Rick McTaggart - CEO & President David Sasnett - CFO.

Michael Gaugler - Janney Montgomery Scott Gerry Sweeney - ROTH Capital Blake Todd - Two Oaks Management John Bair - Ascend Wealth Advisors.

Good morning, and welcome to the Consolidated Water Company's First Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's 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 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, 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 company's relationships with the government it serves, regulatory matters including resolution of the 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 set forth 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 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 over to Rick McTaggart, CEO and President. Please go ahead..

Thank you, Gail. Good morning, ladies and gentlemen. Thank you for joining us today on this call, our CFO, David Sasnett is also joining me on the call from our Florida offices. Net income of the company this past quarter increased to approximately $2.05 million compared to $1.92 million during the first quarter of 2015.

Consolidated gross profit during this past quarter was consistent with the first quarter of last year at approximately $6.1 million in spite of a decline of consolidated revenues of approximately $600,000 due to lower energy pass-through charges in January 2016 4.4% downward base rate adjustment in our retail business.

This decline was partially offset by the addition of approximately six weeks in revenues from our newly acquired subsidiary Aerex Industries, Inc. which was purchased in mid-February. Other factors that impacted net income this past quarter were firstly an increase in general and administrative expenses of approximately $550,000.

This was due primarily to legal costs related to the EWG litigation in Mexico and the United States and costs related to the acquisition of our 51% interest in Aerex. So just to keep in mind the cost of acquiring doing due-diligence that sort of thing were expensed this past quarter in relation to Aerex.

And secondly, the impairment charge we recorded for our investment in our BBI affiliate as result of winding down of its Bar Bay contract decreased by $260,000 as compared to the first quarter of 2015.

Our retail segment gross profit this past quarter remained consistent with first quarter of last year at approximately $3.35 million in spite of lower revenues due to lower energy pass-through charges and a base rate reduction noted earlier.

These base rate reductions were partially offset by an increase in volume sales in our retail segment of approximately 5% during this past quarter compared to last year. Typically lower rainfall and higher tourism arrivals have tended in the past to increase our water volume sales in Grand Cayman.

And according to the National Weather Service Data for this past quarter, rainfall was only about 60% of the rainfall that was recorded in the first quarter of 2015. Other tourist arrivals during the first quarter this year were down slightly by 2.45% compared to the first quarter of last year.

So we tend to indicate that rainfall was the underlying cause of our -- lower rainfalls the underlying cause of our retail segment performance.

Earlier this year we noticed that our -- sorry we received notice that our Cayman retail license have been extended to June 30 of this year to facilitate ongoing negotiations for a new license and we are currently waiting to receive the fully executed license amendment from the government.

These ongoing negotiations continue to be productive and cordial. Gross profit generated by our bulk segment declined by $200,000 this past quarter compared to the first quarter of 2015 due to lower revenues of approximately $1.1 million.

These lower revenues were due in part to a significant decrease in the prices of diesel fuel and electricity from 2015 to 2016 which reduced the energy component of our bulk rates and in addition to that, we noted in earlier filings that our fees that we charge for delivering water to the Water Authority from the North Sound plant in Grand Cayman decreased in the second quarter of last year due to contract extension that we received.

This bulk segment gross profit decline was mainly attributable as I mentioned to our Bahamas and Grand Cayman bulk operations. While our belief is bulk operation gross profit this past quarter remain consistent with the first quarter of last year at approximately $315,000.

Our service segment generated a gross profit of approximately $181,000 this past quarter compared to a loss of a $137,000 in the first quarter of 2015, and this is on higher revenues of approximately $650,000 due to our 51% acquisition of Aerex in mid-February of this year.

On February 11, as we have noted we acquired a 51% interest in Aerex for approximately $7.7 million in cash. On April 28, we filed an amended Form 8-K which included the 2015 audited financial statements of Aerex as well as unaudited consolidated pro forma results of the company in Aerex for 2015.

We are very excited about this acquisition which gives us access to the U.S. membrane water treatment equipment market and provides a platform to potentially expand our traditional design build operate water treatment business into the U.S. market.

We’re already seen one large desalination plant in California completed under a design build operate contract and we are aware of others that are being considered in California and Texas.

We believe that the current membrane water filtration market size of approximately $200 million in 2016 provides us with ample opportunity to expand the Aerex business using our more than 40 years of knowledge, designing, building, and operating this type of equipment.

