Earnings Call: Q3 2018

Nov 7, 2018

Greetings, and welcome to the Tecnoglass Third Quarter 2018 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rodney Nacier with Investor Relations. Please go ahead. Thank you for joining us for Tecnoglass' Q3 2018 conference call. A copy of the slide presentation to accompany this call may be obtained on the Investors section of the Techno Glass website. Our speakers for today's call are Jose Manuel Daes, Chief Executive Officer Chris Daes, Chief Operating Officer and Santiago Giraldo, Chief Financial Officer. Moving to Slide 2. Before turning the call over to Jose Manuel, I'd like to remind everyone that matters discussed in this call except for historical information are forward looking statements with 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 differ in a material nature from these 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 the 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, Ravi, and thank you, everyone, for participating on today's call. I will begin with a review of our operating highlights. Chris will then discuss our backlog, followed by Santiago, who will take us through our financial results, market update and outlook. Looking at our highlights. Our results for the Q3 were very strong. We also established a good base of activity to maintain positive momentum in the Q4 and into 2019. We reported our 6th straight quarter of record revenues, which were up 16.3% year over year. A strong demand in the U. S, which represented 85% of total revenues, drove 3rd quarter results, primarily reflecting market share gains and favorable pricing. Sales to U. S, single family residential grew over 3x year over year. This puts us on track to surpass our $20,000,000 to $25,000,000 single family sales goal in 2018. Along with our progress in commercial, the U. S. Is expected to remain a significant contributor to our growth trajectory based on an attractive mix of projects in backlog. While activity in Colombia was softer in the quarter, sales in that region were up 9% through the 1st 9 months of 2018. We also ended the quarter with a strong level of backlog in that region. Our gross margin improved to 35.8 percent and adjusted EBITDA margin grew to 23.5% during the Q3. We achieved higher margins on incremental sales, reflecting tighter cost controls, the relative to favorable mix and a better pricing environment. We believe this progress further violates our vertically integrated model, our highly efficient manufacturing capacity and our sustainable access to talented employees. Our recently announced alliance with Schuco is another positive step. Schuco is a leading German based architectural systems company. Through the alliance, we added Schuco as a new customer of aluminum and glass products manufacturing our facility. In addition, we have gained the ability to manufacture and sell Shubhrant's colleague edge architectural systems to our customers alongside our legacy product. We view the alliance as a long term win for both sides. We are confident in the strength of our industry leading margin business to deliver on a stronger outlook for the year. As per external sources, the overall architecture of glass and aluminum market, including product and services, is an approximately $25,000,000,000 per year industry in the U. S. We still only represent a fraction of the industry and even with our addressable market. I am confident in the Petrobras team, the benefits of our high division operation and our exceptional position to continue taking market share into 2019 and beyond. I will now turn the call over to Chris to provide additional details on our backlog. Thank you, Jose Manuel, and good morning to everyone on the line. Moving to our backlog on Slide 6. We were pleased to end the quarter with a record backlog at $506,000,000 up 3.6% year over year. This compared to $497,000,000 at the end of the second quarter. The 3rd quarter backlog level represent more than 1.4x our trailing 12 month revenue. Attractive project wins allow us to fully replace 4 consecutive quarters of record invoicing, enhancing our position for 2019 and now building 2020. Closing and bidding activity in the U. S. Was strong, and Latin America continues to improve. We feel good about the U. S. Market continues to represent our largest region, comprising almost 80% of our backlog. This reflects our ongoing efforts to further penetrate the U. S. And to expand our mix of business in very good markets. Our ramp up in single family has been impressive, although many of those projects are typically shorter cycle and underrepresented in our backlog. We also continue to diversify our project categories with more retail, mid rise condos and office projects to supplement our strong high end condo business. This includes 2 of the largest projects to come to the market in both the Miami and the Tampa areas. While we were growing backlog, we are being mindful to carefully balance volume and price with a focus on the strong margins. We are experiencing a more favorable pricing environment in the U. S, partly as a result of production and labor cost inflation for U. S. Base manufacturers. We have not experienced either of those 2 cost headwinds, so we are confident that our U. S. Strategy will continue to drive benefits to our results. We are seeing the impact of higher ground transportation costs along with the rest of the industry. In Colombia, we ended the quarter