Rick McTaggart - CEO and President David Sasnett - CFO.

Gerry Sweeney - ROTH Capital Steven Percoco - Lark Research John Bair - Ascend Wealth Advisors Thomas Hiller - Tortoise Capital.

Good day and welcome to the Consolidated Water Company's First Quarter 2018 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. Sir, please go ahead..

Thanks, Steven. Good morning, ladies and gentlemen and thank you for joining us today for a review of our first quarter 2018 operating and financial results and to hear 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 the first quarter of 2018.

Our desalination business continued to deliver consistent results, while we saw a noticeable pick up in our order activity in our manufacturing business.

Our Mexico project reached a major milestone this past quarter when in February we signed a subscription agreement with two world-class global corporations to provide 75% of the equity funding required to construct and operate our 100 million gallons per day seawater desalination plant and delivery pipeline in Rosarito, Mexico.

Our core desalination operations continued to produce stable results with increased volumes and retail segment and energy charges from our Bahamas bulk operation driving revenue growth. Our previously announced upgrade to the Windsor plant in the Bahamas is underway with an anticipated completion later this year.

Negotiation to renew our Cayman Islands retail license continues during the quarter with progress being made towards bringing discussion to a conclusion. We continue to have a bullish outlook on potential volume increases on our Cayman Islands market driven by positive tourism industry trends.

Tourism activity in the Cayman Islands has continued to benefit as tourist shift to destinations like the Cayman Islands that were not affected by last year's hurricanes in the Caribbean.

Tourist arrivals by air to the Cayman Islands increased by more than 20% this past quarter compared to the first quarter of 2017 with over 134,000 tourists visiting. Weather conditions in the Cayman Islands remained relatively dry with rainfall in our license area at approximately 63% of the 30 year average for the first three months of this year.

Our retail water sales have historically been impacted by weather conditions and tourist arrivals. So these numbers if they hold going forward would generally indicate enhanced 2018 retail water sales.

And anecdotally its actually been difficult for us this year to find hotel accommodations for our visiting staff and directors during certain periods of the year due to significant increase in visitors to the Cayman Islands. The luxury hotel chain Hyatt has announced that it will operate a new 351 room, 5 Star resort in 7 Mile Beach, Grand Cayman.

It will be constructed within our exclusive retail license area and is expected to open in late 2020, so hopefully that will help us get hotel rooms. The project was granted full town planning permission earlier this year.

Work on the $55 million plus airport expansion project in Grand Cayman also reached another major milestone this week with the opening of any departure launch. This project will more than double the capacity of the Grand Cayman airport to support surging tourism numbers and it is expected to be completed by the end of this year.

While manufacturing revenue declined during the quarter for reasons that David will explain in a minute, it is important to note our manufacturing operations saw significant pickup in order activity during the quarter.

Based on current orders in hand, we expect revenues generated by our manufacturing business over the remaining nine months of this year to exceed those for the last nine months of 2017. Our Rosarito project maintained its positive momentum 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 water industry and serves as a blueprint for future opportunities that we choose to pursue. At this point I’d like to ask David to discuss some of the details of our 2018 first quarter financial performance..

Thank you, Rick and good morning everyone. Our total revenues for the first quarter of 2018 were $15.3 million as compared to $15.7 million for Q1 of last year. Our desalination business benefited from a 7% year-over-year increase in bulk segment revenues attributable to higher sales volumes and energy pass-through charges in the Bahamas.

Our retail segment revenues declined slightly despite a 3% increase in retail sales volumes due to a shift in relative sales volumes in Grand Cayman at larger customers with a lower effective water rate.

Our manufacturing segment revenues for the quarter decreased by just over 800,000 from the first quarter of 2017 due to our decision to allocate a portion of Aerex's plant capacity during the first and early second quarter course of 2018 to the production of key components for the refurbishment of our Windsor Plant in the Bahamas or these components sold to third parties they would have generated revenues of approximately $715,000 in the first quarter of 2018.

However because this business between Aerex and Consolidated Water Bahamas represents an intercompany transaction between two subsidiaries of our company, this $715,000 in revenues was eliminated for financial reporting purposes as required in a generally accepted accounting principles.

Our gross profit for the first quarter of 2018 amounted to $6.6 million as compared to $6.8 million for the first quarter of 2017. This marginal year-over-year decline in gross profit stems from the comparable underlying marginal decline in our revenues from the first quarter of 2017.

Our consolidated general and administrative expenses amounted to $4.8 million, and amount was consistent with the G&A expenses incurred for the first quarter of 2017.

It’s important to note that this amount includes approximately $650,000 in development expenses for our Rosarito project expenses that we will cease incurring once we close on this project.

Today we've incurred approximately $23.7 million in development expenses and invested approximately $21.7 million for land and rights away for our Rosarito project.

First quarter 2018 net income attributable to Consolidated Water stockholders was $2.1 million or $0.14 in earnings per share on a fully diluted basis as compared to $2.6 million or $0.18 per share on a fully diluted basis for the first quarter of last year.

We continue to maintain a very strong debt-free balance sheet cash with cash equivalents of $43.7 million and working capital of $58.6 million at March 31, 2018.

