Earnings Call: Q2 2020

Aug 6, 2020

Thank you for standing by. This is the conference operator. Welcome to the Tecnoglass Inc. 2nd Quarter Earnings Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Rodney Neissier, Investor Relations. Please go ahead. Thank you for joining us for Tecnoglass' Q2 2020 conference call. A copy of the slide presentation to accompany this call may be obtained on the Investors section of the Tecnoglass website. Our speakers for today's call are Chief Executive Officer, Jose Manuel Daes Chief Operating Officer, Chris Daes and Chief Financial Officer, Santiago Giraldo. I'd like to remind everyone that matters discussed in this call, except for historical information, are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding future financial performance, future growth and future acquisitions. These statements are based on Tecnoglass' current expectations or beliefs and are subject to uncertainty and changes in circumstances. Actual results may vary in a material nature from those expressed or implied by the statements herein due to changes in economic, business, competitive and or regulatory factors and other risks and uncertainties affecting the operation of Tecnoglass' business. These risks, uncertainties and contingencies are indicated from time to time in Tecnoglass' filings with the Securities and Exchange Commission. The information discussed during the call is presented in light of such risks. Further, investors should keep in mind that Tecnoglass' financial results in any particular period may not be indicative of future results. Tecnoglass is under no obligation to and expressly disclaims any obligation to update or alter its forward looking statements, whether as a result of new information, future events, changes in assumptions or otherwise. I will now turn the call over to Jose Manuel, beginning on Slide number 4. Thank you, Rodney, and thanks everyone for participating on today's call. I am exceptionally pleased with our talented team and their unwavering commitment to excellence during this unprecedented period. This was demonstrated by our solid operating performance in the 2nd quarter. Our structural advantages and automation initiatives help us to produce record gross margin, operating margin and adjusted EBITDA margin. We were especially thrilled to achieve these strong results without taking any headcount reductions related to the economic impact of the COVID-nineteen crisis. The quarter included 2 fewer weeks of invoicing related to the previously announced downtime at our production facilities. We took proactive steps to post production and implement the safest of working conditions at the onset of the pandemic. This allowed us to quickly accelerate invoicing activity once we reopen the facilities in mid April. The timing aligned well with our customers' delivery schedules and the pace of invoicing improved significantly as we progress through the quarter with May June having sequential incremental revenues. We expect to recover that deferred revenue in future quarters. In June, we hit a monthly record level of residential orders and end market, which now represents 90% of our trailing 12 months U. S. Revenues. Momentum in residential remains strong with low mortgage rates and improving single family residential activity providing a strong demand for new homeownership. On the commercial side, despite some project delays, our backlog continues to grow to record levels, representing an encouraging long term pipeline of activity. We remain focused on further penetrating our key U. S. Markets and capturing share in additional cities with attractive commercial and residential demand profiles. In the quarter, 97% of our revenue and 88% of backlog was in the U. S. Latin America has been slower to recover, although this market now represents a significantly lower portion of our revenue compared to a year ago. That said, we continue to expect the U. S. To be the primary driver of our growth in the quarters and years ahead. Our strong balance sheet continues to support our growth ambitions. A strong working capital management, cost reduction initiatives and benefits from a high return automation initiatives collectively helped us to generate the highest cash flow quarter in our history. And third, we were able to further improve our net leverage ratio to 2.2 times and finished the quarter with a very strong liquidity level of 136,000,000 dollars As we move into the balance of 2020, we have ample financial resources to continue executing our growth strategy, while further enhancing our position as a premier architectural class leader in the U. S. I will now turn the call over to Chris to provide additional details on our backlog. Thank you, Jose Manuel. Moving to our backlog on Slide number 5. Based on our sequential quarter improvement and conversations with many customers, we believe that the words of the economic crisis should be behind us. A valuable element of our business is that we have a multiyear view of projects in our pipeline on the commercial portion of our revenues combined with a rapidly growing residential operation. We ended the quarter with an attractive position commercial backlog across the U. S, which grew an impressive 4.8% year over year to a record of $550,000,000 The U. S. Represents 88% of our backlog compared to 84 percent in the Q2 of 2019. We continue to build upon our U. S. Growth strategy through best in class products and expanding customer relationships, which supports our confidence in our