with sub sequential value growth, largely attributable to a strong bookings in the 3rd quarter. We are seeing improving bidding resulting from pent up activity, strengthening economy conditions and more on a favorable business climate, following recent presidential elections. The progress we are seeing on the ground takes some time to show up in invoicing, but we are optimistic for 2019. Overall, we are actively enhancing the quality of our backlog to expand our business in a disciplined manner. The addition of Schuco product lines to our portfolio should enable us to attract new customers and grow our reputation for excellence even more in the architectural glass industry. This is an exciting time for Tecnoglass. We are poised to win more new projects and take advantage of our vertically integrated operations to achieve our visions of becoming a worldwide leader of high quality architectural products and innovative solution for a sustainable future. We look forward to generate additional value in our business. I will now turn the call over to Santiago to discuss our financial results and market. Thank you, Christian, and good morning to everybody on the line. Beginning with our financial highlights on Slide number 8. Over the past several years, we have expanded our business into new geographies, capture an increasing amount of the value chain through our vertically integrated model, invested in our facilities and implemented cost savings initiatives. The benefits of these efforts were evident in the 3rd quarter with double digit growth in sales, gross profit and adjusted EBITDA. We hit record levels in each of those metrics. Adjusted EBITDA increased 29% to $22,800,000 from the prior year quarter, which produced an adjusted EBITDA margin of 23.5%, up two forty basis points from the prior year quarter. We remain confident in our ability to generate incremental margins on higher sales and we'll continue to source additional avenues to improve efficiencies and reduce our cost base. Our operating cash flow performance reflects working capital investments. This includes account receivables in connection with strong sales growth in the Q3 along with a build up of inventories to support future growth. CapEx remained fairly low at approximately 2.3% of sales, primarily dedicated to maintenance and minor efficiency initiatives. We continue to benefit from prior CapEx investments, which have created ample installed capacity to address future growth. We ended the quarter with a strong cash position of $28,000,000 and a conservative leverage profile of 2 point 7 times net debt to adjusted EBITDA, a slight improvement from 2.8 times at the end of the Q2 of 2018 and a positive trend that we expect to extend into year end. This balance sheet strength supports our growth initiatives and operational enhancements moving forward. Looking at the drivers of revenue on Slide 9. U. S. Revenues increased by 20.7 percent to $82,200,000 for the 3rd quarter. A portion of the increase came from single family residential and the remainder was attributable to healthy commercial construction activity, market share gains and a slight improvement in pricing. Nearly all of our business lines grew in the U. S. Market, more than compensating for softer Q3 performance in Colombia. Year to date, the U. S. Is also driving the results, our strategy to continue penetrating the U. S. Market in different geographies and in the residential segment. Looking at the drivers of adjusted EBITDA on Slide number 10. For the quarter, adjusted EBITDA expanded 29% year over year to $22,800,000 largely as a result of higher sales and gross profit. This represented an incremental EBITDA margin of approximately 30% for the quarter year to date. The majority of 3rd quarter improvement came from gross margin, which increased 320 basis points year over year to 35.8%. This was primarily attributable to favorable sales mix with growth coming mainly from manufacturing activities. We also saw good operating leverage on higher volumes with slight pricing improvement on essentially stable input cost per unit. Raw material cost increases and labor constraints affecting our U. S.-based peers have not had a material impact on our manufacturing. For the quarter, we experienced 110 basis point increase in reported SG and A to 20% of sales. This was driven by increased expenses to support higher sales. SG and A, excluding onetime items on a dollar basis, increased $2,700,000 primarily due to stronger volumes, which drove higher ground transportation cost per unit and overall commission cost. U. S. Ground freight and trucking are the main areas where we have seen costs rise and this is likely to continue. Marine shipping costs have so far remained relatively stable for us, given the favorable trade dynamics between Colombia and the U. S. Based on a favorable mix of business and overall market conditions, we believe we are well positioned to continue delivering strong profitability moving forward as U. S. Market pricing responds to rising costs across a variety of products and services. Additionally, we remain focused on efficiency and productivity initiatives to further enhance profitability, while preserving a strong platform to support expected growth. Moving to the Schuco Alliance on Slide number 11. Our recently announced alliance with Schuco is a very strategic partnership for Tecnoglass. The purpose of the alliance is for both companies to grow