Greetings. Welcome to Tecnoglass Inc.'s First Quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Rodney Massie, investor relations. Thank you. You may begin.
Thank you for joining us for Tecnoglass's first quarter 2019 conference call. A copy of the slide presentation to accompany the call may be obtained on the investors section of the Tecnoglass website. Our speakers for today's call are José Manuel Daes, Chief Executive Officer, Chris Daes, Chief Operating Officer, and Santiago Giraldo, Chief Financial Officer. 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's 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's business. These risks, uncertainties, and contingencies are indicated from time to time in Tecnoglass's 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's 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 José Manuel, beginning on slide number four.
Thank you, Rodney, and thank you everyone for participating on today's call. We have had an exciting start to 2019. Our strong momentum continued into the first quarter, allowing us to produce record levels of revenues, adjusted EBITDA, and backlog. Total revenues increased 23% to $107.2 million, marking our eighth straight record revenue quarter. This was driven by stronger performance in the U.S., where we grew revenue by 46% to $92.1 million, representing 86% of first quarter revenues. This progress builds on our multi-year effort to expand our customer reach and geographic presence in this attractive region. Over the past year, the U.S. has represented 83% of revenues. We continue to experience favorable commercial construction trends, a favorable pricing environment, and market share gains, along with rapid penetration into the U.S. single-family residential market.
A strong U.S. performance more than offset softer results in our Latin American regions, where construction activity remains muted. A portion of the first quarter sales increase was in part due to approximately $5 million-$7 million of revenues pulled forward from the second quarter, with installation services growing significantly year-over-year. While this mix of business unfavorably impacted gross margins, we were very pleased to limit growth in operating expenses to 5.4% year-over-year, reflecting tight cost controls and strong operating leverage. In addition to strong results, we have had several exciting business development updates that position us well for the future. Our recently formed strategic alliance with Schüco is allowing us to accelerate growth in the Americas and to reach underserved markets in the U.S. Recently awarded projects put us on the path to see benefits from the transaction beginning in the middle of 2019.
In May, we closed on our previously announced float glass joint venture with Saint-Gobain. This was a very positive step for our company, which we expect to enhance our vertical integration strategy, secure our float glass supply, and generate significant synergies in the years to come. Later this year, we expect to complete a number of enhancements at our glass and aluminum facilities to increase production capacity and automate operations. We are excited to put these high-return initiatives in place, which we expect to add to our successful track record of implementing lean initiatives and making our low-cost plants even more efficient. With these capacity enhancements underway, we believe we are well-situated to generate attractive returns as we execute against our expanding backlog. In closing, we were very pleased with our entire team's dedication to driving exceptional results. Our core operations are strong.
Our new partnerships, ventures, and capacity investments are expected to further benefit our business to address increasing demand, while also elevating our corporate profile and broadening global awareness of our leading architectural glass operation. Furthermore, we have a solid balance sheet to drive future growth and invest in additional value-enhancing opportunities. We are confident in the strength of our industry-leading margin business, and expect to continue gaining share in U.S. commercial and residential construction activity. As we look to the balance of 2019, we are on path for another year of record performance and look forward to delivering on our reaffirmed full-year outlook. I will now turn the call over to Chris to provide additional details on our backlog.
Thank you, José Manuel, and good morning to everyone on the line. Moving to our backlog on slide six. We ended the first quarter with a record backlog of $518 million, up 3.4% year-over-year. This compared to $515 million at the end of the 2019, was primarily due to the solid bidding activity and project wins throughout the quarter. We are especially pleased to see the project wins in diverse geographies in line with our U.S. growth strategy. Additionally, our Schüco partnership continues to yield positive results, complementing our strong project pipeline that is allowing us to strengthen our visibility into 2020. Our ongoing performance in the single family residential market in the U.S. continues to surpass our expectations and currently represents our fastest growth opportunity. As a reminder, many of our single family projects are typically shorter cycle and underrepresented in backlogs.
The U.S. market continues to represent an increasing portion of our business, comprising approximately 83% of our backlog. Currently, our talent sales team recently added several project wins to our portfolio in the states of New York, Massachusetts, and Texas. This reflects our ongoing efforts to further penetrate the U.S. and to expand our mix of business to regions where economic fundamentals support long-term demand for architectural glass systems. We continue to see healthy construction activity within our U.S. markets, including projects in our less penetrated geographies, which currently represent nearly a quarter of our U.S. backlog. We expect to complete the expansion of our aluminum extrusion facilities in the third quarter of 2019. This should allow us to serve the incremental demand throughout our markets, especially for our aluminum products.
