Greetings, welcome to the Tecnoglass Inc. Second Quarter 2018 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 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rodny Nacier, Investor Relations. Thank you, Mr. Nacier. You may begin.
Thank you for joining us for Tecnoglass' Second Quarter 2018 conference call. A copy of the slide presentation to accompany this call may be obtained on the investor section of the Tecnoglass website at tecnoglass.com. Our speakers for today's call are José Manuel Daes, Chief Executive Officer, Chris Daes, Chief Operating Officer, and Santiago Giraldo, Chief Financial Officer. On slide two, before turning over the call to José Manuel, 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 differ 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/or 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 SEC or 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 José Manuel, beginning on slide number four.
Thank you, Rodny, 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. We are pleased with our performance during the second quarter. Over the past several years, we have expanded our business into new geographies, captured an increasing amount of the value chain through our vertical integrated model, invested in our facilities, and implemented cost-saving initiatives. These actions allowed us to achieve our fifth consecutive quarter of record revenues and deliver a stronger adjusted EBITDA for the second quarter 2018, with significant growth year-over-year. We experienced a good pace of activity, which marked a continuation of a solid start to the year.
We are confident that our strategy to continue penetrating the U.S. will continue to drive benefits to our results. During the quarter, we completed the payment of GM&P in a highly accretive transaction as previously announced. We also completed the integration of this well-performing acquisition, including some business optimization efforts, which Santiago will detail further. Into the back half of 2018, we look forward to continue delivering record levels of invoicing and adjusted EBITDA, which we anticipate will largely be driven by U.S. growth. As such, we are encouraged by the strong lineup of projects in our backlog and remain committed to delivering attractive returns to our shareholders. On slide five, net sales climbed by 10% to $89 million, led by accelerating construction activity in the U.S. We are confident that our strategy to continue penetrating the U.S. market will continue to drive growth.
Revenues in the U.S., our largest market, were close to 80% of sales, increased 16%, primarily reflecting market share gains and an upswing in construction activity. This expansion of our business in very attractive U.S. markets helped compensate for relatively stable performance in Colombia. From May until the end of the quarter, we experienced relatively tempered activity in Colombia. We attribute this to greater than expected uncertainty associated with an unusual polarized presidential election. This put the construction activity on hold, awaiting what was ultimately a positive outcome. The incoming pro-business administration should be very positive for the economy and construction in years to come. We believe the majority of our Colombian customers agree with us as demonstrated by the highest consumer and business confidence readings since 2012, which were presented for the month of June this year.
Adjusted EBITDA for the quarter was $18.3 million, an increase of 36% from the prior year quarter. Adjusted EBITDA margin improved by almost 400 basis points year-over-year to 20.5%. Stronger sales certainly contributed to this improvement, and disciplined cost controls helped too, reflecting better gross margin, excluding non-recurring items. We have not seen any material impact to margins from aluminum tariffs, and we expect to see a more favorable pricing environment as a result of the trade changes under the new administration. 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 continue to have a very strong backlog, which stood at $497 million at the end of the second quarter, compared to $501 million at the end of the quarter one. The Q2 backlog level represent more than 1.5 times our trailing 12-month revenue. Backlog increased 2% year-over-year with attractive project wins fully replacing four consecutive quarters of record invoicing. Furthermore, we had some additional projects in the pipeline that had not been yet closed by the end of the quarter. Overall, we have seen steady levels of quoting and bidding activity in the U.S. and Latin America, and we feel good about the composition of our project pipeline and the good visibility afforded by our backlog.
The U.S. market continues to represent our largest region, comprising almost 80% of the backlog and revenues. This reflects our ongoing efforts to expand our mix of business in very good markets throughout the U.S. We continue to experience favorable construction conditions and saw a number of major project additions, which is a credit to our growing client base, our strong reputation in South Florida, and our increasing number of the U.S. markets. In South Florida, where we have been exceptionally in a strong position, we further scale our market penetration by increasingly participating in the retail and residential market, which previously was largely untapped by Tecnoglass.
As we have mentioned, despite seeing a more moderate activity in the high-end condo market, we were able to win two of the largest projects to come to the market in the past months, and are moving more into the mid-rise and office space, not only in South Florida, but also other geographical areas within the state. In the rest of the U.S., we are sourcing project wins from a diverse number of regions, where structural glass and curtain wall systems continue to lead the architectural glass trends. We will continue to focus on diversifying our revenue stream from attractive markets where historically we have not had a dominant presence as we currently do in Florida. In Colombia, the second quarter was impacted by polarized and extended presidential election process, which caused an overall slowdown in construction and economic activity as a whole.