faster in the U. S. Than either could expect to achieve on its own. It will allow us to expand our portfolio and offer more solutions to our clients while also becoming a key supplier to Schuco. The alliance creates a shared distribution network within the Americas, meaning we will help sell each other's products in currently underserved markets by either party. Among the mainly benefits of this arrangement, we will gain access to more U. S. Customers as we strengthen our go to market capabilities. We will expand our portfolio of high end renowned designs and we will increase production at our state of the art facilities. Additionally, Schuco is a premier architectural systems company with a globally recognized brand in over 80 countries and a 60 year reputation for excellence. This alliance further validates the quality of TainoGlas products and elevates our profile not only in the States, but in many additional markets where Schuco already has a presence. This is all highly aligned with our long term global expansion plan. We expect to see benefits from this transaction beginning in the middle of 2019. Looking at the construction market on Slide number 13. U. S. Commercial construction activity continues to dominate our business. The environment remains favorable for us, particularly for impact resistant windows in hurricane prone coastal states and for energy efficient architectural systems more broadly. Deliveries for our hurricane resistant glass continues to be strong as recent climate conditions have created added awareness for storm preparedness. Our innovative low e coating are helping clients to cut energy costs by limiting heat transmission. The Architectural Billing Index, ABI, has remained above 50 for the 12th consecutive month, and it forecasts business conditions to remain strong overall, particularly in the Southeast where we have an ever expanding presence. Based upon our current backlog composition, the view of the ABI readings are positive for our exposure. We believe that our markets will continue to grow faster than the national average and that we will continue to take share in our markets. Expansion into new markets and new product innovations are additional catalysts for Tecnoglass specifically, which we will continue to emphasize within our growth strategy. Turning to our Colombian market update on Slide 14. In Colombia, all economic indicators are positive and have accelerated since midyear. Interest rates and inflation remain low, providing some runway for construction to outpace GDP growth. Additionally, confidence in social and political conditions has sharply rebounded to positive territory for the first time since August 2012. This is consistent with the outcome of recent presidential elections, which point to a pro business climate over the next several years. Based on 3rd quarter bidding activity and conversations with customers, we also believe conditions are improving around the country. That said, we are watching the market carefully. And as mentioned on our Q2 earnings call, we do not expect an uptick in Colombia through the remainder of the year. Our Q3 backlog and overall quotes for business improved compared to the Q2, but the average project start is stretched deep into 2019. Therefore, we continue to anticipate a gradual recovery as developers take increasing advantage of the favorable macro environment over the next several years. Moving to our 2018 outlook on Slide 16. Based on our progress year to date, we are increasing our outlook for the full year 2018. We now expect revenues to grow to a range of $360,000,000 expected to be weighted towards the U. S, partly fueled by new products and end markets. As we have said on prior calls, we expect year over year growth to be higher in the first half compared to growth in the back half based on anticipated timing of invoice in 2019 compared to 2017 and the anniversary of the GMP acquisition in early 2018, which carried 2 months of invoicing into the year. We now expect full year adjusted EBITDA to be in the range of $79,000,000 to $82,000,000 Favorable operating leverage on higher revenues, improved mix of sales from manufacturing operations, along with limited inflation should allow us to drive higher margins. While we have had a usage of operating cash flow during the 1st 9 months of the year, given the very strong growth during that period, we expect to reduce the usage for the full year given the seasonality on some tax and interest payments during the last quarter of the year. We are extremely confident in our ability to achieve our growth objectives. We look forward to continue advancing rapidly as a leading manufacturer of high quality glass products and to continue gaining market share as we build on our competitive advantages. 