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Edited Transcript of CWCO earnings conference call or presentation 13-May-19 3:00pm GMT

Q1 2019 Consolidated Water Co Ltd Earnings Call

George Town May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Consolidated Water Co Ltd earnings conference call or presentation Monday, May 13, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David W. Sasnett

Consolidated Water Co. Ltd. - Executive VP & CFO

* Frederick W. McTaggart

Consolidated Water Co. Ltd. - CEO, President & Director

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Conference Call Participants

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* Gerard J. Sweeney

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* John Bair

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Presentation

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Operator [1]

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Good morning and thank you for joining us today to discuss Consolidated Water Co.'s first quarter ending March 31, 2019 conference call. With us today is the Chief Executive Officer of Consolidated Water Co., Mr. Rick McTaggart. He is joined by the company's Chief Financial Officer, David Sasnett. (Operator Instructions) I'll provide some important cautions regarding forward-looking statements made by on management during the call. I'd like to remind everyone that today's call is being recorded and will be made available for telecom replay via instructions in today's press release, which is available in the Investor Relations on the company's website.

Now I'd like to turn the call over to Consolidated Water Co.'s CEO, Mr. Rick McTaggart. Sir, please go ahead.

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [2]

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Thank you, Nancy, and good morning, everyone. Thanks for joining us today on the call. As you read in the earnings release we issued earlier this morning, we've started the year with a strong quarter.

In Q1, we realized double-digit growth in revenue, gross profit and net income, driven largely by increased production activity in our manufacturing business segment, which I have to say has really come back strong this year. We expect that this year-over-year growth in manufacturing will continue over the remainder of the year given the order backlog we already have in place.

We also made good progress in other areas of our business. But before I go further, I'd like to turn the call over to David who will take us through the financial details for the quarter, after which I will discuss our recent operational activities and outlook for the remainder of the year. David?

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [3]

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Thanks, Rick, and good morning, everyone. As Rick mentioned, our total revenues grew 17% to $17 million for the first quarter with the increase primarily driven by an increase of $2.5 million in the manufacturing segment and slightly higher revenues from retail.

Manufacturing increase is a result of an increase in the number of orders and expanded project production activity. The increase in manufacturing and retail revenues was partially offset by a slight decrease of bulk and services revenues. Decrease in bulk revenues was due to the lower rates that came into effect in February for water supply for the Red Gate, North Sound plants in the Cayman Islands. For our third plant in the Cayman Islands, or actually Water Authority's third plant, North Side Water Works, are contracted and set to expire in June 2019. However, during the quarter, we secured a new multiyear contract commencing on July 1 of this year.

Our retail water segment represented 39% of our total revenues in the quarter, and bulk water represented 42% of our revenues. Manufacturing generated about 18% of our revenues and services came in at just over 1%. Lastly, manufacturing was a big increase from last year, which was only about 4% of our revenues for the first quarter 2018.

Gross profit for the first quarter of 2019 was $7 million, or 40.9% of revenues; and total dollars, which was up 13% from the $6.2 million or 42.4% of revenues in the first quarter of last year. Our G&A expenses on a consolidated basis declined slightly to $4.4 million from the $4.7 million the first quarter last year.

Other income for the quarter increased 76% to $260,000 from $148,000. Net income from continuing operations attributable to stockholders for the first quarter of 2019 was $2.6 million or 17% per fully diluted share. This was up 45%, totaling $1.8 million or $0.12 per fully diluted share for the same period last year. Including discontinued operations, net income attributable to stockholders of Consolidated Water for the first quarter was $6.2 million or $0.41 per fully diluted share.

Our net income and diluted EPS for the first quarter of 2019 to 2018 included operating expenses of about $0.5 million and $600,000, respectively, related to development costs to the Rosarito desalination process. The rise in net income for this quarter of 2019 as compared to the same year-ago quarter reflects an improvement in income from operations of approximately $1.1 million and the gain on the sale of the company's discontinued Belize operations of approximately $3.6 million.

Now turning to our balance sheet. Cash and cash equivalents totaled $38 million as of March 31, 2019, as compared to $31.3 million as of December 31, 2018. The increase in the result is primarily from the sale of our discontinued operations in Belize, and to a lesser extent, lower accounts receivables for our Bahamas operations. The accounts receivable decreased from $24.2 million at December 31, 2018, to $22.5 million in March 31, 2018, which is attributable to collections on our Bahamas operation.