That said, the election outcome was very favorable in our view, and we expect an improving macroeconomic environment, which should allow us to capitalize on significant pent-up demand over time. Overall, we are actively enhancing the quality of our backlog to expand our business in a disciplined manner. Beyond our strong book of business, we look forward to several additional catalysts, including the complete integration of GM&P, providing opportunities for operating efficiencies. The recently elected Colombian president determined to prolong a favorable business climate and a stronger pricing environment in the U.S. following the recently enacted tariffs on aluminum imports. We are excited to continue expanding our business and confident that we are poised for additional success with our cutting-edge product portfolio, growing reputation in the architectural glass industry, and the unique vertically integrated operations.
I will now turn the call over to Santiago to discuss our financial results and the markets.
Thank you, Christian, and good morning to everybody on the line. Beginning with our financial highlights on slide number eight. We improved results across nearly all metrics, including sales, adjusted EBITDA, margins, and adjusted net income. We recorded our 15th straight quarter of year-over-year growth to deliver another record quarter of revenue. Adjusted EBITDA increased 36% to $18.3 million from the prior year quarter. Driving an adjusted margin of 20.5%, up 400 basis points from the prior year quarter. We remain confident in our ability to generate incremental margins on higher sales. We'll continue to source additional avenues to improve efficiencies and reduce our cost base. Our cash flow performance improved compared to the prior year, with improved working capital management and the timing of spend following a buildup of inventory earlier in the year.
CapEx remained fairly low at approximately 2.8% of sales as we continue to benefit from prior investments, which have created ample in-store capacity to address future growth. We ended the quarter with a strong cash position of $30 million and a conservative leverage profile of 2.8 times net debt to adjusted EBITDA, which has been stable over the last five quarters. We were especially pleased to complete the payment of GM&P on their highly accretive payment structure while slightly improving net leverage compared to the first quarter. This balance sheet strength supports our growth initiatives and operational enhancements moving forward. Looking at the drivers of revenue on slide number nine. U.S. revenues increased by 15.8% to $69.9 million for the second quarter, primarily driven by strong commercial and residential construction activity.
Colombia revenues were approximately flat year-over-year, which we primarily attribute to the extended presidential election, as previously mentioned. Year to date, we experienced a more balanced growth from the U.S. and Colombia, with a portion of growth in the U.S. also reflecting two additional months of additional revenue coming from the GM&P acquisition. Looking at the drivers of adjusted EBITDA on slide number 10. For the quarter, adjusted EBITDA expanded 36% year-over-year to $18.3 million, largely as a result of increased sales and higher gross profit excluding non-recurring items. We experienced a 202 basis points of improvement in reported SG&A of 19.1% of sales. SG&A, excluding one-time items on a dollar basis, increased $1.3 million, primarily due to higher transportation and commission costs associated mainly to volume and, to a lesser degree, price.
While most of our businesses hedge in some manner to currency fluctuations, our SG&A does have some FX exposure in portions of our expenses in Colombian pesos that are not linked to the U.S. dollar. Since 2017, we have seen an appreciation of the Colombian peso, resulting in an unfavorable impact on SG&A comparable to the prior year quarter. Gross profit increased 9.3% on a strength of higher sales. Reported gross margin in the second quarter 2018 was 27.7% and essentially stable year-over-year. On an adjusted basis, gross margin we have improved to 31.8%, excluding a non-recurrent acquisition transition expense of approximately $3.6 million. This expense was related to certain projects signed by GM&P prior to the acquisition, which experienced operating inefficiencies caused by changes in GM&P's supply chains in connection with the integration into Tecnoglass.
The overhaul of GM&P supply chain and other business optimization costs in connection with the now completed integration resulted in the $3.6 million one-time charge. The original GM&P purchase agreement included a provision to adjust the price based on such integration costs, and accordingly, the acquisition purchase price was retroactively reduced by $3.6 million through a combination of the previously announced implicit value of the Tecnoglass shares awarded to the seller and a $1.5 million reduction in the final amount of the seller's note, which as a whole, offset the impact of the one-time charge to Tecnoglass. On an adjusted basis, we were pleased with the approximately 400 basis point improvement in gross margin, which represented favorable incremental performance on higher sales and cost controls.