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. We will now be conducting a question and answer I'm doing well. A couple of random questions here. So for the last 12, 18 months, you've been pushing it to a number of new regions and cities in the United States. Can you talk about some of those successes, whether or not Chicago or Boston, and talk about how they've been building the momentum and any other new cities that have been added to that list of recent success stories would be helpful. Hi, this is Jose Reyes. We are finishing 2 very nice projects in Boston. And Boston Properties is the owner. They are very, very happy with it. And we are finishing jobs in Washington, New York. We have entered the California market with some small jobs as a tryout on the West Coast. We're finishing jobs in Texas and we now even are closing a job in Phoenix. We are expanding. It's not easy for people to trust a new company. But after they see the way they perform and the quality of the product, those open very quickly. Could you also comment on how you think the U. S. Tariffs are affecting some of your competitors? Clearly, there's limited effect to your business. But how do you think it's affecting your competition? And are you seeing that in the marketplace when you're bidding on projects? Well, actually everybody is increasing prices because of the momentum of the economy. There is not enough aluminum or windows or glass to supply the demand. The demand is very strong. And I don't see the tariffs affecting anyone. Everybody is making a lot of money and everybody is happy. And as it relates to residential and where do we think that could go to in 2019? Hi Alex, this is Santiago. Basically for the quarter, we estimated to be about $8,000,000 We are on target to surpass the full year guidance of 2019, we think, time, in 2019, we think that needs to become a more meaningful part of the overall business. We haven't obviously come out with guidance for 2019, but the expectation is for that to continue to grow next year. Our next question comes from Jeremy Hanlon with Dougherty and Please go ahead. Hey, guys. It's actually David on for Jeremy. Thanks for taking my questions and very nice quarter. Hi, David. How are you? Good. How are you? Good. Thanks. So just on the U. S. Outlook in 2019, how should we be thinking about the growth in that segment? And then stepping over to Colombia, it seems like it saw some pressure in the quarter. Could you just discuss kind of what is going on down there after the decent growth in the first half of the year? And then also maybe the outlook in that segment in both Q4 and 2019? Sure. On the U. S, we'll come out with guidance here in the next call, but the expectation is for that to continue growing over a record year 2018. The percentage growth is to be determined once we have more information at year end, but that is expected to be to continue to be our strongest market. If you look at Q3, it accounted for 85% of overall sales. And in line with what Jose just said, we continue to take market share and grow into other regions. So the expectation would be for the U. S. To continue this growth trajectory. In Colombia, we had said that a lot of activity was delayed and pent up activity was caused by the presidential elections. And what we're seeing is basically in line with what we expected. We think that the rest of 2018 is going to be probably a 2% growth year over year for the full year. So very much flattish, but the good news is that we are seeing growth in the Colombia backlog and actual businesses getting close after the presidential election. So we certainly expect Colombia to grow at a good pace for 2019 versus this year. Okay. Good deal. And then SG and A in the quarter jumped a bit, assuming some of that is a function of the higher revs. But can you just maybe break down that for us and what is causing that jump? And is there kind of a range we should expect moving forward? No. I mean, basically, the main contributor to SG and A increase and especially as a percentage of sales because you have some costs in there that are variable. So when you have this much higher sales, you are also going to have an incremental in nominal SG and A. But the one factor that contributed more than sales was land transportation in the U. S, which every other company is also seeing out there. And we are going to offset that with shipping directly to the ports of North. We were shipping to Miami and from Miami land to New York and to Washington and to Chicago. And now we have found a different route and next year the cost of transportation is going to be lower. Okay. That's helpful. Very helpful. And then my biggest surprise was the upside on gross margins jumping to nearly 36%. We haven't seen those levels in a while. Can you just kind of break down the details of this? And how much of this improvement is favorable pricing versus favorable mix? We haven't really taken a lot of margin from incremental pricing. The main contributor was the mix of products that was sold with the manufacturing companies basically getting the brunt of the sales for the quarter. So when you have a favorable mix of sales with manufacturing taking a large portion of that, you're going to see this type of margin profile, which is kind of what you saw prior to the services acquisition of GMMP. But then also you have some operating leverage in there, some of the fixed costs that are associated to the cost of the products, we gain about 50 basis points on leverage. So it's a mix of all. The main thing was the mix of sales. Thank you. Our next question comes from Julio Romero with Sidoti and Company. Please go ahead. Hey, good morning, gentlemen. Good morning, Julio. How are you? Very good. So can we talk about pricing? I know last call you mentioned your competitors were raising prices to offset some of that input cost headwinds, some of that may or may not be related to the tariff situation. But are you still kind of holding price relatively steady? And can you give us any color on how that's translating to share gains in your business? Yes. This is Jose. We