Obviously Aerex, I think it is something like $19 million last year. You guys did indicate that sales would be different and they could be lumpy. Are you looking - or would you be in a position at some point in the future to provide, maybe some backlog numbers for the company on a go forward basis, so we can get a little bit more visibility into the business?

David Sasnett

Yes, I think as we become more comfortable with the company, and - we would be able to provide some backlog information. But I dont think their projects - really of a long-term nature that take several months. So the backlog is typically - its rather short. This business is cyclical. They - thats just the nature of the business and so, we dont view the current level of activity with Aerex indicative of what theyll do in the future, obviously. Were very confident about the contribution this company is going to make to our consolidated operations, very happy to have a 51% interest in Aerex.

Gerard Sweeney

Got it. And then finally, just real quick on Rosarito. I know theres some hurdles in place, so some, I guess, blocking and tackling with the agencies, that and [indiscernible] et cetera. But when - any idea if things go rather smoothly, when construction could start?

David Sasnett

Well, they said if you look at our public disclosures, the states set a date of August the 15th for finalizing the contract, but they have the right to extend that date. And as I mentioned earlier, Rick is in California and in Mexico, working on finalizing this contract with a large group of people, our consortium partners and a lot of government officials.

Weve provided all of our comments to the government on the agreement, so theyre working through that at the moment. We are hopeful that they can move forward with finalizing this agreement. If everything went well, wed be looking at perhaps reaching some kind of financial close by the end of this year and starting construction next year. But I, obviously, the timing of all this is under the control of the state.

Gerard Sweeney

Understood. Its totally fair. I appreciate it. Thanks a lot David.

End of Q&A

Operator

[Operator Instructions] At this time, it appears that we have no further questions. We are going to conclude the question-and-answer session. I would now like to turn the conference call back over to Mr. Sasnett for any closing remarks. Sir?

David Sasnett

Thanks, guys, for participating, everyone, ladies and gentlemen, on our call this morning. Well talk to you next quarter. Good-bye.

Operator

And we thank you for your time also today, sir. Again, the conference call has now concluded. At this time, you may disconnect your lines. Thank you, take care, and have a great day, everyone.

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