And in addition to that, as I mentioned, we see the added value of expanding our traditional build and operate business into the U.S. We’ve historically bought equipment ourselves from Aerex and its competitors and are therefore familiar with the competition from a customer perspective.

And as a final comment, investors should keep in mind that due to the nature of Aerex's business, we expect its revenues will fluctuate more than the revenues that we have historically generated under our long-term water supply contracts and utility license.

Just looking at our projects, on April 21 of this year, we reached another significant milestone in the development of our 100 million gallon per day seawater desalination plant in Mexico with the submission to the State of Baja California of our binding tender offer to design, build and operate this plant for 37 years.

We believe that our proposal is very competitive and it reflects our deep knowledge of a project that we have been developing for quite some time.

The State of Baja California accepted two other proposals, in addition to ours, and intends to announce the results of its technical evaluation next Friday, on May 20, at which time the financial proposals of all the technically compliant bidders will be publically disclosed.

So we will keep investors apprised of any developments regarding this very important project. So Gail, with that I would like to just open the call up for questions..

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Michael Gaugler of Janney Montgomery Scott. Please go ahead..

Good morning everyone..

Hey Mike how are you?.

Good. Rick you mentioned that California and Texas as really the markets for Aerex on a go-forward basis.

I’m just wondering would there be anything to preclude Aerex from befitting from Rosarito if you are ultimately selected as the developer of that project?.

Absolutely not I mean we definitely have that in mind..

Okay. That was really all I had. Thanks..

Thanks Mike..

Our next question comes from Gerry Sweeney of ROTH Capital. Please go ahead..

Hey good morning guys. Thank you for taking my call..

Sure, Gerry.

How are you?.

Doing well, thanks Rick. A question on the bulk side, the revenue coming down, you talked specifically about just general reduced energy cost flowing through.

How -- I’m curious as to how volumes have been on that side of the business?.

Actually in Grand Cayman we saw a slight increase in volumes this past quarter in the Bahamas I think it’s been fairly consistent. We’ve mentioned over the last couple of years that the government there in the Bahamas has been -- has undertaken a loss reduction program. So they’re staying around the minimum volumes now for that business..

Gerry, I just wanted to add that volumes don’t have a huge impacts on our bulk business they are much more relevant to the retail side of our operations because our bulk contracts have minimum take or pay arrangements. So incremental volumes above the minimum probably contribute to gross profit don’t have the huge impact on gross profit.

They don’t have the impact on gross profit let’s say an increase in volume has in the retail segment..

Got it, it’s a good point. Also I know you talked about I think in the Bahamas at some point they were trending down towards the take or pay level and there potentially could be some opportunity for the Bahamas government to expand some of that bulk business into other areas that may need water.

I mean it was a little bit of a corporate ended statement but just curious if there was an opportunity on that front at all for the future?.

Well my understanding is that the government is interested in encouraging more people to connect. The actual connection rate in that side I think is quite low compared to other jurisdictions that we operate in.

I don’t remember the exact percentages but I think it’s somewhere less than 50% in the households are connected to the public water supply there so.

There is an opportunity to encourage people to connect to the more reliable source and there is a big development there that’s -- the Bahamas development that and the government has its sights on supplying them as well but that I think it’s been in the news quite extensively that that project is having some issues itself so..

Got it. And then just a couple of quick housekeeping items.

I assume energy cost impact stabilize, if not down back a little bit so, is it fair to say that we’re done with some of that energy pass-through declines?.

Well, you tell me, I don’t know how the energy market is going to go over the next year or so but I mean seems to me there is opportunity for it to go up..

Yes, I mean on a look back basis over the last quarter it seems to have stabilized so..

Yes..

And then could you just go over that the G&A I think you mentioned it shift around by $550,000 it sounds like there was a couple puts and takes in their little less on the impairment charge but a little bit more on some of the other charges that gets around acquisition and some -- wasn’t sure if there was something else.

If you could just spend 30 seconds on that just so I think cost might be --.

You want me to take this Rick?.

Yes, you can do. You go ahead..

Well, first of all we have the incremental G&A expenses from the Aerex acquisition for the six week period well they were included in our results. Then we also have the incremental expenses associated with the litigation in Mexico that was raised by EWG. And so, and then we had some acquisition cost and under current GAAP.

The legal fees that you incurred and the accounting fees things like that and under previous accounting guidance you could capitalize this cost but years ago they changed the guidance, so all that stuff is expensed by us.

