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

Michael Gaugler - Janney Steve Percoco - Lark Research John Bair - Ascend Wealth Advisors.

Good day and welcome to the Consolidated Water Company’s Full Year 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 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 the governments it serves; regulatory matters, including resolution of the negotiations for the renewal of the company’s retail license of 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 maybe required by law.

I would now like to turn the conference over to Rick McTaggart, Chief Executive Officer and President. Please go ahead..

Thanks, Brandon. Good morning, ladies and gentlemen and thank you for joining us today for a review of our 2017 operating and financial results and an update on our business developments. With me this morning in our Florida office is David Sasnett, our CFO. We are pleased with the progress we made during 2017.

Our desalination business continued to deliver expected results due to our attention to controlling operating costs and maintaining the high operating efficiencies of our plants and utility business. We also made significant progress with the Rosarito project reaching certain milestones needed to bring this project to the construction phase.

Our core desalination operations continued to produce stable results with increased volumes and energy charges from our Bahamas bulk operation driving revenue growth. We also have begun a major refurbishment and upgrade to the Windsor plant in the Bahamas, which will be completed later this year in 2018.

This past summer, we began negotiations to renew our Cayman Islands retail license with the newly formed utility regulator, OfReg and while discussions continue, we believe we are making important headway.

Also since last fall, tourist activity in the Cayman Islands has increased as tourist shift to destinations like the Cayman Islands that were not affected by last year’s hurricanes in the Caribbean. In fact, a record 2.1 million people visited the Cayman Islands in 2017, with their arrivals hitting record levels for the fourth year in succession.

418,000 visitors arrived by air in 2017 which represents an 8.5% increase over 2016 full year. And these record numbers had continued into this year with a record 39,000 tourists arriving by air in January 2018, which is a 14% increase over the previous record year of January 2015.

And over 218,000 tourists arrived in January by cruise ship which is a 20% increase over January of 2017. Weather conditions remained dry in the first quarter of 2018 with a little less than 3 inches of rain falling in our service area during the first few months of this year.

Since our water sales are affected primarily by weather conditions and tourist arrivals, these numbers bode well for Q1 of 2018 retail water sales. Our manufacturing operations continued to recover from a low point in 2016. As expected order flows picked up in the second half of 2017 and for the full year manufacturing revenues increased considerably.

While the significant amount of business development activity is still underway in our Manufacturing segment, we believe that manufacturing revenue levels have stabilized.

Our transformational Rosarito project maintained its positive momentum during 2017 and into the early part of this year, culminating in our recent major announcement of an agreement for the equity funding of the project.

As discussed in our March 7 press release, we are pleased to have attracted equity partners SUEZ, a global leader in the water treatment industry and Greenfield, an affiliate of a leading U.S. asset management firm. The agreement calls for us to retain a minimum equity stake of 25% in the Rosarito project.

And based on the levels of expenses and investments already made by our company in the project we do not expect our equity commitment under this agreement to require additional cash outlays on our part.

Under the terms of the agreement, SUEZ will design and construct the project in a 50-50 joint venture between us and SUEZ will provide O&M services to the project.

We believe that this project clearly demonstrates our ability to partner with some of the largest global players in the desalination industry and serves as a blueprint for future opportunities that we choose to pursue. At this point, I would like to ask our CFO, David to discuss some of the details of our 2017 financial performance..

Thank you, Rick and good morning everyone. Our total revenues for 2017 were $62.3 million, up 7.7% to $4.4 million from $57.9 million we reported in 2016. This increase resulted from additional revenues generated by our Manufacturing and Bulk segments.

Our gross profit for 2017 increased by 4.9% to $25.4 million as a result of these incremental revenues. Our consolidated G&A expenses were $19.1 million for 2017, up slightly from the $18.7 million in G&A we reported for 2016 and this increase was due mainly while almost entirely to incremental employee costs that amounted to about $519,000.

Our G&A expenses for the year also included $3 million in development expenses related to the Rosarito project. As a reminder since inception of this project, we have invested approximately $23.5 million in development expenses and approximately $21.7 million for land and rights of way for the project.

As Rick just mentioned upon reaching financial close for the project and commencing construction of the plant, we expect our expenses related to the Rosarito project to decrease substantially. Net income attributable to CWCO stockholders for 2017 was $6.1 million or $0.41 per share on a fully diluted basis.

This is after the inclusion of the $3 million in the development expenses for Rosarito for the year. Our net income represented a 55% increase from last year’s net income of $4 million, which equated to $0.27 per a fully diluted share.

Consistent with prior years, we ended the year with a very strong balance sheet, one that is practically debt free and with more than ample liquidity. Our cash and cash equivalents amounted to $47.2 million at December 31, 2017 as compared to the $39.3 million in cash and cash equivalents we held a year earlier.

Cash flows from operating activities increased just over 74% to $13.6 million for 2017 as compared to the $7.8 million we generated in 2016. In 2017, we returned $4.5 million to shareholders in the form of dividends. Capital expenditures for 2017 were $4.6 million.