Furthermore, with our initiatives to automate certain processes and optimize production lines at our facilities, we should be even better positioned to advance our competitive position in the U.S. while further augmenting our structural advantages. Overall, we are bidding on many attractive projects across our diversified footprint, leading to a first quarter backlog at a new record level. We have a strong R&D pipeline of high-performing products to build upon our innovative culture as we continue to raise the global profile of our company throughout meaningful partnerships and dedications to excellent service for our customers. A key element of our successful track record of broad industry-leading margin has been our ability to source and execute high-return projects while remaining focused on innovation, productivity, and capacity expansion. I will now turn the call over to Santiago to discuss our financial results and markets.
Thank you, Christian, and good morning to everyone on the line. Beginning with our financial highlights on slide number eight. We were very pleased with our performance in the first quarter of 2019. We continue to broaden our customer relationships and strengthen our presence in new markets across an increasingly diversified footprint. We are expanding our reach into new markets and project types, including multifamily, office buildings, high-rises, and hotels, in addition to our growing single-family residential business segment. As a result, we drove significant increases in revenues and adjusted EBITDA to new first quarter records. Our operating cash flow performance reflects working capital investments. This includes a buildup of inventories to support a strong pipeline of projects being invoiced during the first quarter of this year and beyond.
While accounts receivable increased on a nominal basis with strong sales growth, day sales outstanding improved year over year, with a portion of the balance being associated to retainage work on our installation business. We spent $3.7 million on CapEx in the first quarter, with maintenance CapEx approximating $1 million, and the remainder geared toward opportunistic high-return investments and efficiency initiatives. Primarily to address robust demand within our aluminum frame manufacturing operations. As of March 31st, we have deployed approximately half of the total anticipated capital investments of approximately $20 million. We expect to fund the remaining portion with cash on hand and existing debt capital resources. In March, we raised net proceeds of approximately $36.1 million through a follow-on public offering of shares.
We ended the quarter with a strong cash position of $62 million and a net leverage ratio of 2.2 times, down from 2.6 times at the end of 2018. This balance sheet strength supports our growth initiatives and operational enhancements moving forward. Looking at the drivers of revenues on slide number nine. We reported our eighth straight quarter of record revenues, which were up 23% to $107.2 million for the first quarter. Continued strong performance in the U.S. drove the strength in the first quarter sales, with the U.S. increasing by 46.1% year-over-year to $92.1 million, primarily reflecting continued strength in overall construction activity, market share gains, deeper penetration in single-family residential, and a favorable pricing environment. At the end of the first quarter of 2019, the U.S. represented 86% of our total revenues. Furthermore, nearly all of our business lines grew in the U.S. market.
Looking at the drivers of adjusted EBITDA on slide number 10. Adjusted EBITDA increased 15.7% to $21.1 million from the prior year quarter, which produced an adjusted EBITDA margin of 19.7%. First quarter gross margin was 29.8% compared to 30.7% in the prior year quarter. This 90 basis points difference was mainly attributable to a higher mix of service revenue year-over-year. This was partially offset by lower labor and energy cost per unit and lower depreciation and amortization cost. Notably, raw material cost increases and labor constraints affecting our U.S.-based peers have still not had a material impact on our manufacturing cost. Higher sales and lower ground and marine transportation costs were the primary drivers of the 270 basis points decrease in reported SG&A to 16.5% of the sales in the first quarter.
Our operation continues to be very lean, as shown by the SG&A operating leverage generated on our record quarterly sales. Moving to our high return investments on slide number 12. In May 2019, we completed our previously announced strategic joint venture with Saint-Gobain. As a reminder, in January, we purchased a minority position in Saint-Gobain's existing Colombia-based subsidiary, Vidrio Andino, which has annualized sales of approximately $100 million. We were excited to complete this investment, which reinforces our vertical integration strategy and elevates our global profile with customers, suppliers, architects, and other industry participants. Through this joint venture, we have secured float glass supply, improved purchasing economics, and enhanced our ability to serve customers by having more control over the production process. This should drive better margins over the long term.
Permitting processes are already on their way to start construction of a second state-of-the-art plant nearby Barranquilla in the fourth quarter of 2019. Additionally, as we mentioned, we are making further enhancements at our glass and aluminum facilities to automate various processes with a plan to increase our installed aluminum manufacturing capacity by approximately 25%. These enhancements, which have been ongoing since the fourth quarter of last year, are expected to support a two and a half times improvement in the efficiency of certain automated lines within glass production. The aluminum capacity expansion is expected to be completed in the third quarter of this year, while full implementation of our automation initiatives is expected to be completed by the end of 2019. Looking at the evolution of our presence in the U.S. market on slide number 13.