Our 2018 first quarter cash flows provided from operating activities were almost 700,000 as compared to the first quarter last year when operating activities used approximately the same amount of cash. In the quarter we returned 1.3 million to our stockholders in the form of dividends.

Capital expenditures for the first quarter of 2018 totaled $2.9 million and were driven primarily by the refurbishment and upgrade of our Windsor Plant at Bahamas, and the expansion of our Governor's Harbour plant in Grand Cayman. We believe these improvements will generate efficiencies in future periods.

We expect total CapEx for the remainder of 2018 to be approximately $14.4 million as we complete these two projects and purchase other capital items in the ordinary course of business. And with that, I'd like to turn the call back over to Rick..

Thanks David. So Steven, we’d like to actually open the call up for questions..

[Operator Instructions] And our first question comes from Gerry Sweeney with ROTH Capital. Please go ahead..

In the press release there's a line in regards to Mexico and they talk about the equity funding et cetera, but it also talks a little bit about the land sale to the group.

Could you expand on that and is that more imminent in terms of a timeframe and what that would do in terms of cash outlay or change the balance sheet or anything like that in terms of your financial statements?.

The APP contract we signed with the Mexican government contemplates the sale of that land to the project but that will not occur until financial flows to the project. So since all this happens at once, there won’t be a sale of the land in advance of the financial flows..

And then with the retail revenue down slightly and I guess that was due to as you said the allocation to some customers but I guess lower water rates. With all the influx of tourism and tourists into the area and even or hotel rooms, would you expect an increase in the revenue going forward.

I mean there's a little bit of a mismatch we talk about more tourism coming in but then we saw lower revenue because it was allocated to different customers.

How do we work that out on a go forward basis?.

Well you have another factor here that's not predictable Gerry and that's rainfall because nothing drives the - water more than rainfall. We can get the statistics on - we talked about tourists that arrive by air because they're the ones that obviously to stay in hotels. Cayman Islands gets some large number of tourist coming on cruise ships.

It's very difficult to predict quarter-to-quarter what's going to happen because you don't know what's happening with the rain. But I think the increase in tourism shows that we're all that - we expect revenues to increase in Grand Cayman that’s a very positive trend.

It's just hard to predict from quarter-to-quarter because you obviously don’t know about the rain..

Directionally it's fine, just over time.

We should expect higher revenue over time with increase tourism?.

Exactly. I think that the customer that shift to a lower rate customer has happened and I think you're going to see any further change that should be stable going forward is the reason more water than there were last year essentially.

So, but hopefully if retail revenues increase relative to were purchased by the customers that shift will start to mitigate that..

That's what I was going to say. I mean the - it should just be upside going forward as the hotels and other properties that condominium is more water to - the cadence to the higher tourist numbers, the restaurants all that..

And then switching over to the manufacturing side. I understand the allocation of some of the equipment towards intercompany related aspects but you also mentioned order activity is picking up from existing and new as well as new customers.

Any details on that new customers pipeline how you feel about the business visibility, how much, how little anything along those lines?.

Yes, toward the new customers that we got orders from are in the segments that we think bode well for the future. I mean one of them is a large piping order which we're really pleased that we were competitive on this and we hope to get more of these as it is - it’s a much bigger market than just the municipal equipment market.

And the other project is a municipal project and a little bit different than what we've been used to doing but we think again it opens up a new market, a new sales channel for us at Aerex.

So we have the types of equipment that we've made historically for municipality's membrane based treatment, we have this new piping water channel and we have a municipal, it’s a wastewater project that we’re working on. So I think it’s very positive and I congratulate our sales guys for opening up this new market..

And Gerry, I would just like to add that we purchased Aerex they were doing business with extremely significant customer and that business dropped off, did issues with the customer of Aerex, we’ve seen return of some of that business. So we’re also very encouraged about that too.

That was a very valuable customer from Aerex and they seen to increasing their purchase activity from Aerex. As we said all along, it was never an issue with our company, there’s an issue with the customer itself..

I know you’ve never told us who the customer it is but I was curious what end market they play in.

Was it the customer specific was it end market, is that end market returning?.

It’s very specially, is a debate well it’s difference to our customer we don’t really talk about we don’t really give their name, we’re not required to, so we don’t. It’s a very specialized product, that's used to the water treatment and it requires a lot of expertise very detailed high quality manufacturing.

We’re very proud of Aerex ability to get this work to begin with, it’s not something that everybody can do but really beyond that at some point of time, if they become significant enough, Gerry we will have to disclose them because as you see reporters disposed of them with any customer that constitutes more than 10% of our revenues but till that time we'd rather just not talked about them in too much detail..

[Operator Instructions] And our next question comes from Steven Percoco with Lark Research. Please go ahead..

Can you give us any additional color on the license renegotiations in Cayman, I take it from your comments that you’re looking towards bringing the negotiations to a close that you should have something for us on the next conference call, one way or the other?.

Well, we would hope so. I mean everything continues to move in a positive manner. Obviously, we don’t want to talk about too many details of the negotiations.