Given our raw material efficiency and disciplined purchasing economics, we believe we are well positioned to improve our profitability moving forward as U.S. developers and contractors face inflationary construction costs across a variety of products and services. Overall, we remain focused on additional efficiencies and productivity initiatives to further enhance profitability while preserving a strong platform to support expected growth. Turning to our Colombian market update on slide number 12. We believe activity in Colombia has entered a period of stability, with leading indicators pointing to an ongoing recovery. One of the most recent catalysts is the positive outcome of Colombia's presidential election, which we expect to extend a pro-business climate over the next several years. As an encouraging sign, immediately following the election, the Colombia Consumer Confidence Index and Colombia Business Confidence Index for the month of June each reached their highest readings since 2012.
These readings are consistent with other upbeat data points, including low interest rates as the new normal and a healthy GDP growth rate both year-over-year and what is projected for 2019. While the bidding activity in Colombia remains at firm levels since mid-year of 2017, our backlog is also stretching deeper into 2019. Therefore, a sharp upturn in 2018 is unlikely. In turn, we anticipate a long gradual recovery as developers take increasing advantage of the favorable macroeconomics over the next several years. Looking at the U.S. construction market on slide number 13. We are seeing growth in the U.S. as commercial construction activity continues to benefit from good levels of demand. The Architecture Billings Index forecasts business conditions to remain strong overall, particularly in the South and Northeast, where we have our largest presence.
We are carefully monitoring the diverging trends in the West, but based upon our current backlog composition, we view the ABI readings as a positive for our exposure. Additionally, we view the need for energy-efficient buildings, increasing environmental regulations, rapid advances in coating technology, and demographic shifts to urban centers as long-term catalysts for our business. Expansion into new markets and new product innovations are additional catalysts for Tecnoglass, which we continue to emphasize within our growth strategy. Moving to our 2018 outlook on slide number 15. Based on our progress year to date, our outlook for the full year is unchanged. We reiterate our outlook for revenues to grow to a range of $345 million-$365 million, with our mix of revenue growth still expected to be weighted towards the U.S.
As we have said on prior calls, we expect year-over-year growth to be higher in the first half compared to the growth in the back half, based on the anticipated timing of invoicing in 2018 compared to 2017 and the anniversary of our GM&P acquisition in early 2018. We continue to expect full year adjusted EBITDA to be in the range of $71 million-$81 million. Favorable operating leverage on higher revenues and an improved mix of sales from manufacturing operations, along with tight cost controls, should allow us to drive higher margins. We continue to expect to generate positive cash flow from operations for the full year, taking into consideration that there are certain seasonal factors, mainly related to tax payments during the first half of the year. We are extremely confident in our ability to achieve our growth objectives while further improving our industry-leading margins.
We thank you for your continued support in 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 session. If you'd like to ask a question, you may 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 handset before pressing the star key. Our first question comes from the line of Jeremy Hamlin with Dougherty & Company. Please proceed with your question.
Hi, this is actually David on for Jeremy. Thanks for taking my question. Nice job on the quarter.
Thanks, David. How are you?
Pretty good. Yourself?
Good, thanks.
We just have a couple questions today. First, wanted to ask about this non-recurring acquisition expense of $3.6 million. Can you just kind of walk us through what happened here again so we can better understand it? Can you give us a sense of how we should be thinking about gross margins for the back half of the year?
Sure. This was related to a couple of specific projects that GM&P had already been executing prior to the acquisition. Under the purchase agreement, we had agreed that any inefficiencies or over-running costs related to any of the projects that they had already booked would be compensated in the acquisition price. Basically, what happened is that they had some inefficiencies in the subcontracting schemes that they had and some other third-party purchasing of some of the materials. Those two projects have been closed, and all of the projects ongoing are basically under our new supply chain structure. We see that as something that is not recurring. To your second question, gross margins, if you look at the history since the acquisition, have been really stable at the low 30s type margin.
We expect that to be the case and possibly pick up a little bit of leverage on the second half of the year on what we have projected as higher revenues. All in all, since the beginning, we have mentioned that with the acquisition integrated into Tecnoglass, we would be looking at low 30s type gross margins.
Okay, great. Next, just wanted to touch on Colombia and kind of what happened in Q2, given some disruption, it sounds like, around the election. Also, it seems like you're a bit more positive moving forward. Could you just talk about what you saw in Q2, your outlook moving forward, and then how we should be thinking about growth rates in Colombia, specifically in the back half of this year?
Yes. Essentially, the Q1 was very strong. If you look at growth year-over-year, we experienced substantial growth in Colombia. It is coincidental in the sense that during the first quarter call, we were actually getting closer to the presidential elections, and the leftist party was getting closer in the polls. What that caused was for a lot of people to get a worried sentiment that there was actually a strong possibility of this leftist candidate becoming the president. Since then, obviously the outcome was very favorable. During May and June specifically, a lot of the activity really got put on hold until people got a better understanding on what was going to happen with the outcome.