U. S. Market positioning. Fortunately, most projects are still progressing according to plan now that construction is permitted in all markets. We are working as close as ever with customers to get real time updates on project timing to help us best manage production schedules and working capital turns. We are getting our critical products to job sites as quickly and efficiently as possible. Feeding and quoting activity in the U. S. Has stayed in line with pre COVID levels, which marks an encouraging trend for the recovery. In residential, which as a reminder is not fully captured by our backlog, we have been very pleased with our continued penetration into more single family projects since we entered that end market in 2017. In recent months, we have taken our initial steps beyond South Florida and into other markets in Central Florida and the Panhandle. We have an exciting opportunity to replicate our U. S. Playbook in residential to win new customer relationships and expand our geographic footprint over time. Recent U. S. Housing data suggests a quick recovery is taking place, which adds additional catalyst to our rapidly growing reputation in residential. Before I hand the call over to Santiago, I want to make sure that all of our team members know how proud we are of their contribution. While the downtime of our facility impacted our regular cadence of invoice for the quarter, we were extremely pleased to demonstrate our commitment to protecting the well-being of our employees, customers and partners. The workplace protection that we implemented included reconfiguration of processes to incorporate social distancing and other best practices while maximizing productivity. With most of our vertically integrated operation co located within the same campus, we were able to adapt quickly and efficiently. While market uncertainties understandably persist today, we believe we have addressed many factors under our control to continue safely growing with our customers and delivering additional value creation to our all stakeholders as the national and local economies recover. I will now turn the call over to Santiago to discuss our financial results and outlook. Thank you, Christian. Beginning with our capital resources on Slide number 7. A key priority for us during the quarter was to reinforce our balance sheet strength for continued success. We made great progress on that front. We generated a record cash flow from operations of approximately $24,300,000 This was in excess of adjusted EBITDA, reflecting aggressive cash management such as tight cost controls, working capital improvements and automation benefits. With the recent completion of a significant phase of growth investments, CapEx was largely limited to maintenance spend. These collective actions helped improve our total liquidity to $136,000,000 as of June 30, representing an over 40% increase compared to $95,000,000 at the end of March. We further deleveraged our business to end the Q2 at a comfortable level of 2.2x net debt to adjusted EBITDA with no significant maturities until 2022. From a capital allocation perspective, we remain prudent in our approach with a near term focus on balance sheet strength and returning a portion of capital to shareholders through our dividend. Looking at the drivers of revenue on Slide number 8. The month of April represented the majority of lower revenues for the quarter, primarily due to the 2 non invoicing weeks during the first half of the month. As we have discussed on today's call, we experienced a significant demand recovery that drove sequential monthly revenue improvement as the quarter progressed. This sequential revenue improvement was mainly in the U. S, which represented 97% of revenues for the quarter with revenues from Latin America being slow to recover as construction sites continue to prepare for safe operations. U. S. Revenues for the quarter were $79,100,000 compared to $99,300,000 in the prior year quarter. It's important to remember that a majority of the revenue not invoiced during the quarter represents active projects in backlog, which we expect to deliver in future quarters. Adjusting for those 2 non invoicing weeks, our U. S. Revenue was down in the high single digit percent range, which we believe was more reflective of our market environment. Additionally, in the prior year, the Q2 of 2019 represented our highest revenue quarter on record, which provided for a difficult year over year comparison. In June July, our U. S. Revenue was down a more modest mid single digits, helped in part by residential, so we feel good about the duration of our U. S. Business into the Q3. In Colombia and other Latin American countries, the steep decline in revenue was a function of significant business disruptions. We experienced delayed activity with many customers have been slow to adapt to the expensive preparations required at job sites to adhere to varying COVID-nineteen guidelines. Revenues in Latin America remain in the early stages of recovery. Looking at the drivers of adjusted EBITDA on Slide number 9. We focus our efforts on operational excellence to achieve record margins in gross profit, operating income and adjusted EBITDA for the quarter. We improved adjusted EBITDA as a percent of sales by an impressive 580 basis points to 28.4% compared to 22.6% in the prior year quarter. In dollars, adjusted EBITDA was $23,300,000 compared to $25,800,000 with lower revenues mostly offset by a 4 70 basis point improvement in gross margin to 38.8 percent and a $4,000,000 