Rick McTaggart - CEO and President David Sasnett - CFO.

Gerry Sweeney - ROTH Capital Hasan Doza - Water Asset Management.

Good day and welcome to the Consolidated Water Company's Third 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..

Thanks you, Carrie. Good morning, ladies and gentlemen and thank you for joining us today. While we review our third quarter 2017 operating results and provide you with an update on business developments. With me this morning is David Sasnett, our CEO.

We were pleased with our third quarter financial results as they reflected the growth of our desalination business along with an upturn in our manufacturing operations. Our desalination business continued its steady performance with moderate growth compared to last year's third quarter.

Consolidated gross profit increased due to higher revenues in our bulk water and manufacturing segments and improved performance and services. As mentioned previously, our facilities on the British Virgin Islands were adversely impacted this hurricane season.

We are extremely proud of our BVI staff that have worked tirelessly to bring our facilities back online.

While we believe water demand on Tortola and Jost Van Dyke in the BVI will continue to be negatively impacted as those islands will go through a slow rebuilding process the overall impact on our results will be minimal given insurance coverages and the continued payments being made by our customer.

Last quarter we mentioned signs of stability in our manufacturing segment based on the improving order backlog and I am pleased to report that we saw continued improvement in the third quarter. While still below preacquisition levels, Aerex revenues more than doubled year-over-year and gross profit almost doubled.

By one quarter does not make a trend, we're pleased to have ended the third quarter with contracts already in hand for completion through the second quarter of 2018.

2017 third quarter results also benefited from a positive swing in other income as in last year's third quarter we incurred an impairment charge related to the investment in our BVI affiliate. Earnings in the third quarter were 1.2 million or $0.08 per share which included 864,000 in Rosarito project development expenses.

Earnings during the quarter were also impacted by our Bali operations which we have announced our intention to exit. Those operations incurred a net loss of 569,000 or $0.04 per share this past quarter. Excluding the impact of Bali, net income and EPS would have been $1.7 million and $0.11 per share respectively for the third quarter of 2017.

It is important to note that our balance sheet remains practically debt-free with significant cash balances and liquidity. With much of our corporate development expense for the Rosarito project behind us we are in an excellent position to undertake other organic and acquisitive growth opportunities, while we continue paying dividends.

Now I will provide an update on our business activities relating to existing operations and then a overview where we stand with respect to the timing of the Rosarito project. This past summer we began negotiations to renew our Cayman license with the newly formed OfReg in the Cayman Islands and talk so far have been very productive.

We continue to be encouraged by news of improving the economic conditions in our Cayman Islands and Bahamas markets which we believe bodes well for water demand growth in these businesses.

Air arrival figures to the Cayman Islands broke records in July and August with tourism officials predicting that the Cayman Islands could see 2017 year-end visitor numbers exceed 400,000 for the first time ever.

The Cayman Islands Department of Tourism said that July was the best month of 2017 so far when typically marches the best month of the year for tourism in Cayman. As previously discussed, the Cayman Islands is also tripling the size of the airport terminal in Grand Cayman to eliminate a long-standing barrier to tourism growth in the country.

The airport expansion is more than half way through four phase process and is expected to be completed by early 2019. Plan development activities in Grand Cayman appear to be responding very favorably to the government's infrastructure improvement initiatives.

The Cayman Islands planning department recently disclosed that the dollar value of plan developments for the first 10 months of this year double compared to the same period in 2016 and dollar value set the eclipse the previous annual record set in 2008.

Preliminary Planning Commission was recently granted for a 450 room luxury hotel resort at the extreme southern end of our utility service area. And if completed this would be the largest hotel residents development in the Cayman Islands.

Another local developer recently announced the 60 unit boutique resort would be constructed on a site just outside of our utility area but within the service area of our bulk water customer Water Authority-Cayman.

In the Bahamas, we expect increasing volume sales to our customer the Water and Sewerage Corporation of the Bahamas which supplies potable water to the $4.2 billion Bahamas resort in Nassau. Water demand to Bahamas continues to ramp up as that project comes online after several years of delay.

The Bahamas resort which includes three luxury hotel totaling 2,300 guestrooms as well as the largest casino in the Caribbean opened earlier this year after 10 years of development.

In the third quarter we moved ahead on our transformational Rosarito project but the construction timeline has been pushed out due to the state water commission not yet obtaining approval from the state Congress the Baja California Mexico for certain changes to the congressional decree that authorize the project and the payment guarantee trust.

The Rosarito project represents, the largest public private infrastructure project ever undertaken by the state of Baja, California and involve many stakeholders in the region.

During the quarter we continue to address the financial and regulatory issues that are required in order for construction to begin while we're disappointed in this delay this is very complex project the one that we're convinced will add great value to the company.

