Rick McTaggart - Chief Executive Officer and President David Sasnett - Chief Financial Officer.

Gerry Sweeney - ROTH Capital.

Good day and welcome to the Consolidated Water Company’s Second Quarter 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 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 the 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 its government it serves; regulatory matters, including resolution of the negotiations for the renewal of the company’s retail license on the 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..

a modest reduction in gross profit dollars due to lower revenues and a drop in other income that resulted from reduced earnings from our OC-BVI investment. Also, in last year’s second quarter, we benefited from a one-time gain on sale of assets of $272,000. In the second quarter, we took the decision to discontinue our operations in Bali.

The sales volumes from this plant have not been high enough to cover operating costs, and we have not been able to find a strategic partner for this operation that could help us to develop additional business. Based on our expectation of these operating losses continuing, we concluded that it is prudent to wind down our operations there.

A quick look at 2017 first half results showed a positive trend from the year ago levels, with gross profit and net income from continuing operations both increasing at a mid-single-digit rate.

Importantly, our practically debt-free balance sheet remains very strong, with a significant cash balance to be able to fund the ongoing investments in Mexico, other business development opportunities and continuing to return capital to our shareholders in the form of a dividend.

Now I will provide an update on our business activities relating to existing operations and then an overview of the milestones associated with the Rosarito project. Over the previous 9 months, we successfully negotiated extensions of 4 bulk desalination contracts.

Last month, we began negotiations to renew our Cayman retail license with the newly formed OfReg and our view is that talks are proceeding favorably. We recently were informed that our retail license has been extended through January 31, 2018, while negotiations with OfReg continue.

We expect medium to long-term water demand in our Cayman Islands retail area to grow due to the impacts – the favorable impacts of the airport expansion and planned addition of tourist properties in the area.

As mentioned last quarter, the airport expansion, which is currently underway, is key to increasing airlift capacity in Grand Cayman and consequently driving the construction of new tourist properties in our license area. Tourist arrivals are already increasing due to an additional room capacity from properties completed late last year.

Tourist air arrivals in Grand Cayman increased by 9.5% this past quarter compared to the second quarter of 2016. The impact of this increased tourism-based water demand was basically offset by higher rainfall this past quarter in our service area compared to the second quarter of 2016.

Also during the second quarter, we made considerable progress on our transformational Rosarito project and now expect to be in position to break ground before year-end. Rosarito represents the largest infrastructure project ever undertaken by the state of Baja California, Mexico.

Our total investment in the Rosarito project to date has been $42.9 million. And during the quarter, we continue to work through financing and regulatory issues, making progress on both fronts.

With respect to financing, we made progress lining up debt financing for the project and have been working closely with the North American Development Bank and other interested lenders to develop the terms and conditions of the loan package.

North American Development Bank has also been extremely helpful assisting the state, our client, to create and implement the necessary tariff payment guarantee structure for the project.

On the regulatory side, we are working with the client and federal regulators to assist to obtain – to assist the client to obtain its seawater allocation permit for the project. Additionally, we have made good progress obtaining the rights of way for the Phase 1 aqueduct, a very important condition precedent of the contract.

As you can imagine, this is a very complex project and one that we are convinced it will be worthy investment and the time it is taking to lineup all the various parties and regulatory approvals that are required to move on with construction. And we look forward to breaking ground by the end of the year.

Of note, we are pleased to see that in May the Otay Water District in California received a permit to build and operate nearly 4 mile cross border pipeline that could ultimately be used to transport potable water from Rosarito.

The Otay Water District serves the San Diego Metropolitan area and would be a good potential anchor customer for the second phase of the project. At this point, I would like to ask our CFO, David Sasnett to provide additional color on our second quarter and first half financial performance..

Thanks Rick and good morning everyone. Some of these numbers I will discuss have already been mentioned by Rick, but I will run through our highlights quickly here. Our total revenues for 2017 with the second quarter were $15.2 million, which is slightly below the $15.4 million we reported last year.

Higher revenues are both segment and they show to partially offset revenue decreases in our other three segments. Gross profit for 2017 declined to $6.5 million, a slight decline from the $6.7 million we reported for the second quarter last year. This decline is consistent with a small decrease in our revenues.

Our G&A expenses on a consolidated basis were $5 million, quite consistent with the $4.9 million we reported for the second quarter last year. The slight increase this year is due to incremental employee costs that were partially offset by a decrease in professional fees that we incurred.

A big portion of the variance in our results for the second quarter of this year as compared to the second quarter last year was in the component of our income statement that we call in other income which is below the operating line.

Net income for the second quarter last year was a little over 21 – excuse me for the second quarter of this year was little over $21,000, which was significantly less than the $404,000 we reported for the second quarter last year. This year-on-year decline resulted from $49,000 less in interest income for 2017 due to lower interest earning balances.

And the loss that we reflected from our investment in OC-BVI about $38,000 this year as compared to income from our investment in OC-BVI of about $100,000 last year. Rick had already mentioned earlier that we had a non-recurring gain in 2016 of $273,000 from the sale of fixed assets.

I just want to point out that the decrease in the income we have recognize from our investment in OC-BVI for the second quarter is directly attributable to 31% decrease in the rate OC-BVI is charging for the water supply for their Bar Bay plant under the 14-year extension of the water supply contract for this plant that became effective back in March of 2017.

Since if you are looking at our numbers going forward, we won’t be reporting the same level of income from OC-BVI as we had in past at least on initially for 2017. But as this contract matures over its 14-year life, we expect the performance to improve for OC-BVI.

Our net income from continuing operations attributable to consolidated more to shareholders for the second quarter was $1.7 million that’s 11% per share on a fully diluted basis as compared to the $2.3 million or $0.16 per share that we have recognized last year.