I mean we are in the -- we believe the final stages of the negotiations which are really centered mainly on the tariffs and the adjustment mechanism going forward for the utility tariff, so I’d really like to say we should, could -- we have something definitive by August but of course it’s not totally within our control.

I mean we are dealing with the regulator so….

Yes, this has been a marathon on the last, as we all know the last couple of miles of marathon and the most difficult to run. So there are certain issues that have to be addressed with the regulators. We’re optimistic we can do that. I think they want to finish this as well.

So there is reason, there is initiative on both side of the table, to wrap things up we’re hopeful we can get it done. We can’t guarantee anything at this point. That’s look positive, like Rick said..

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

Good morning.

I want to circle back to the land sale if you could refresh our memory here once you get the financing in place for Rosarito and will you recover your full land costs or how does that work?.

Yes, we’ll certainly sell the land for more than we paid for or at least it will cost out, the way the transaction works we will put the – sell the land into the project company and we will receive funds for that.

We in turn will turn around and invested capital as needed to do the project but we expect we’re hopeful there will be some net cash coming back to the company after this transaction occurs..

So the full land value and whatever on top of that isn’t coming directly back to the company itself, right?.

A portion of it we get the cash back to the land and when we return we’ll turn that money back into the project. We think the whole the financial close will be able to pull some cash out of this transaction..

And my next question is assuming that the Bali operations are essentially wound down unless you can update us on the status of that and if you are having any other -- looking at other any other areas where you might be considering a Rosarito type project or you kind of putting that on the back burner until Rosarito is really off and running and ground broken and so forth?.

Well with respect to Bali, we’ve written the assets down where they essentially have not carried value. We probably would have exited the operation by now, but as we disclosed in our filings Bali loan remaining customers sued us. We had to take that lawsuit through court.

We recently received a favorable ruling from the court and that the court looked at the contract and said this can’t be litigated in Bali this is a contract that was written with the intention to arbitrate any disputes in Singapore. So they pretty much said they only want to hear the lawsuit.

Of course the customer filed an appeal and so that appeal could take up to a year to resolve and we being corporate citizen so we’re going to continue to provide water until we get clearance from the court. But it’s not going to have much of the financial impact on us.

And our cash out for the company is probably less than $300,000 in total for the year. So we’re all looking to sell the assets at some point in time to part getting one who will be willing to participate but really we have to deal with our sales in conjunction with the existing appeal.

With respect to looking at things outside of Bali, we are very interested in adding onto our business to what we consider to be the intelligent acquisitions that compliment what we do now and put us in markets where we’ll have synergies.

Unfortunately our sort of hands are tied a bit until we close this Mexico deal and we have significant amount of capital invested there. But once we close Mexico will be back on the acquisition trial I think and we've been - we’ve seen some interesting things in the market.

So we’re always eager to grow the business we just need to close Mexico first I think..

That’s kind of where I thought - kind of how you would respond on that, so that's good.

What's the objective of the entity that’s suing in Bali, I mean what to do they get out of this by dragging this out just continue to water supply?.

That’s all. We warned them, we told them through years that the operation wasn't making money and typically and most jurisdictions and most areas you just backlog the company and you’re done. This customer sued us and even though we don't think the lawsuit has to be merit we still - it hasn’t been totally dismissed because of the appeal.

So they're just trying to maintain the water supplies as long as they can. And they’ve actually slightly increased the amount of water they buy from us because I think they’re doing some additional development, but that’s it. It just a tactic on their part to try the maintain the water supply as long as possible..

So ultimately you recover some - the cost of delivering water if you prevail in this, will they end up having to?.

No they’re paying us at the moment, they are paying us but the problem is the volume that they purchased is not enough to make the plant profitable..

It’s a very small amount of water..

So they are paying us on time they don’t have an issue in that regard, but they just don’t buying water of course to turn a profit..

[Operator Instructions] And our next question comes from Thomas Hiller with Tortoise Capital. Please go ahead..

I was curious after the completion of the Rosarito project, what percentage of annual revenue do you think that would constitute for the company because I know that it's only partially owns, I was just curious if you had a general ideas to where that would lie?.

Well our 25% investment in the project will be accounted for as an equity investment. So revenues of that will be in our income statement similar to way our investment in [CBI] is handled. But we also have an incremental revenues associated with the operations and management agree we’ll have for the project.

We loan 50% of the company that actually runs the plant. We've been very careful not to disclose those numbers. They are still under negotiation with all parties involved, but obviously we think it's going be - the operating revenues will be significant to our services segment.

And we think that obviously this equity investment will generate a nice return for us. We worked 10 years on this project and - on completing and I think we'll get a nice decent return on the money we put in. But we are very careful not only to talk about this just still we have something final that we can really talk about..

And this concludes our question-and-answer session. I’d like to turn the conference back over to Mr. McTaggart for any closing remarks..

Thanks a lot, Steven. I just like to sum up that our core desalination assets continue their steady performance while our transformational Rosarito project progresses toward groundbreaking hopefully later this year. The company also is well-capitalized to take advantage of other organic or acquisitive growth opportunities.

I'd to thank everybody for joining us today and I look forward to answering your questions again in August..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..