Consolidated Water Co. Ltd. Q4 2015 Earnings Conference Call March 16, 2016 11:00 AM ET Executives Rick McTaggart – President & CEO David Sasnett – CFO Analysts Michael Gaugler – Janney Montgomery Scott LLC Steve Percoco – Lark Research John Bair – Ascend Wealth Advisors Operator Good morning. And welcome to the Consolidated Water Company’s Fourth Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. 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 well, 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 company’s current expectations, belief, assumptions, estimate, forecast and projections for its business and 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 and uncertainties and assumptions which are difficult to predict. Actual outcomes and results may differ materially from what is expressed in such forward looking statement. Important factors which may affect these actual outcomes and results include without limitation tourism and weather conditions in the areas of the company served, the economies of the US and other countries in which the company conducts business, the company’s relationship with the government it serves, regulatory matters including resolution and negotiations for the renewal of the company’s retail license on 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 that force under part one 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 obligations or undertaking to update or revise any forward looking statement 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 may be required by law. Please note this event is being recorded. I would now like to turn the call over to. Rick McTaggart, CEO. Please go ahead. Rick McTaggart Thank you, Amelie. Good morning, ladies and gentlemen. I am traveling this week in connection with our upcoming public tender submission for our Mexico project. So my comments this quarter maybe bit brief than the normal to provide more time for your questions-and-answers. Our CFO, David Sasnett is joining me on the call this morning from our Florida office. The company’s net income increased in 2015 to approximate $7.5 million, or $0.51 per fully diluted share, net result from $6.3 million, or $0.42 per fully diluted share in 2014. This increase in net income reflects higher operating efficiencies, successful water loss mitigation efforts and construction activities that enable us to maintain our gross profit and now is essentially equal to that of 2014 despite the drop in revenues. The lower and the loss resulted from lower G&A expenses relating to our development project in Mexico. Consolidated gross profit decreased only slightly to approximately $22.9 million last year compared to $23.1 million in 2014. And again this is even more consolidated revenues fall by approximately $8.4 million over the same period. This drop in consolidated revenues is due to the significant reduction in the cost of energy introduced to concurrent of their water rates that are linked to energy prices and to a lesser extent resulted from lower water sales volume in Bahamas and Cayman Island Bulk water operations. Retail revenues declines slightly to approximate $23.3 million last year compared to approximately $24.1 million in 2014. This was due to this lower energy cost we charges to our customers. Retail gross profit in terms of dollar is actually improved slightly due to higher operating efficiencies during 2015. Negotiations with the Water Authority-Cayman for a new retail license in Grand Cayman we commenced during the third quarter of 2015 and we are meeting with them more or less on monthly basis now during the negotiations. So far the negotiation with them productive but we cannot say within the certainly when they will be completed or what the final terms of the new license would be. The current license is set to expire at the end of 2015. However, we have been informed by the Water Authority that this license has been extended through mid 2016 and they are waiting final complete order from the government. Looking at our Bulk operations. Bulk water revenues declined to approximately $31.8 million last year compared with approximately $39.2 million in 2014. And this was due to reasons mentioned earlier as well as lower tariff that we charged through Water Authority Cayman resulting from the two year extension of the North Sound operating contract early in 2015. Bulk segment gross profit fell by approximately $1 million from 2014 to 2015, this was due to higher maintenance and repair cost at Bahamas operations and also to the lower revenues in the Bahamas and Cayman Island businesses. Our service segment revenues declined about $200,000 from 2014 to 2015 but the segment generated a gross profit of approximately $280,000 last year versus a loss in 2014. And this was due to more profitable construction activity in 2015. I’d like to say a few words about our recently completed acquisition and our equity interest in Aerex Industries. We’ve known Aerex Industries for many years during the latter half of 2015. And we saw potential to acquire that business. After customary negotiations and due diligence we were able to purchase 51% ownership of Aerex in February of this year. We also had an option which is exercisable two years after the purchase for the remaining 49%. Aerex is headquartered in Fort Pierce, Florida. It’s OE manufacturer