As Rick had mentioned earlier, our Board decided in late May 2017 to discontinue operations in Bali and we recorded an impairment loss of $1 million as a result of that decision. After factoring in that $1 million impairment charge, our net income for this second quarter was about $625,000 or $0.04 per diluted share.

We have about $830,000 of net investment on Bali still on our balance sheet. We don’t expect to be recording any significant impairment charges in the future, however to the extent we can’t sell the remaining investment for $830,000, we are exposed to a loss on that investment.

I just want to point out that we continued to maintain a very strong balance sheet and excellent liquidity. At June 30, 2017, we had cash and cash equivalents of approximately $46 million after year-to-date dividend payments of $2.2 million and capital expenditures of $2.6 million.

For the remainder of 2017, we are expecting approximately $8 million more in CapEx, our cash flows from operating activities were $9.6 million for the first half of 2017. We think that’s a very healthy figure.

I want to just comment that you should be aware that our strong financial position gives us significant flexibility and it allows us to pursue both organic and acquisition growth opportunities. And with that, I will turn the call back over to Rick..

Thank you, David. In summary, second quarter results represented a steady performance of our core desalination operations. We see a pickup in our manufacturing segment orders which should favorably impact our financial results in the second half of the year. And our key development project Rosarito continues to move closer to the construction phase.

Now, I would like to open up the call for questions..

Okay. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Gerry Sweeney with ROTH Capital. Please go ahead..

Hi, good morning, Dave and Rick how are you?.

Good.

How are you doing?.

On Rosarito, it sounds like you are – you have a high degree of confidence that construction will start by year end, it sounds like there is movement on the – on a couple of key components the financing, right of ways, etcetera, what would potentially be out there, the pushback that started.

And then also if – how long would it take for revenue to start hitting the income statement post start of construction?.

On the first question I mean we have listed these conditions precedent, but we need to achieve I mean any one of them could delay it at this point.

I know that as I mentioned the government has been making progress, putting together the guaranteed package, which is quite complex, hopefully that is more or less resolved by the end of the summer and that’s really the big one that is out of our control.

I mean the thing is that the client is responsible for the seawater allocation permit that’s another one that they are responsible for that could be delayed.

But other than that I mean everybody is very committed to moving a project to financial close and the financing institutions we had a big kickoff meeting in July and everybody seemed enthusiastic, but there are still a number of conditions that we need to meet..

Got it.

And then how long would construction to sort of startup take?.

3 years..

3 years, okay, got it.

And then switching gears a little bit back to the Caribbean, volumes in Bahamas was a new plan or you are updating your plan and new I guess new contractor there recently with one of the facilities and is there an opportunity to see growth in the Bahamas that you could potentially that you are looking forward to similar to I am sorry opportunity to see some growth in the Bahamas similar to what you are seeing in Caymans increasing tourism etcetera?.

Those contracts are more or less fixed quantity contracts and we see growth by them going to tender maybe on a new contractor or asking us to expand capacities at one of the plans there Nassau which we have done in the past. I mean we essentially doubled the capacity of the Blue Hills plant back in 2011.

So the potential for growth in the Bahamas I think is different.

We have a lower connection rate on their public utility there and the water and sewer corporation which is a government owned utility has been pressing to get more people connected up to the public utility a lot of people still use well water and maybe rainwater catchments and that sort of thing there.

So there is some potential for that, it’s a much bigger population base of 200,000 people there. So that’s the type of the potential we see, not necessarily the tourism growth, but the connection rate..

Got it..

Gerry, I would like to point out we have expanded our Blue Hills plant there to meet additional demands of the Bahamian government. So in the future I mean if they do have an increased connection rate it would seem logical they would back to us ask for further expansion of the existing plants and the contracts we have with them.

I mean that would be the most cost effective solution for them..

Got it, okay, that’s helpful.

And then finally, it sounds like you are gaining a little bit more confidence and I know orders try to pretty quickly there, at some point are you going to be able to provide some backlog figures or even maybe some qualitative if you can provide even some qualitative views today as to how much of that return in contracts that you are seeing are returning activity or RFPs, etcetera, just so we get a better feel for how that’s going to trend for the next two to four quarters?.

Gerry, this is David, I don’t think we will ever provide backlog information. I don’t think it’s necessarily indicative of what’s going to happen. Aerex receives their purchase orders literally [ph] just a month or two months before they expect some of this production to take place.

So I don’t think providing backlog information will be particularly useful. And what we have seen with Aerex is we bought them, they lost orders from their biggest customer through no fault of their own and what we are seeing now is that we are seeing that this customer is starting to order again from Aerex, which is very encouraging.

And we are very optimistic about the second half of the year. For Aerex we think it will be better than the first half. And Aerex is beginning to approach sales volumes that are more consistent with what we thought they would have when we bought them. They are quite back yet, but it’s been very encouraging.

We have also decided to pursue some additional business for Aerex outside of what they have done traditionally. I mean we think it’s a great company. We have hired additional sales and marketing resources to help them. So we are still bullish on Aerex, I mean we have had a hiccup there, but after we bought them, but we think it’s a very sound business.

We think the guy who runs it, Tom Donnick is very professional, very confident. So I mean we think things will turnaround for Aerex, we are very encouraged about the prospects for the second half of this year..

Great, that’s very helpful, I appreciate it. Thanks David..

[Operator Instructions] This concludes our question-and-answer session, I would like to turn the conference back over to Rick McTaggart for any closing remarks..

Well, thank you very much for joining the call today. And we look forward to speaking with you again in November. Thank you..

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