Property, plant and equipment increased approximately $5.4 million, and construction in progress decreased by approximately $5.6 million from December 31, 2018 to March 31, 2019 as a result of the commissioning of the expanded plant capacity of our Abel Castillo Water Works plant in Grand Cayman in March 2019.

Our projected liquidity requirements for the last 3 quarters of 2019 include capital expenditures for our existing operations of approximately $3.3 million, approximately $5.3 million to be expended for our Mexican project development activities, and approximately $1.3 million for dividends payable.

Our liquidity requirements will also include future quarterly dividends when such dividends are declared by the Board of Directors. Our dividend payments amounted to approximately $5.1 million for the year ended December 31, 2018, and approximately $1.3 million for the 3 months ended March 31, 2019. This wraps up the financial results for the quarter, and I'd like to turn the call back over to Rick.

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [4]

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Thank you, David. Our first quarter results demonstrated that the teams representing each of our business segments are working very hard to improve our operational performance by providing excellent products and services to our clients. As I mentioned earlier, we expect the results of our manufacturing segment for the remainder of this year to continue to be better than last year's results given the healthy order backlog.

Our manufacturing operations are based in Florida where we manufacture and service a wide range of water-related products. We also provide design engineering, operating and other services that are applicable to water production, supply and treatment for commercial, municipal and industrial sectors.

Our bulk water business segment provides potable water under long-term water supply contracts in the Cayman Islands and The Bahamas, which are countries where naturally occurring potable water is scarce and where reverse osmosis desalination technology is economically feasible.

During the quarter, we executed a new 7-year bulk water supply agreement with the Water Authority-Cayman, as David mentioned earlier, which is effective on July 1 of this year. This agreement while at a lower rate secures our position as the dominant desalinated water supplier in the Cayman Islands for the next several years.

In the Cayman Islands, we also own and operate a retail water utility business, which supplies desalinated water directly to residential, commercial and public authority customers within the main tourist area of Grand Cayman. Completing the expansion of the Abel Castillo Water Works plant in Grand Cayman assures us that we can meet future water supply needs for our retail customers there.

While there are many water-scarce countries in the Caribbean and in other markets that present significant opportunities for our business model, not all areas of the world present ideal environments for further development due to changing economic and political conditions. Therefore, opportunities may arise through a strategic divestment where we can extract value and resources and utilize them on better opportunities. The sale of our Belize subsidiary, which we completed at the start of the year, has allowed us to repatriate more than $12 million in cash that we can use to fund our growth initiatives, both internal and in terms of strategic M&A.

Now in terms of environmental factors that might come into play for the Cayman Islands operation. Last year was a relatively dry year in Grand Cayman with rainfall 30% lower than in 2017 and 31% lower than the 30-year average. In the first quarter of this year 2019, rainfall amounts were higher than last year and returned to the 30-year average for the first 3 months of the year. Stay-over tourist numbers, however, continued to grow in the first quarter this year and were 8.7% higher than the first quarter of 2018. We believe that the higher rainfall amounts were the main driver for the 2% retail water volume sales decrease this past quarter. Historically, we sell more water in Grand Cayman during the first and second quarters of the year when the numbers of tourists visiting the country is typically greater and local rainfall is less versus the latter parts of the year.

Now I'd like to talk a bit about our planned Rosarito Beach desalination plant in Mexico. The plant is expected to be the largest seawater desalination plant in the Western Hemisphere designed to provide drinking water to the Northwestern coastal region of Baja California, Mexico for 37 years. The project comprises a construction of a seawater reverse osmosis desalination plant with a capacity of 100 million gallons per day to be implemented in 2 phases of 50 million gallons each. And the first phase includes the installation of an aqueduct designed to deliver potable water from the plant to Baja California's water system. While we currently own 100% of the project development company, we have executed agreements with our potential equity partners through which we will retain at least 25% ownership and the project company at closing of these agreements. In addition, we will retain 50% ownership position in the contract operator for the project.

The need for additional potable water has increased significantly over the past 3 -- few years, with Baja California's rapidly growing coastal cities becoming heavily dependent on the Colorado River, and the aging aqueduct from the River to the coastal region crosses several earthquake zones.

The Rosarito project reached 2 significant milestones during the quarter. Firstly, we were informed by a major lender that their credit committee had approved up to USD 200 million in debt financing for the project. This represents a substantial portion of the financing required to complete the first phase, and the company expects the remaining to follow according to schedule.