reduction in SG and A. The improvement in gross margin primarily reflected lower raw material costs attributable to lower aluminum prices, lower direct labor and material waste from our automation initiatives as strong dollar and favorable mix of revenue during the quarter. We expect continued year over year margin improvement for the rest of the year, given some sustainable benefits related to our automation investments and weak local currency for the rest of the year. The reduction in SG and A was primarily driven by less variable costs related to shipping, travel and commissions, given lower revenues in the quarter. We continue to monitor areas where we can limit cost, but we are encouraged by improvements in our markets over the past couple of months. We believe that our lean, highly efficient and vertically integrated operations leave us in a great place to maintain our industry leading margins as we look to capitalize on the recovery. Looking at the activity in our markets on Slide number 11. Consistent with our revenue trend and recent improvement in the Architectural Billing Index, we believe that the worst of the pandemic related economic impacts are behind us. U. S. Activity is normalizing as many economies continue to reopen and customers pick up the pace on projects. The COVID-nineteen outbreak in Florida has not had an adverse impact on our major projects in that market. On the residential side, we are seeing promising trends that indicate that the rebound taking place has a long runway. Increasing housing starts and a strong order growth reported by many large public homebuilders continue to provide evidence that the new residential demand is strong. As Jose mentioned earlier, in June, we reached a monthly record for residential orders. We typically see our residential orders translating to invoicing over 60 to 90 day period. Residential now represents 19% of our U. S. Revenue and is likely to remain the fastest growing portion of our business. Moving to our outlook on Slide number 13. We are encouraged by our pace of activity into the month of July. We are working closely with our customers to service existing projects and we are gaining share as opportunities arise to outperform in all markets. Based on our current momentum and invoicing schedule, we expect sequential monthly revenue to grow as we move through the Q3. We expect the U. S. To represent a significant majority of our revenues through the year, with growth led by single family residential sales. Our exceptional gross margin performance in the 2nd quarter included returns on automation initiatives, which are contributing to results as planned. During the quarter, we also benefited from favorable timing of input costs and manufacturing versus installation revenue. As our markets stabilize, we expect gross margins to trend back towards a normalized level in the low to mid-30s range. This normalized margin is unchanged from our previously communicated range that had already factoring the benefits of automation initiatives. In summary, we are positioned to successfully navigate the current environment with our structural advantages, strong liquidity position and industry leading margins. As we execute our strategy during this unprecedented period, we will maintain our focus on safely serving customers, aggressively managing costs, strengthening our balance sheet and generating returns for our shareholders. With that, we will be happy to answer your questions. Operator, please open the line for questions. Thank you. We will now begin the question and answer Our first question comes from Mike Schliske of Collier Securities. Please go ahead. Good morning, everybody. Good morning, Mike. Good morning. It looks like a lot of your EBITDA margin in the quarter, a lot of the growth was due to implementation of automation. Do you have any way to quantify how much that might have been in the quarter? And then I appreciate your gross margin comments, Daniel. But can you comment on sustainable are these EBITDA margin levels going forward? Yes. Thanks, Mike. There's a few moving pieces here. Obviously, the mix of our revenues plays a part. But we as we had indicated before, we felt that being able to achieve at least 150 basis points of higher year over year margin was certainly attainable. Based on what we're seeing with the automation, I think we can estimate that at least 200 basis points versus the gross margin that we ended up with at 2019 is probably a reasonable run rate to go with. There are, of course, other moving pieces depending on as I was explaining, depending on how the mix of the revenues come in place. But assuming stable mix, I think 200 basis points could make sense year over year going forward. Thanks for that. I also want to ask about your expansion into Central Florida and the Panhandle. I guess I was kind of curious what's the next area you might go into after that and the timing of that? I'm kind of curious whether if you're seeing some rapid growth in some of the housing market here, would it make sense to accelerate your plan to expand your residential footprint given the fact that there could be any opportunity to gain some share as that market comes back here? We are expanding as our logistical team can afford to do it. The housing market, the residential has a totally different outlook than the commercial. There's many small orders and in many different places. The delivery and the logistic to take it there to the place and on time is totally different. So we are expanding geographically