At this point I’d like to ask our CFO David Sasnett to provide additional color on our third quarter year-to-date financial performance..

Thanks Rick and good morning everyone. Our total revenues for the third quarter of 2017 was $16.6 million represented a $2.2 million and 15% increase from the $14 million we reported last year.

Our core desalination business continues to perform as expected but the retail segment experienced an increase in revenues and volume sold and our manufacturing segment which reported revenue of $3 million more than doubling its revenues from last year.

As Rick noted we’re beginning to see improvement in our manufacturing business and its important to note that our manufacturing revenues this quarter would derive from contracts with the higher average dollar value than the manufacturing contracts for Q3 2016.

Gross profit for our third quarter was $6.3 million which represents a 6.6% increase over the third quarter of last year and this is attributable to the 15% growth in our revenues.

Our consolidated G&A expenses were $4.9 million slightly up in the $4.5 million reported for the third quarter of last year and consistent with a $5 million we reported for the second quarter of this year.

The slight increase for this year is due primarily to the $864,000 of G&A incurred for the Rosarito project as compared to 606,000 we incurred for this project for the third quarter of 2016.

Our net income for the third quarter was $1.2 million or $0.08 per share on a fully diluted basis as Rick mentioned our results this quarter continue to be impacted by our operations in Bali which incurred a loss of $569,000. Speaking of Bali I would just like to briefly explain the change this quarter and financial reporting for the subsidiary.

Approximately three months ago we reported Bali as a discontinued operation in our June 30, 2017 Form 10-Q. You will note from the income statement included in this quarter 10-Q that we have ceased reporting Bali results separately in our income statement as discontinued operations.

At the time we filed our 10-Q for the second quarter of this year, our actions and the facts and circumstances for CW Bali were consistent with the various accounting requirements for reporting the subsidiary in our income statement as a discontinued operation.

However one of those requirements that was met three months ago was our ability to conclude that a sale of the assets of CW Bali within one year was probable.

Since at the time we filed a June 30, 2017 10-Q we’re negotiating with an interested and viable buyer and we’re listing our Bali assets and operation for sale of local business brokers we have concluded that the sale of our Bali assets for the year was probable.

But as we filed our second quarter 10-Q specifically in October 2017 CW Bali sole remaining customer having learned of our intention to terminate CW Bali operations and exit the Bali market filed a lawsuit in the Bali courts that is based upon the anticipated termination of CW-Bali’s water supply contract were discussed.

It’s important to note that this termination of the contract has an even occurred as the date of filing of the lawsuit CW-Bali will supply and discuss for water in compliance with the terms of their water supply agreement and CW-Bali continues to supply them water today. We believe this lawsuit to be completely without merit.

However under Indonesian law the filing of this lawsuit results in a legal prohibition on any sale of CW-Bali assets. Since we cannot determine but this time when or how this lawsuit will be resolved we can no longer conclude that the sale of Bali assets within one year's probable.

Since we no longer meet this probable sale of one year requirement we’re no longer segregating and reporting Bali results as a discontinued operation in our consolidated income statement.

However our investors should be aware that as a result of the impairment losses we have reported to the third quarter of this year and the cost reductions that have occurred in our Bali operations our future results should only be minimally impacted by CW-Bali assuming we can resolve the lawsuit without experiencing significant financial consequences.

I would just like iterate that we continue to maintain a very strong balance sheet and excellent liquidity. On September 30, 2017 we had cash and cash equivalents of approximately $46.8 million which equates to approximately $3.14 if you were to calculate on a per share basis.

Our cash flows from operating activities were 11 million and we return $3.3 million to shareholders in the form of dividends over the first nine months of 2017. And with that I’d like to turn the call back over to Rick..

Thanks Dave. Carrie, we'd like to open the call up for questions please..

[Operator Instructions] The first question will come from Gerry Sweeney of ROTH Capital. Please go ahead..

Rick I was hoping maybe you could touch a little bit more upon the Rosarito project and what maybe give a little more detail what we need to get from - some of the changes that we need to get done in the contract to get that final approval and what we should keep an eye out for in the news just to continue to watch the project?.

As we mentioned in the Q that the Baja California state Congress is currently considering changes to a decree that to a decree that they issued in December last year which authorize the project and these changes were essentially mandated by the federal government to be compliant with federal law and also to - there were changes requested by the banks to improve the – I guess the creditworthiness of the payment guarantee trust.

So that's really the big step now getting - its the states responsibility to get all this sorted out, but I mean obviously it impacts us and they're working hard the governor and his ministers are working to try to get this approved by the Congress. So that’s really the thing that’s at the fore front of our mind right now.