Second, the state government obtained 2 critical permits for the project: one for the extraction of the seawater to supply the desalination process; and the second permit for the discharge of the concentrated seawater, which is a by-product of the desalination process. Preparing the environmental studies, public consultations and permit applications, which was our responsibility, has been a multiyear process. So we're very pleased to finally reach these critical milestones for the project.

Also during the quarter, the Congress of the State of Baja California renewed its key authorizations which were required for the project, bypassing Decreto #335. This Decreto allows the state to obtain the revolving credit facility needs to secure payments for the project during the 37-year operating period. This means we can now proceed to several important steps before beginning the construction phase, including securing the remaining debt financing and the aqueduct rights-of-ways.

Now looking ahead to the remainder of 2019. As David mentioned, we're supported by a strong balance sheet and ample liquidity, both of which have continued to improve. We are focused on closing the development phase of the Rosarito project as well as expanding our businesses into new markets and complementary product lines. This includes actively evaluating acquisition targets in North America that would expand our geographic footprint and diversify our revenue streams. Our Board of Directors considers acquisitions to be a strategic imperative, particularly given our substantial cash on hand. So we are currently actively speaking with at least one potential target, and we have our eyes on others. Our ideal target will have an existing water treatment-related business and a business model similar to our Caribbean desal project model and will give us access to new markets for existing products and services.

And now in terms of the state of the industry in general. According to industry research, the global market for desalination is strong and is expected to double by 2026, reaching more than $37 billion. These researchers say that growth is being driven by multiple catalysts: from shrinking or limited freshwater resources or adverse environmental changes, to growing populations increasing the freshwater crisis, but also creating more favorable regulatory and tax environments. The driving factors -- these driving factors bode well for Consolidated Water, and we expect them to be good for our growth and opportunities, and especially for building shareholder value over the quarters and years to come.

Now I'd like to open the call for questions. Nancy?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Gerry Sweeney from Roth Capital.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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A question on the Decreto #335. If I understand that correctly, that allows the State of Baja California to go out and obtain the revolvers for payment opportunities based -- so that means the state still has to go out and get that facility. The Decreto allows them to get it, is that correct?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [3]

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That's correct, Gerry. We authorized the permissions for them to obtain that new facility, and they're in the process of obtaining that facility.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Do you know how far down the road obtaining that facility they are, with the caveat that I know it's a government agency, et cetera, and anything could change?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [5]

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Well, we're helping them as much as we can, and our advisers are helping them. So I really can't say when it's going to be finalized. But there is a bidding process that they have to go through as a government entity. I think they're in the process of preparing those documents to take it to bid.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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Okay. Great. That's helpful. And then on the north side facility on the Cayman. How much volume -- or what percent of volume is this on the bulk side? This is more for modeling purposes. I think the price of the water's gone down about 13%. So I want to figure how much of an impact it could have on just the overall revenue if that makes sense.

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [7]

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We actually don't disclose the revenues on a plant-by-plant basis in the bulk segment, so...

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [8]

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Yes. There are competitive issues there, Gerry. So we just don't disclose that information.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

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Okay. Anyway, biggest plant, smallest plant, medium-sized plant, or should I just stop there?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [10]

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Just stop there, Gerry.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [11]

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Okay, Okay. That's fair. And then did you say on the Mexico CapEx side -- I'm not sure if I heard -- did you say $5.3 million for the rest of this year?

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [12]

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Hang on a second. Let me check that number here.

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [13]

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A big part of that is payments for the remaining right of ways. So that sounds about right. I mean, I think more than half of that.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [14]

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Okay. Because I mean, obviously, it was running smaller amounts. I was just curious -- I figured there had to be a payment of a larger amount in there. Got it. That makes sense. And then I think -- I mean, one final question was -- you sort of addressed this in your commentary. I tracked the tourist inbounds into Caymans. Obviously, up a lot last year, up again this year. And the revenue was down about 2%. So it does sound like weather was the main driver. But I guess the real question is I know they're doing an airport expansion. Is this uptick in tourism directly responsible to the airport expansion, and has that been fully completed?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [15]

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Yes. So the main factor that I understand is creating this more favorable tourist environment is the hurricanes that damaged a lot of the Caribbean islands back in, I guess it would be 2017, late 2017. So a lot of those places were down for quite a few months, and it was driving tourists more toward Grand Cayman, Cayman Islands. The airport kind of facilitated that increase. I don't think it was the cause of it. But I already see notes in the newspaper where the government is talking about expanding the airport again within 5 years. So apparently, they're planning on further increases and upticks in the tourist environment there.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [16]

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Got it. Okay, that's helpful...