So really those things the Aerex G&A increase obviously will be there going forward and they encourage general and administrative expenses that will be incorporated in our results through the rest of this year. With respect to the legal fees, we incurred with the Mexico I don’t know if we could predict how that will go.

And then obviously we won’t have incremental expenses associated with the Aerex acquisition now that has been closed. So hopefully that’s helpful to you..

Yes and I mean what I was really trying to get out, what is baseline G&A, I mean what was the litigation cost and what were the acquisition cost provided from that?.

We disclosed if you’ll take a look in the 10-Q..

Yes..

There is a discussion of the litigation both in the footnotes to the financials and is disclosed in the MD&A section and the exact amount of legal fees that we incurred for that litigation were disclosed therein. So you can take a look at that..

Okay, appreciated. Thank you. That’s all from my end..

Thanks Gerry..

Our next call comes from -- question comes from Blake Todd of Two Oaks Management. Please go ahead..

Good morning guys..

Good morning.

How are you?.

Doing great. In your press release you talked about the proposal that you put to Mexico and there is three entities that you say that did it.

And could you explain what those three different entities were that did the proposal?.

Yes, it’s public information I mean they ourselves obviously which it was a consortium consisting of NSCR well which is our subsidiary, Newwater which is a Singapore company and Degrémont -- Suez Degrémont which is a one of the largest water companies in the world.

So the three of us is consortium, the other group is essentially Hyflux out of Singapore and the third group is Aqualia out of Spain..

And we know or have you will this be part of the disclosures when we get into the financial as to what percentage ownership each piece will have?.

Well, I mean what we’ve disclosed in the past is that we expect to make our long-term revenues through 15% equity interest in the project and/or less and service fees we’re providing operational services to the plant and the distribution and the pipeline there, so that’s as much as, as we can tell you at this point.

I mean all the financials information is still undisclosed by the client or anything like that. So we don’t know what the rates are that the competitors have charged and we’re certainly not going to disclose ours right now..

And then one last thing May 20, Mexico comes back and says these particular bids are technically feasible.

I’m assuming that they will then ask for proposals from one or three of you for the financing; is that correct?.

That was all submitted on the 21 of April. So it was in two packages and they don’t open the financial package until they determine whether the proposal is technically compliant..

Super. Thank you for the color..

Sure. No problem..

[Operator Instructions]. Our next question comes from John Bair of Ascend Wealth Advisors. Please go ahead..

Thank you.

One of my questions was just answered; the other one is that you would kindly shed some light on what’s going on in Bali these days for you?.

David, do you want to take on that?.

Yes, things in Bali haven’t changed. The local economy is surely not doing very well there. And as a result, our sales volumes has actually declined in the first quarter this year as compared to first quarter last year. We’re in the process as we said at the moment, as we said in the Q; we’re trying to find a partner there.

We still believe that the price -- the markets has got a great potential. But at the moment we’d like to bring in a partner that would help us deal with the ongoing losses that we have and a party that could really market properly to the local hotels and to the government itself.

So, I mean ultimately if we don’t find a partner we will have to take some kind of impairment charge against these assets and we’ve talked about that openly both in the Risk Factors of our Q and in the discussion in the retail segment the MD&A.

But we think the project itself and the market have a lot of potential when we think it’s -- it would be an attractive investment for some party and so we’re marketing it now and we’ll see how that goes.

I can’t tell you that the entire Indonesian economy and also they’re approached to their water assets is somewhat confusing to us because when we first entered the Bali market years ago they had a water crisis at that time and it’s only grown worse and they continue to tap into the fresh water aqua for there and with long-term disaster results for them the government there seems almost unable to address the issue.

So hopefully they will come around and realize the importance of desal, we have actually talked to the Water Utility there at times and they have been very interested in doing something with us but nothing seems to happen there. It’s always difficult reaching a deal with any government and it seems to be the more so in Bali.

But like I said we still believe in the market and we’re hopeful that we could find a partner that would help us not only build out that plant but also grow the business there but we’ll just have to see how it goes..

So if I’m hearing you correctly, you would still retain an interest in the project; is that correct?.

Yes..

Yes the ideal situation for us would be to continue to remain a partner but to also use our expertise in the capital of our new partner to build additional plants and the entire Indonesian market needs desal is just getting them to pull the trigger on it, getting them to actually take actions seems to be the impediment there..

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

Yes, thanks Gail. Just wanted to thank everybody again for joining today and look forward to speaking with you again in August to discuss our second quarter results. Thank you..

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