I mean obviously there will be other challenges as we continue to move ahead but we are working in parallel to complete term sheet with the lenders and complete all the various agreements that are necessary to finance the project where we continue to work on the discharge permit that we are required to get from the federal government for the concentrated seawater discharge and those sorts of things.

We continue to work on obtaining the right-aways and meeting these other requirements that are necessary to close the contract once the stake is - the required approvals from the Congress..

And with the Congress can that happen any moment or there is certain sort of legislative procedures timing et cetera that require - would sort of highlight the vote or set dates for the votes, how does that operate?.

The Congress is - my understanding is that it’s in session now there has been a lot of press coverage in Baja regarding this matter. So if you want to look at the local press there and if want in Mexicali, there's a lot of articles about that over the last few weeks.

My understanding is that they could call for the vote at anytime we don't have any sort of timetable for, it's up to the state government when they feel like the right time is to put this thing to vote..

And switching gears Eric, it’s nice to see that rebounding I think in the Q or in the press release talk a little about the building backlog or something along those lines.

As we look out fourth quarter into next year could you give us a little bit of visibility into what that backlog is, where it stand today versus even at this past quarter the quarters before just so we can get maybe some idea the potential rebound on a go forward basis on that business?.

I think it would be fair to say that the shop is full through - into the second quarter of next year so beyond that we can’t give you any specifics..

Why was the shop full on the third quarter of this year just for comparison sake?.

Later in the third quarter but not the complete third quarter..

And then on the - what was it the bulk side in Bahamas I believe, there was - I think it’s had a charge for the plant expansion or something along those lines.

I am just curious what the charge was why wasn't it capitalized, why was it expensed if it had to do deal with the facility which I think you’re upgrading for the long-term?.

It was something that is more appears in maintenance than it was something that was capitalizable. We did a survey it wasn't - even that was a little over $400,000 we thought the appropriate accounting treatment would just be the right and office, repairs and maintenance expense..

Is that a one-time event could we assume that…?.

Well if we think about it Gerry - if you look at our repairs and maintenance expense over the course of the year and compared to the previous years is pretty steady but timing of those the expenses are not steady we will have a large amount of one quarter and then we will go couple of quarters without any.

It’s not like - you repair the equipment when needs to be repaired sometimes that sporadically you hit one quarter more than the other. We shouldn’t see a charge like that 400,000 in the fourth quarter that's what you're asking..

I just want to keep it normalize?.

There was a pretty big repair job so..

And let me see here, volume of water I mean I think you talked a little bit about it, but it was certainly up in the quarter and it sounds like it's being driven more by development in the region and you gave a timeline of some of the other developments.

Could you just remind me you know there is a little bit I believe a seasonality with the operations on Grand Cayman.

Is the fourth quarter generally busier or less busier than the other parts of the year?.

From a water sales standpoint its typically a little slower. The first and second quarters are really the big quarters for us in Cayman and the only reason that the fourth quarter is a little bit unpredictable because of the weather. So, if you’re getting some more rain events and stuff in October and November then that tends to push down the sales.

But really tourism tourist season starts in December so at least you got one month in the fourth quarter where based on what we're seeing in numbers so far this year I mean looks like it going to be a great tourist season..

Gerry long-term our demand - our demand of our retail segment long-term is impacted by development but I would right now quarter-to-quarter is weather. As Rick said, tourism is really big in the first two quarters for every year starting in December..

And its drier than..

And its drier so that's why you get you both this our first and second as you see better than our third and fourth..

The next question will come from Hasan Doza of Water Asset Management. Please go ahead..

Just wanted to check, I noticed your bulk water of gross margins were down year-over-year.

Can you specify what led to the gross margin being weaker quarter-over-quarter, when we look at the third quarter of last year versus the third quarter of this year?.

We talked about it earlier in the previous question is, we had some significant refurbishment charges this quarter over $400,000 in Bahamas that was a one-time kind of thing. We don’t expect that kind of expense every quarter and that’s the primary difference. Otherwise those margins on that business are very predictable..

[Operator Instructions] And this concludes our question-and-answer session. I would now like to turn the conference back over to Mr. McTaggart for any closing remarks..

Thanks Carrie. So our third quarter results we believe represented solid performance of our core desalination operations and a continued rebound in manufacturing segment revenues.

Beyond its revenue turnaround, we continue to believe that will be able to leverage Aerex's extensive water and wastewater customer base to create attractive O&M opportunities in the continental U.S. and our key development project Rosarito continues to move closer albeit bit more slowly than we would like to the construction phase.

So I’d just like to thank everybody again today for joining us and we look forward to speaking with you in March. Thank you..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day..