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [17]

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Yes. And Gerry, one thing you have to remember, the primary factor for the retail business is rainfall. I mean if you have -- because the incremental population attributable to tourism it can increase our revenues. Nothing impacts us more, whether or not it's a wet season or a dry season.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [18]

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And I guess that's just general irrigation, et cetera. So if it's dry, more irrigation, more volume, and that much larger amount than just overall tourism. Is that sort of the idea?

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David W. Sasnett, Consolidated Water Co. Ltd. - Executive VP & CFO [19]

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Yes. I mean because you've got a lot of people on going in our service area that use the water on a regular basis than our tourists. That's the base demand for the water there. And how they use water has a big impact. And obviously, if there's a lot of rainfall, they use us for irrigation and things like that.

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Operator [20]

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The next question comes from John Bair from Ascend Wealth Advisors.

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John Bair, [21]

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There's no (inaudible) like the air you breathe. Just very optimistic-sounding on the operations and order flow for the manufacturing side. And I was just wondering if most of this is related to orders for plants to operate and so forth? Or whether this is -- are these primarily domestic orders outside that?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [22]

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These are primarily third-party domestic orders. So nothing that we're going to use, which was the case earlier last year when we had to eliminate some of the revenues from Aerex. So this is all third-party stuff.

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John Bair, [23]

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Can you say whether -- are these mostly like municipal-type orders? Trying to get a sense of public/private kind of -- sense of where this might be coming from.

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [24]

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Yes. I mean it's a mix, John. I mean there's some specialty products that we're making for the power generation industry. We're also making products for large wastewater plants. So sort of a mix. And we also have some contracting work that we do from time-to-time through Aerex, water treatment related projects that are impacting revenues this year.

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John Bair, [25]

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Okay. And to that point, do you have much of any meaningful exposure to water disposal or water treatment that's related to the oil and gas business that's -- have you seen any pickup in that area? Or do you have any real exposure in that area?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [26]

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I mean from what I recall, we don't have any orders in that business right now. It was a big part of Aerex' business, maybe 4, 5 years ago. But nothing that I can think of from that segment at this time.

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John Bair, [27]

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Is that an area that you have looked at to any extent and think there's some potential upside there for sales?

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [28]

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As I said in the past, we had clients that were interested in having us fabricate equipment for them. We haven't had any sort of inquiries from them recently. They were using -- they were preparing specialty equipment to clean fracking water and that sort of thing, and that business tapered off about 3, 4 years ago. So we're not actively chasing that right now, John.

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John Bair, [29]

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Yes, okay. Very good. Good second quarter. Coming up, hopefully.

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Operator [30]

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(Operator Instructions) This concludes the question-and-answer session. I would now like to turn the conference over to Mr. Rick McTaggart, Chief Executive Officer for closing remarks.

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Frederick W. McTaggart, Consolidated Water Co. Ltd. - CEO, President & Director [31]

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Thank you, Nancy. I'd just like to thank everybody for joining us today, and we look forward to hearing from you again in, well, I guess it would be August. So take care. Thank you.

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Operator [32]

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Thank you, ladies and gentlemen. Now before we conclude today's call, I would like to provide the company's safe harbor statements that include important cautions regarding forward-looking statements made during today's call.

The information that we've provided in this conference will include forward-looking statements within 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 words or phrases usually containing the words: belief, estimate, project, intend, expect, should, will, or similar expressions.

Statements that are not historical facts are based on the company's current expectations, beliefs, assumptions, estimates, forecasts and projects 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 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: continued acceptance of the company's products and services in the marketplace; changes in its relationships with the government of its jurisdictions in which it operates; the outcome of its negotiations with the Cayman government regarding any retail license agreement, its ability to successfully secure contracts for new water projects, including the project under development in Baja California and Mexico; its ability to develop and operate such project's profitability and its ability to renew existing bulk water supply contracts; its ability to collect its delinquent accounts receivable in the Bahamas; and its ability to manage growth and the other risks, 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 the conference call 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 changes in events, conditions or circumstances on which any forward-looking statements is based, except as it may be required by law.

Before we end today's conference call, I would like to remind everyone that this call will be available for replay starting later this evening and running through May 20.

Please refer to today's earnings release for dial-in replay instructions available via the company's website at www.cwco.com.

Thank you for joining us today. This concludes the conference call. You may now disconnect and have a good day.