and service provider of a wide range of products and services for municipal industrial water treatment. And they surely one of our most highly respected and valued suppliers since the early 90s. We believe that Aerex’s present business as it is now is an excellent ambition to Consolidated Water and further that Aerex’s market footprint in US and its excellent reputation gives us access to new potential customers that maybe looking for build and operate type deals which have been our bread and butter for many years. We are excited about the capabilities to boost to the occasion and opportunity give up kind of this acquisition provided us and we plan to file preliminary 8-K during the April where we provide investors with more detailed financial information on Aerex and its historical acts for 2015. Now just looking at our Mexico project. As previously discussed, the deadline for submission in bids to State of Baja, California, Mexico for our proposed 100GB desalination projects in Rosarito beach is next Wednesday that’s 24. We presently engaged with our partners in completion of the tender document which is quite extensive and complicated due to the scope of the project. And we are on track to meet the submission deadline. We are confident that we resemble the strong partnership and that our proposal will constitute a highly credible and technical proven and economically attractive response to the government’s request for tender. So obviously we will keep investors — as that process, develops over the next few months. So any questions from anybody? Amelie? Question-and-Answer Session Operator [Operator Instructions] Our first question is from Michael Gaugler of Janney Montgomery Scott. Please go ahead. Michael Gaugler Good morning, Rick. Good morning, Dave. I’ll start I guess with Rosarito. Just wondering if there is any indication from your sources there as to whether or not others are planning to bid and what the potential timeline for a decision might be? Rick McTaggart Well, yes, I mean we were aware of government’s letter actively trying to develop and I guess proposals to the government and the government has indicated that they will take a decision I think by May and I am not — probably as well as the bid announcement. Michael Gaugler Okay. And then just one other here in the first quarter whether on Grand Cayman thus far, wondering how it shaping up versus last year and if there are any items affecting water volumes sales year-over-year we should be aware of? Rick McTaggart For the first quarter I mean that’s usual bid list time of the year, we get [twos and arrive] — or I haven’t seen anything inconsistent with historical sales but really we should know certainly by the — by early April and we are not — Michael Gaugler Okay. I was just wondering if there any weather disruptions. I think you had wet first quarter last year so I just kind of want to take a pass at that but otherwise that’s all I have. Operator [Operator Instructions] And the next question is from Steve Percoco of Lark Research. Please go ahead. Steve Percoco Thank you. You indicated that your development expense in Mexico could be significantly higher in 2016 presumably if you win this bid. Can you give us any idea of what they would be in 2016 and how development expenses might ramp if you are successful in the project? Rick McTaggart Actually I think we expect them to decrease compare to previous years. We are at the end of the project development phase and once we bid the project either those expenses go away because we didn’t get it or we just hope will not the case or get starting to another phase where capitalizing or other cost for truly development and actual construction once we get a contracts. I would expect the development expenses to be less than previous years. Steve Percoco Okay. Well, I guess I was just going by a statement that was made in your risk factors in the 10-K. My second question is you’ve indicated that the negotiations have been productive with the Cayman Water Authority and I was wondering I know you can’t be specific about it but can you give us any tangible signs of progress that cause you to make that statement that the negotiations have been productive. For example, have they submitted their regulatory model to you, the return on capital model to you as they had indicated they would allow back? Rick McTaggart Yes. They did. We mentioned in the K that we’ve received draft license from them, I think we said in the third quarter of last year and the negotiations have been based on that. License which we are using what they call arching of model so made in last year that we negotiate on the basis of our camp and I think that’s really what’s that’s jump started thing and it’s already — we have a common view on where we want to be at the end of this thing. So that’s why I said it has been productive. We are not — we are not at hard on the — but basically issues related to the license. This could be model point. Steve Percoco Okay. And finally I wondered if you could give us just kind of a status update on Bali. I noticed that water sales they were lower this year. Do you expect more of the same in 2016? Do you anticipate that this situation might change at all? David Sasnett Yes. First of all, Steve, this is Dave Sasnett. I want to clarify something regarding the Mexican development