Our CapEx for 2018 will increase from this level, primarily due to the Windsor, Bahamas plant project that Rick mentioned earlier in the expansion of our Governor’s Harbour plant in Grand Cayman. And notably during 2017, we increased our quarterly dividend from $0.075 per share to $0.085 per share.

We believe this dividend increase reflects our board’s confidence in our existing cash position and our future cash flows. And with that, I would like to turn the call back to Rick..

Thanks, David. So in summary, 2017 represented the steady performance of our core desalination operations, a pickup in our manufacturing business and a large step forward in moving the transformational Rosarito project closer to the construction phase.

Our continued strong cash flow and balance sheet puts us in a position to be able to return cash to our shareholders, while continuing to pursue organic and acquisitive growth opportunities. Brandon, I would like to now open the call for questions..

Alright, thank you. [Operator Instructions] Our first question comes from Michael Gaugler with Janney. Please go ahead..

Good morning everyone..

Hey, Mike.

How are you?.

Yes, congrats on the progress with Rosarito, it’s pretty much where my question lies, just wondering when you expect to close on the project and then how much in additional development expenses we could expect in 2018 related to it?.

Well, from the first question, I mean, we hope to close this year. We are still as we have mentioned still negotiating the financing agreements and there is a couple of things that the government still needs to do to finalize the security package for those financing agreements.

So, we are working hard to do that and I would hope that we could close this before the end of the year..

Okay.

Any idea on what further development expenses could be perhaps a range?.

Hey, Mike, this is David. Ultimately, the amount of development expenses we incur will be dependent upon when we closed the project. There is a certain G&A carry associated with the project on our part.

And if you look back at our financial statements for the last 2 or 3 years, I mean there is a pattern there that exists, you can drive from what we have incurred over the last 3 years.

So I mean taking an historical average and figuring it because the project 6 months into the year would incur probably close to half of what we have historically covered and concurred. So, I mean, really its dependent upon when we closed the project. This is a certain amount of fixed overhead that we just – we are committed to until we closed.

So, take a look, we haven’t provided any projections on anything going forward, but if you take a look at what we have done in the past, I think our historical results will give you some indication of where we will be going forward. I think you can presume a certain closing date for the project..

Okay, that’s helpful.

And then also Rick just wondering what you need yet in terms of any potential permits if any to start construction?.

Yes. We still – we mentioned that we are still waiting on letters to federal permits.

There is one that the state has to obtain for the use of the seawater and then we have to obtain a concentrated discharge permit from the federal government and those two are really the main ones I think that we are still waiting on and those are hopefully in their final stages..

Okay. That’s all I had gentlemen. Again, congrats..

Thanks a lot, Mike..

[Operator Instructions] Our next question comes from Steve Percoco with Lark Research. Please go ahead..

Thank you. Your manufacturing operations improved both with respect to revenue and operating profit, yet you booked a gain again on the – or a gain on the put/call option including an amount taken in the fourth quarter.

Could you just kind of give us a sense on where the manufacturing operation is? Are the 2017 results indicative of what you expect that business to realize going forward? What changes if any do you see down the road?.

Steve, the put/call option that we gained and we booked is indirect. It’s just exactly opposite to the impairment charge we took for this business during the fourth quarter.

Once a year, we evaluate all of our businesses, we checked it will for possible impairment and quite frankly speaking into fourth quarter of this year, we had decided to take a $1.4 million impairment charge as the revenues for Aerex were not consistent with the revenues that we used when we originally projected for the company when we bought it.

I think it’s fair to say that it – our expectations for Aerex are higher than what they have done so far with us. I mean, when we bought the business, the company was doing about $19 million in revenues and since that time it hasn’t approached that revenue level with us.

There are some factors that have to do with Aerex’s customers that have caused that decline. It has nothing to do with Aerex, but really our expectations for the business are higher than the $3 million we reported in revenues for 2016 or the approximate $6.5 million to $7 million we reported for ‘17.

However, when that business will return to a level consistent with our prior expectations we can’t say, because of what’s happened with Aerex’s customer base, they have had to retool the business somewhat and changed our sales and marketing approach. We think we acquired a very good company.

We are very confident in the management of that company, especially the President, Tom Donnie. But I think it’s fair to say their expectations are higher than what we have done so far, but we can’t say for short when they will approach the revenue levels that we saw before we bought them and that’s about it.

It’s a business that’s full of a lot of small contracts and we have to continuously market that business, but I mean, like I said our expectations are higher than what we have seen so far..

I understand that.

But I guess what I am more focused on is the 2017 level is that indicative of your expectations now going forward with the business?.

Well, we know – see we are very careful not to project, I mean, our company doesn’t give earnings guidance, we don’t give revenue guidance, we don’t give – we don’t project going forward. So, if you are looking for some kind of number for 2018 as far as the revenue is concerned we don’t provide..