as much as we can and as fast as we can. We are now up to Pensacola and we're planning to move all the way to Houston between here to the end of the year and next year. And also moving along the East Coast line, we are now up to Jacksonville in very small places and we plan to move all the way to the Carolinas. We are designing product for those areas. We are getting all the logistical together to be able to do it properly, because if you get into a market and you start failing, it's better not to do it than to do that. Sure. That makes sense. Thanks for that color. Maybe one last one for me. Can you give us any sense of the progress or the kind of status that you have on the refinancing or renegotiating your debt as due in 2022? Any thoughts there on savings of interest costs or other parts of that process at this point? Absolutely, Mike. We've been working on that since the beginning of the year, exploring our different options. Clearly, there was a period of time where there was so much volatility that nothing really could be expected for certain. The good thing is that we're now seeing that those options that we were evaluating are opening up again. And depending on market conditions, we certainly think that what we do going forward will carry interest savings for the company. So we're well ahead. We're working with different parties to be able to do that. We haven't decided what the structure will be. But in any event, each one of the different alternatives that we have in place will be at a lower cost than we currently have. So from an interest perspective and an EPS perspective, that would be a tailwind probably next year and going forward. Okay. Thanks so much for that answer. And all the answers, I appreciate. I'll hop back in queue. Thanks, Mike. Our next question comes from Josh Wilson of Raymond James. Please go ahead. Thank you. Good morning and congrats on the quarter. Thank you, Josh. Good morning, Josh. Good morning. Could you talk about the improvement you're seeing in quoting and bidding as it relates to the different geographic regions in the U. S? Yes. We saw a lot of stop quoting and especially all around the country even in South America because of COVID in the month of March, April, May. June was a lot better. July was great because everybody that was delayed, the quoting and the job came back and we're now back to I believe around 90% of what we were. There are some areas where I don't see any improvement like in hotels. Hotels are being delayed and I don't know for how long. And large condominiums in South Florida are also delayed. But the rest, I mean, the small condominiums, rentals, even office buildings and mixed use buildings are all in place. And New York and Boston area, we're doing really good. We're closing a lot of new projects. So I believe the U. S. Is a very resilient country and we're going to make it soon. I mean, sooner than later, everything is going to go back to normal. Got it. And on that topic, as it relates to some of the more infamously impacted categories, what are you hearing from your customers in terms of their outlook for office and multifamily? Well, in multifamily here in South Florida, we depend a lot on the people from outside of Florida. We're seeing a lot of New York's and Boston and even Canada people coming and buying. So that's why a few of the buildings are being built. And we are still not seeing any influx from Latin America, which is one of the largest markets, Brazil, Colombia, Venezuela and then Russia. So we have to wait for that. As soon as that reopens, I believe we're going to have a multitude of buildings going up because the owners are ready, the developers are ready, the GCs are ready. It's just a matter of getting the people coming here. Got it. And then Santiago, can you give us a sense of what think CapEx will be for the year? Very minimal, Josh. As we had indicated before, the growth CapEx and the automation initiatives have been fully completed. They're fully operational now. So for the rest of the year, it would be mainly maintenance CapEx, perhaps a couple of $1,000,000 but not much more than that. And that's in line basically with what we had expected for the year. The good thing is that we had already completed our investments, so we're not really having to delay anything. With the completion of this phase, we're pretty much set as far as our installed capacity goes for the next few years. So my expectation is that the rest of the way will just speak to mainly maintenance CapEx. Got it. Good luck with the next quarter. Thank you. Our next question comes from Tim Wojs of Baird. Please go ahead. Hey, guys. Good morning. Nice job on the profitability. My first question, Santiago, is just really like a clarification. The 200 basis points of kind of gross margin going forward, is that kind of a go forward comment, just given the strength year to date? Or is that kind of what you would expect for the full year? No, I think that for the next couple of quarters, we can get a couple of 100 basis points over what we ended up 2019 with. So if we ended up with 31.5%, I think low to mid-30s is the new norm basically. I think getting to the mid-30s is achievable, but I was as I was saying earlier, there is a few moving pieces here. Obviously, we can't control raw aluminum prices. In the last Q, they were as low as $1400 per ton, they're back to $1700 Going forward, we expect to have a little bit more of installation revenues versus manufacturing revenues. So there's a few moving pieces, but