expenses. I think the disclosure we have in our K insisted our development expenses next year for Mexico will continue to be significant. I don’t think we said that they will be more than they were this year. We will still — we have an operation in Mexico that we established and pursue this project and the administrative cost associated with that project are going to be still hitting our financial statements. But we don’t expect the volume of the expenses that we’ve incurred in Mexico in 2016 to be comparable of what we had in previous years. As Rick said earlier, if we win the bid and start capitalizing expenses or someone else will win and we no longer be incurring expenses to pursue that project. With respect to Bali, the situation — excuse me, did you have a follow up question? Steve Percoco Well, I was just going to say that the statement that you made I believe says we expect to expand significant additional funds in 2016 to continue to pursue this project. David Sasnett And that’s correct. We will have six months at least of continued administrative expenses. And once the decision is made, those administrative expenses will either be capitalized and therefore they will not — now or we won’t win the bid and they will be terminated. Steve Percoco Okay. But even if they are capitalized they represents a cost something that potentially maybe need to be funded or may come obviously out of cash. And that’s why we are just wondering if you could give us any sense of how the expenditures might ramp up in 2016 and beyond if you are successful in the bid. David Sasnett We haven’t providing any estimate to that, Steve. Don’t feel comfortable doing that. Steve Percoco Okay. Bali? David Sasnett Well, the situation in Bali is quite simple. The Bali still has a water crisis but the economy in Bali is very weak. And as a result the hotels in the area who we do business really don’t have their financial liability at the moment to buy water from us because they are continuing to use the local fresh water aqua for wells that are on their properties to get water of very low quality, the water is nevertheless free to them. But we are holding discussions even as we speak with the government or utility, their PDAM another parties because all parties on Bali realize that the current situation can’t continue for much longer. Will that translate into water revenues for us and new contracts? We certainly hope so. But ultimately they’ve recently passed a regulation in Bali so that now it really affects all of Indonesia. So now that all these new water contract have sort to be coordinated and review by the water utility because they need some kind of master strategy for the entire island. So we are continuing to be optimistic about the long-term prospects for Bali. But on the short term we don’t see any indication that there going to be any significant increases in revenues in the short term. Hopefully at some point time these companies that we have targeted will ultimately step up and sign a long- term contracts for this. But at the moment, the economy so poor there, they are struggling to the point where they can’t afford to pay any money for water. So they are continuing to use their own wells as long as they can. Operator Our next question is from John Bair from Ascend Wealth Advisors. Please go ahead. John Bair Thank you and good morning. I was wondering if you could tell us if the Aerex acquisition will be accretive to your earnings this coming year. And what markets did they have historically served? Is it primarily domestic or do they serve markets outside of the United States? David Sasnett This is David speaking. We are going to follow 8-K as we mentioned with pro forma result for Aerex and our company. And until we do that we are not — we haven’t decided to disclose anything regarding Aerex’s results last year, whether not the acquisition will be accretive to us. So we would like — we hold to further question till we actually do our public filing. Rick would you like to talk about Aerex, its market a little bit. Rick McTaggart Yes. They primarily do business in the US and they also done business in the past in China and also Japan. So it’s mostly around island, areas of the Caribbean as well obviously it supplied its equipment over the years. So they are primarily the US market. John Bair And maybe I didn’t catch this but when do you anticipate roughly following that 8-K on the Aerex? David Sasnett Mid April I think, it’s — the deadline for filing the document is 71 days after the acquisition date of February 11. So we will file it shortly before the deadline. So maybe 70 days or so after February 11. John Bair Okay. Thank you very much. Good luck on your bid. Rick McTaggart Thank you. We need it. Operator [Operator Instructions] There are no additional questions, conclude our question-and-answer session. I’d like to the conference back over to Mr. McTaggart for any closing remarks. Rick McTaggart Yes. I just like to thank everybody for calling in today. As David mentioned we will be filing an 8-K in the Aerex acquisition in April, mid April. And I look forward hope to speaking with you all again in May when we release our first quarter results for this year. Thank you. Operator The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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