It’s not a number, I mean you have booked a gain in the impairment charge and I guess what I would like to know is having taken those charges and the gain on the put/call option is the business the way it was in 2017 now indicative of what you see going forward?.

Going forward, I am not sure if I know how to answer that, Steve. We certainly reduced our revenue expectations going forward that’s because that’s how we took the impairment charge. So, I think that we think that – if you are asking 2017 indicative of going forward, we would hope that’s the minimum case going forward, but we can’t say for sure..

Okay.

Could you give us any color on the license negotiations in Grand Cayman, is there anything that beyond what you sated that you could say?.

I don’t think so at this time. I mean we are in negotiations with the new regulator, been much more productive than prior to 2017 and we continue to meet with them on a regular basis to finalize the terms of the new license. So once those terms are established and we will make the appropriate disclosures to the street..

Okay.

Can you give us an update on Bali and what your expectations there are for 2018?.

Go ahead Dave..

Well, we disclosed in the second quarter of 2017 this is our intention to get out of Bali and to discontinue those operations. And the original plan set forth by the Board was to exit by the end of the first quarter this year.

We have since been engaged in a lawsuit by Bali’s sole customer who is selling us the saying that we need to continue to maintain this non-profitable operation just so we can provide them with water.

And we are in a position now we are litigating that matter in the courts in Denpasar assuming we have favorable limits our goal to be out of Bali completely. And I think based upon the impairment charges we have taken to-date I would expect Bali to have significant impacts in our results of operations in 2018..

Do you have operating costs, I mean as long as you are…?.

They are relatively insignificant to the company. And I think the biggest cost right now is the legal costs that we have, just with the lawsuit. They have been more than we anticipated. But the operating costs are run about $300,000 a year..

Okay.

So do have a court date set for the lawsuit?.

What’s happened so far is there have been filings of various documents with the courts. And I am not sure exactly when the court will run the preliminary decision. I would expect it won’t take too much longer..

Well, Steve it is in the courts, I mean it’s been actively dealt with over the last few months, so it’s now like we are waiting on the date for the first hearing, I mean it’s underway..

Okay.

And then finally, you said upon closing that you would be looking for potential acquisitions going forward, can you give us any idea of what you see what you would like to add where you are looking, any color that you are willing to share?.

Closing of what, I am sorry?.

I guess unless I heard wrong I thought you said that you would be looking at additional acquisitions going forward?.

We always are looking at businesses that could complement our business and be accretive. I mean sometimes were smaller projects, sometimes were bigger ones like Rosarito. I mean we don’t discuss any particular list of targets that we are working on, but we are always looking at the potential additions to the business..

Okay. Thank you very much..

Alright..

Our next question comes from John Bair with Ascend Wealth Advisors. Please go ahead..

Thank you for taking my call.

You answered a question about Bali that I was going to ask about operating costs and continuing to produce some volumes of water there, my other question with regards to your 10-K indicated the limited ability to show the proper terminology, but to move money out of convert Belize dollars out and I noticed in the 10-K that there is a pretty high dollar amount in Bahamian dollars and I am wondering if you had the same restrictions there and how that kind of effects your operations overall…?.

John, we have never had any problems with Bahamas. They have a free flow of dollars back and forth and very healthy tourism economy. And the Central Bank has never given us any issues with repatriating money from there. So it’s a very different situation than what exists in Belize..

And how does that in Belize then how does that I mean if I recall when I read this every weekend about the little more restrictive in Belize, are conditions there improving such that if I recall you were able to convert more than you were and ‘16 is that right?.

Yes. Slightly more, it doesn’t really have anything to do with us, it is has to do with whether or not their dollars are available for us to convert. And to not get into a big discussion of how foreign currency works, it’s just things have to get better in Belize for us to be able to get that money out.

The government is aware of the problem they are working on it. I mean this is not good for them as it limits investment, I believe and so forth. So they are working on this issue and we are trying to work with them and hopefully things will improve.

This is a – we didn’t have this problem within 4, 5 years ago it’s just very last couple of years, this was popped up..

Is that a function of tourism change or just general, what shift in their economy I guess would be probably the more appropriate?.

Yes. The economy has not done well there and you have had some issues I think, I don’t have all the facts, but isn’t things that have I believe is a less attractive investment alternative for people over the last 2 years and they have had some economic issues and things like that.

And I am not sure, but there might have been a problem with one or two of their banks and some of their compliance or regulations, but I am speculating here. I mean we haven’t done an in-depth analysis of why this problem exist we are just aware that it does..

Alright. Well, good luck on Rosarito. It’s interesting progression there. Hope you get it off the ground soon. Thanks a lot for taking my questions..

Thank you..

[Operator Instructions] It appears there are no more further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Rick McTaggart, CEO for any closing remarks..

Yes. Just like to thank everybody for calling in today. And we will keep you updated on our further progress. Take care..

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