are going to increase prices on some products, especially the high end product because the product is actually underpriced compared to our peers. And on the lower line, even though our product is superior to the other ones, we still see a strong competition in pricing. So we can increase those in order to keep gaining market share. And on the big buildings, most of those are buildings and then negotiations. And we don't control that, but we see the competition is having higher prices and that's good for us because we can increase our margins. Okay. And on Schuco, I appreciate the color you gave earlier about timing, expecting that maybe starting mid-twenty 19. But what do you think is a conservative estimate for the incremental revenues we can expect from that partnership going forward? Well, in the 1st year, which is for us 2019 because we are now developing products with them because the products that they have tailor mostly for the European market. So we have to take those products and convert them a little bit. I mean minor design engineering to convert them for example for hurricane windows and for the American market of North. We're doing that. So for the 1st year, maybe $3,000,000 to $5,000,000 And then for the 2nd year, which is 2020, we expect it to be 3 or 5 times that. Helpful. And given that that's sort of a luxury product in the market, I mean, should we expect you'll be able to manufacture those incremental revenues at more or less the same gross margin that you're currently at? Oh yes, even more. Even more because they are unique products. I mean you have no competition. Once you have a product like that people if they want the product, they pay the price. Okay. And just on cash flow here, I know you saw some inventory tick up in the quarter. What should we expect for cash flow in the quarter? And what's kind of driving that inventory number heading upwards? The inventory number is mainly products that are being sold in the next few months. So it's not like you're seeing raw materials in there. It's already products and finished goods. So the incremental inventory is basically just associated with the work that is coming in the next few months, really. As far as what we are expecting on operating cash flow, it's going to depend on how much we are able to grow for the next few months. If you look at it, the main use of cash is obviously AR and inventory. But if you look at the turnover ratio, they're basically staying flat. We're just selling quite a bit more. That being said, there are some seasonal payments that do not take place in Q4. So our expectation would be to be able to generate positive cash flow for the overall year. Okay. And then just lastly on backlog. I know we saw it tick up sequentially and year over year. Any key projects that have entered that recently? And any color into the margin profile that you're seeing in that backlog? Well, we have landed a couple of jobs open doors in Florida. I mean, we were mainly in the 3 counties, Dade, Broward and Palm Beach. We move up north to Orlando, Tampa and we have been getting jobs up there. And from here to the end of the year, we are negotiating, I mean, a ton of projects that we believe we're going to get. We're 95% there to close it. And we believe the backlog is going to increase potential. Excellent, excellent. Thanks very much. I appreciate your time. Thank you. Thanks, Julio. Our next question comes from Johannes Venderberg with Logos Investment Management. Please go ahead. Hello, Management. Please go ahead. Hello, guys. Congratulations on the quarter. Good morning. I had one additional question on the Schuco deal. Most of my questions on that are already answered. But I was wondering, do you see any increases in capital expenditures or operational expenditures as you're preparing for launching these new products in mid-twenty 19? No. It's minor expenditure in the new dies. I mean every window you have to have the dies. Since we're going to change a few I mean minor details of the designs, we have to develop those dies. But there's nothing major. I mean, a couple of 100 Yes, good color. Thanks. I had one other question, and that's related to the shelf registration that the company did last month. Can you provide some color or some thinking about the reasoning behind that and why at that moment? Sure. That's actually something that had been in the works for a while, just with corporate practice, something that we wanted to do to have flexibility for the next several years, but nothing imminent. It was just good practice to have the flexibility to tap the capital markets if an opportunity does come our way. Okay. So but it's not related to specific plans, for example, acquisitions or for reduction of debt or something like that? No. If you look at the shelf, it's a universal shelf. So it has basically the language of general corporate purposes, just working capital or whatever it may be. We left it very broad. Obviously, if there was a transaction, it would have to be accompanied by a supplemental prospectus related to the transaction. This is just the general filing to give us flexibility over the next 3 years. There are no further questions. I would like to turn the floor over to Jose Manuel for closing comments. Okay. Thank you everybody for attending the call. We believe we're going to have very good news in the next quarter and the years to come. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.