The U.S. continues to be the largest and most evident vehicle of our company's growth. In 2013, the U.S. market represented approximately 40% of our business. As of the first quarter 2019, the U.S. represented 83% of our LTM sales. This rapid evolution over the last six years has been marked by several key transactions, along with ongoing initiatives to penetrate attractive markets across the country. This includes our 2016 acquisition of E.S. Windows to more effectively control the distribution of our products, and our 2017 addition of GMMP, which gave us the ability to directly install our products in projects. Both GMMP and E.S. Windows have enhanced our vertically integrated platform and further strengthened our structural advantages in key U.S. markets.
In 2017, we entered the U.S. single-family market and have rapidly scaled that business, which we expect to represent over 10% of our revenues in 2019, up from less than 3% just back in 2017. We believe that our collective markets in the U.S. will continue to grow faster than the national average. We also expect to take share in our markets, largely driven by enhanced relationships with new customers, proven execution in a broad range of high value-added projects, and structural differences that allow us to be very competitive while maintaining a quality-first approach. In the U.S., we still only represent a fraction of the approximately $30 billion architectural glass and aluminum industry. With our exposure to both commercial and single-family residential, we see significant upside in our business to capture a rising share of the U.S. demand. Moving to our 2019 outlook on slide number 15.
We continue to anticipate stronger top and bottom-line growth in full year 2019. For the full year, we remain confident in growing revenues to a range of $395 million-$450 million, with the majority of revenue growth expected to be from the U.S. market, helped partially by innovative new products, project types, geographic expansion, and single-family residential. We continue to expect year-over-year percentage growth to be higher in the first half compared to the growth in the back half based on the anticipated timing of invoicing in 2019 compared to 2018. Based on this reiterated sales outlook and anticipated mix of revenues, we continue to expect full-year adjusted EBITDA to be in the range of $85 million-$94 million. This outlook assumes favorable operating leverage on higher revenues and a higher mix of sales from manufacturing operations.
Additionally, the outlook incorporates our share of adjusted EBITDA from the Vidrio Andino joint venture, which will begin contributing to our results in the second quarter of 2019. We will also note that as we mentioned in the first quarter, we saw approximately $5 million-$7 million of revenue pull forward from the second quarter. As a result, we saw a revenue benefit in the first quarter, we will see an offsetting revenue impact of $5 million-$7 million in the second quarter. This is purely related to timing of invoicing on some service revenue discussed earlier. In closing, we remain well-positioned for another year of strong growth in our business, which should allow us to unlock significant value to our shareholders.
Our recent high return investments, vertically integrated low-cost operations, extensive portfolio of in-demand products, new partnerships, and our attractive leverage profile are all moving us in the right direction. We are very confident in our ability to achieve our 2019 growth objectives while further improving our industry-leading margins. We thank you for your continued support of Tecnoglass. We will be happy to answer your questions. Operator, please open the line for questions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star keys. Our first question is from Jeremy Hamblin with Dougherty & Company. Please proceed.
Good morning, congrats on the strong results. I wanted to start with the gross margin that you saw in the quarter. It sounded like you had a much higher mix of service revenues, and that was probably the most significant impact. With the various puts and takes, you have the aluminum capacity expansion later this year. Santiago, could you give us a sense for your expectations around the kind of the timing and cadence of gross margins as we move throughout the year?
Sure. Hi, Jeremy. We are basically looking for gross margins to pick up sequentially. As you said, the Q1 gross margin was essentially related to a higher mix of service revenue, which over time is going to even out. As we pick up the exceeding capacity on the aluminum front and we are able to pull more manufacturing revenues, gross margin is going to kind of trend up to the low 30s, which is what we had discussed in previous calls and what we had guided to. This is just a timing issue on service revenue.
For the year, you're still thinking kind of in the 33% range?
Yes. That would be a target for us.
Okay, great. Switching gears to your Colombian business, which has struggled, and I think you've been patient and asked for some patience from investors in terms of thinking about that business. You've continued to see it languish a little bit here. I don't know if Christian or José Manuel, you want to give some sense of whether we're starting to see traction there, how we should be thinking about that in 2019.
Hello, Jeremy. José here. I believe 2019 is going to be flat with last year. 2020 looks better because now that the election is gone of last year, the government seems to be stabilizing. People are starting the projects that they put on hold. That being said, it's going to pick up, but as a portion of our business is very small now, maybe it's going to pick up 10%-15% next year, which at the end is not going to be that much in the overall. We see strong demand. We have a really nice backlog for next year also on the U.S. We're very optimistic.