there's also some structural things that are going to be in place. And I think that gets us to the 150 to 200 level, which would equate to 34%, 34.5% as opposed to 32% or so that we ended up 2019 with. Okay. That's fair. And then on the back half, do you think on a year over year basis your mix of installation versus manufacturing will be more normalized or do you think it will still skew towards manufacturing? I think it will be more normalized during the 1st couple of quarters of this year. GMP was completing a few large projects based on our backlog schedule there due to ramp up Q3 and Q4. So we should have less of a tailwind related to mix for the next couple of quarters. And that's why you wouldn't expect to be able to reach 38%, 38.5% gross margins, partly because of that. So we're kind of normalizing for mix and trying to understand the other moving pieces like I was saying such as raw aluminum prices and others. But in any event like I was saying because of the automation and the tailwinds on labor cost and whatnot we should be able to get to the mid-30s. Okay. That's clear. Thank you. And then just on the residential business, is there any way to frame what those June orders look like and kind of a view now what the second half in residential could be and how that business can actually perform on a full year basis in 2020? I mean, can we be flat to up there this year now? Well, the residential is not so predictable because it's a day by day operations. I mean, we have like maybe 2 months in orders already because that's the time when we get the order and we deliver around 6 to 8 weeks at the most. So after that, it depends on how the market performs and how we perform. I mean July was a great month. August is starting really good, but we have to wait and see. Now if you ask me what I believe, I believe we're going to keep growing. We're gaining market share from the not so good producers. There is a lot of them in the market. And we have the best window I believe for the residential market with the higher pressures, better finishes, range of finishes in the paint and the glass. And we are gaining market day by day and we are gaining new dealers and new distributors. So if you ask me, I believe we're going to keep going. There is no reason not to. Okay. That's great. And then I'm going to squeeze one more in. Just are you guys seeing any sort of pressure on lead times or labor productivity? My guess is you're not, but I just want to make sure. No, we're not. We're not. We're doing really good at all. I mean, the surgery that the COO, Christian Dias did of the company with the automation and efficiencies and expenses costs. I mean, he got a lot of things that were not useful and he put the resources in the right places, has worked marvelous for the margin, for the EBITDA and for the efficiency of the company. Great. Great. Well, good luck on the second half guys. Thanks for the color. Our next question comes from Will Jellison of D. A. Davidson. Please go ahead. Hey, good morning. Good morning. So it looks like you guys had a pretty favorable benefit from reductions in selling, general and administrative expense. I'm wondering, is that something that was related to COVID stay at home work orders and if that can be expected to continue for the rest of the year? So basically, you have a portion of that are related to variable costs, mainly shipping and handling and commissions. So with the cadence of revenues trending up, you would expect that to inch up as well. Although there are some COVID related expenses related to traveling, for instance, that are not there and will not be there until things kind of get to some type of normality. That being said, as Jose was mentioning, there was a lot of restructuring that was done at the company. So some of this is actually just related to restructuring and seeking efficiencies and whatnot. But the majority of this would be or I would say probably 60%, 70% of this will be related to variable costs. So we would expect under more normalized revenue quarters and full monthly invoicing for nominal SG and A to return to a more normalized level. Okay, great. That's helpful. Thank you. And then my last question, I'd like to pivot. Do you have any updates on the new float glass facility that you had put on hold last quarter? Yes, we do. We do. Due to COVID, we put the project on hold. We got together with San Gobain and there was no time to start an investment of that nature. We are now reassessing the necessity to do it. I mean, we believe we should do it. Last month, for example, was the 1st month that the float that we do have actually Bogota with them was sold out. So that means that the demand is there again. And with the increase in sales that we plan to make in the next 2 years, that means that the flow plant will go ahead. We are looking at the numbers now. And I believe by the end of the year, we will have an answer of when we'll start. I believe we should be by January next year or March. We will decide that between now and the end of the year. Okay, perfect. That answers my question. Thank you very much. Thanks Will. This concludes the question and answer session. I would like to turn the conference back over to Jose Manuel for any closing remarks. Thank you everyone for participating in today's call. We will keep having great news for you. I believe our company is poised to give better results, keep cutting extra costs making better margins. Thank you. This concludes today's conference call. You may disconnect your lines.