Okay, great. Thanks. To that point, you obviously have had a phenomenal run here in the U.S. in clearly capturing market share. I wanted to get a sense of what you're seeing out in the marketplace from competitors, the competitive response, to you moving outside of your dominant region in Florida and obviously seeing contract wins in other geographies across the U.S., whether that's the Northeast, Texas, or key markets in the Midwest. Are they getting more aggressive on price? What type of competitive response are you seeing as you move into these newer geographies?
Jeremy, in order to penetrate some markets, you have to give a discount because they're used to their usual provider. Always trying with a new supplier is not easy. After the first or second job, when the client gets acquainted with you, everything turns back to normal. We have done great performances in the Northeast and also in Texas. We believe that the margins are going to go up because now the clients are comfortable that we are going to deliver, that we have a good product, and that we are responsible.
Okay, great. I wanted to come back to your residential business, another area that you've seen expand. You gave a little bit of color on this last quarter, and I might have missed it on this call, but in terms of what did you do in Q1 here in the residential side of your business? How did that compare to Q1 of 2018?
We are increasing the residential, still it's a learning curve. Like I told you, it's a totally different animal, and we don't want to outgrow ourselves and sell too much and then make a mess. We are growing at around 20%-25% a year, which is really nice. I believe we did around $30 million in the first quarter, which is the softest of them all. Around $50 million-$60 million, we're going to be happy with that.
Yeah, that would be pretty strong growth. Okay, last item, just want to clarify, Santiago, the commentary around the $5 million to $7 million pulled forward. In terms of flowing that through here in Q2, clearly you've been seeing sequential growth going back to 2017. I think what you're implying is we should not expect sequential growth in Q2. Should we be expecting still year-over-year growth in Q2 on the sales line?
Yes, Jeremy. Obviously, the $5 million pull forward is going to decrease what we had originally expected for Q2. That being said, we have good traction, Q2 and Q3 tend to be good quarters, we're expecting Q2 to be along the same lines of Q1, based on the visibility that we have in hand. Certainly, strong growth year-over-year. I don't know that from a sequential perspective, we're still going to be able to grow given that pull forward. Definitely strong growth year-over-year from Q2 to Q2.
I'm sorry. Maybe I misunderstood. You're expecting Q2 to be up similar in terms of a growth rate, like in the 20% range?
Oh, no. No. Because you had the $5 million to $7 million pull forward.
Yeah
kind of benefited the comparison. Like we said, we think that this is going to be the fastest or the strongest growth from a Q versus Q perspective on a percentage basis, and that's going to level off from Q2 on. From a percentage perspective, it's going to be a more normalized growth year-over-year, and to bake in, to get to the midpoint of guidance, you'll have to kind of come closer to high single digits to low double digits to get to that end.
Understood. All right, thanks for taking the questions. Good luck, guys.
All right. Thanks, Jeremy.
Our next question is from Julio Romero with Sidoti & Company. Please proceed.
Hi. Good morning.
Morning, Julio.
Morning.
I wanted to ask about the enhancements to the glass and aluminum processes. If you could talk about the progress there, and I know you mentioned it should be by end of 3Q, but when can we expect that increased capacity to flow through? Does that capacity open up all at once, or is there sort of a step function to capacity there?
Julio, this is Christian Daes. We expect aluminum expansion to be running by the 15th of July, and we are on track. As a matter of fact, we'll begin installing the new press next week. We could see on the third quarter already results for the additional aluminum capacity, which we believe is going to bring in good profits there. On the glass side, we're still on track. The project is supposed to be finalized by October 15. Once that's done, our capacity will not only be twice what we can do today, but also it will be much quicker, so the response to customers will be, the lead times will be cut by a week.
We expect this to be a real turnaround for our customers and to be able to serve a lot of people that we cannot serve them now because of the lead times and the transportation times that we have.
Okay. Understood. With the additional extrusion line and with the furnace and the increased glass capacity, what does that do to your go-forward CapEx needs, maybe on an annualized run rate basis?
No. After we do this CapEx, we are done for quite some time on CapEx. Probably maintenance will be $4 million-$5 million a year. Everything that we're investing, for example, in the automized aluminum storage and the glass and the sorting and all of that that we're doing is going to bring serious expenses cut and also increase the reliability and the quickness that we're going to be able to give customers. That will definitely have an impact, and we expect to be able to work without investing any more CapEx for years.
Okay. Helpful. I'll hop back into queue. Thanks very much.
Thank you.
Our next question is from Tim Wojs with Robert W. Baird . Please proceed.
Hey, everybody. Good morning. Nice job.
Morning.
Hey. I guess maybe if you could talk a little bit just about what you're seeing from a quoting perspective in the U.S. I know you saw some pretty decent backlog growth, and I would assume just given the pull-forward in install that the underlying backlog growth might have been a little bit better than what you reported. Just kind of what you're seeing in the market, I think, would be helpful from a quoting perspective.
Yes. Tim, this is José Daes. We are quoting a lot. The movement in Florida, for example, that was really quiet last year, this year we're seeing a lot of movement in quoting in Tampa, Sarasota, Jacksonville, Orlando. Even in the Miami-Dade, Broward, and Palm Beach counties, new large projects are on the pipeline. We expect the sales to increase for the years to come. Since we are now selling in Boston and New York successfully, we have finished some beautiful jobs, and people are happy. We expect those states to add up a lot of new buildings for us in the next couple of months.
Okay. It sounds like you're seeing a pretty good recovery in the Florida activity. I guess second question is just on pricing. How has pricing kind of been? I know it's been a modest contribution in Q4, and it sounds like again in Q1. Any way to kind of quantify what the pricing contribution you're seeing to growth and backlog is?
Well, sometimes it depends. When you're getting a new client, you have to discount your price in order to convince the people to change suppliers. After you do the first or second job, everything is normalized, and then they judge you by what you did, and then the reliability, the quality of the glass, the timing of deliveries, and then you can increase the price again. We believe our gross margin is going to stabilize in the 32%, 33%, and maybe even grow a little bit for the years to come, because after we get the clients, we can increase the prices 2%, 3%, 4%.
Just as a follow-up, Tim, on what you see on backlog, it's mainly volume, because these are contracts that have long lead times, and they have been signed for a while, as you know. You're not going to see a whole lot of volume, a whole lot of pricing-related increase there. It's going to be related more to volume than anything else.
Okay. When we think about SG&A as a percentage of sales was a lot lower than what we had modeled. How should we kind of think about that for the year? Kind of what's your expectation for any sort of leverage in the remainder of 2019?
Well, we've indicated in the past that what we had expected was for operating leverage to come from SG&A, which is exactly what you guys saw in Q1. There's no reason to believe that on a nominal basis, SG&A will go substantially higher other than the variable costs in there, which are mainly commissions and transportation, which obviously we don't have a whole lot of control over on the transportation side. Our target is to be able to maintain a certain stable level of SG&A for the rest of the year outside those variable costs. We expect to continue gaining leverage on added sales on SG&A. There's no reason why we shouldn't be able to do that.
Okay. Okay, great. Well, good start to the year, and good luck on the rest of it.
Thanks, Tim. Talk to you.
As a reminder, it is star one on your telephone keypad if you would like to ask a question. Our next question is from Joshua Wilson with Raymond James. Please proceed.
Good morning, and thanks for taking my questions.
Hey, guys. Hey, Josh. How are you?
I'm well, thanks. I want to make sure we're really clear on gross margin. Could you talk about what the impact was on gross margin for the quarter from the sales pull forward so we can get a sense of what the snapback might eventually be?
Yes. The normalized gross profit, as we've discussed in the past, is low 30s. Basically, you can bake in probably 150 basis points there on the mix of revenue that was pulled forward. As we discussed earlier, our thought is that over time and for the year, we get back to the normalized levels once the mix of business kind of normalizes as it has been historically.
Got it. What is your guidance assuming on the cost end? What sort of trends are you seeing there?
I'm sorry, the guidance on what?
What's baked in for costs.
I'm not following. I'm sorry.
In terms of inflation in either transportation or raw materials.
No. We're not expecting inflation on transportation or raw materials. We are not baking in significant upside costs on that. As we had mentioned before, we have not seen any kind of increase on aluminum or marine transportation. The only thing that we really saw inflation on last year was land transportation. We're doing some things to kind of optimize that. We are not baking in any inflation on those costs. The guidance that we had provided earlier in the year for the full year just baked in somewhat stable costs on that front.
One more clarifying question from me. Did I hear right that your sales guidance assumes that the Latin American sales are flat year-on-year for the full year?
Yes, that's correct.
What is the timing of the snapback to offset the big decline we had in the first quarter?
Sequential growth, what we're expecting is for LatAm to pick up sequentially and not many kind of ups and downs. What we have baked in is basically stable quarters that are better than Q1 to come back to the same level as 2018 in no particular order, based on what we have projected for the jobs that are going to be done in Colombia and in LatAm.
Got it. Good luck with the next quarter.
Thanks, Josh.
We have reached the end of our question and answer session. I will now turn the call over to José Manuel Daes, Chief Executive Officer, for closing remarks.
Thank you everyone for participating in today's call. We hope to keep growing the business and getting better margins and cash flow. Thank you.
Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.