As I said, overall once it was said and done, a pro-business candidate ended up winning the election, and what we're seeing right now is confidence in both residential and commercial sentiment, with the index as actually being the highest since 2012. More to come in the next 100 days as the new president talks more about his macroeconomic policies. On a preliminary basis, he has indicated that he intends to lower corporate taxes. We see that as a positive. We're being cautious with the remaining of the year as far as how fast we think that's going to pick up. I think there's certainly a lot of pent-up activity.
What we're thinking as far as revenues for the rest of the year, is probably stable over what we saw in Q2 with any upside to that coming really as an upside, as opposed to just being overly optimistic on the timing of what the new administration, new regime is going to flow into the markets, basically.
Okay, great. Appreciate taking the questions, guys. Thanks and good luck.
All right, thanks. Talk to you later.
Our next question comes from the line of Alex Rygiel with B. Riley FBR. Please proceed with your question.
Thanks, nice quarter, gentlemen.
Hi, Alex. How are you?
Very good. Couple few questions. I did miss a moment or two during the call here, so I apologize if there's any duplication here. First, could you address the mix in your backlog that's associated with residential, office, and multi-family? I think what I'm trying to get to here is kind of understanding more what your mix is in multi-family today. Then maybe talk about sort of the outlook that you think about over the next 12 months in the U.S. associated with each one of those end markets.
Basically, in the backlog, there's really no residential components. That's really very short-lived and intra-quarter. That segment is performing very well and actually above expectations. What you're seeing there is essentially commercial work, out of which I would tell you 80% is U.S.-based. Out of that portion, probably I would tell you 80% multi-family and the rest probably rentals and [other through commercial]. On your second question on projections, you meant what we see as far as the execution of the backlog or the composition from a geographical perspective?
I think I was looking for your particular kind of view on the multi-family market versus the office market over the course of the next 12-24 months.
Okay. The general view for the Florida market, specifically, is that the high-end condo market is cooled off. We did win a couple of large projects. As we said in the past, we are shifting more into mid-size office space and other pockets within Florida. If you talk about Miami specifically, we did see a little bit of cool off on the high-end condo market. However, the focus right now is to replace that with other asset types and also focus on work on curtain wall in the Northeast and other places within the U.S.
Could you address the impact, if any, to yourselves and your competition as it relates to rising raw material costs and the tariffs?
This is Christian. At the beginning, there was an impact of a few dollars. Now after all, oil prices have been going up, and we have been able to put into the cost, the tariffs, and they are being paid by customers without any complaints because there is a shortage of aluminum due to the new tariffs. At the end, it ended up being convenient. We see that the best is yet to come in the year, and that's why we are very optimistic for the second half of the year.
Turning to sort of future growth opportunities, where do additional acquisitions fit into your strategy in 2018? Are you building a book of M&A targets or is that something that we should think about more so in 2019?
No, I think we just completed the integration of GM&P, Alex, what we're looking for, given our backlog in hand, is to execute that and continue to have organic growth for the time being. Obviously, as opportunities arise, we are going to be kind of listening and mindful of valuations, but nothing on the horizon. We just want to basically continue to execute the backlog in hand.
Excellent. Thank you very much.
Thank you, Alex.
Our next question comes from the line of Julio Romero with Sidoti & Company. Please proceed with your question.
Hey, good morning, everyone.
Morning, Julio, how are you?
Morning.
just wanted to first start out with the 10% revenue growth in the quarter. Can you maybe give us the breakout in regards to how much of that was price, how much of that was volume, and how much was mix?
Basically volume, Julio. We have not baked in or seen substantial price inflation yet. What you are seeing is basically the result of the U.S. growing about 16% year-over-year in volume. Just incremental work.
Got it. You mentioned residential was performing above expectations. We're two quarters of the way through the year. How do you feel about that full-year target of $20 million-$25 million on the residential side?
We still feel very confident to end up for the higher end of that target, Julio, and I think that is going to compensate, what we were seeing for Colombia to start off the year, we're being more cautious about the second half of the year. Residential and the new products that we launched last year are certainly being well-perceived, and we feel very good about getting toward the higher end of the original target there.
Understood. I wanted to piggyback on Alex's question earlier about rising input costs. I mean, certainly freight and labor have also been rising across the industry. Can you just talk about what you're seeing in the market from a competitive perspective? When it comes to maybe freight specifically, given that you have one vertically integrated site, can you talk about Tecnoglass maybe versus your competitors, and can you maybe try to quantify the incremental gains you might be seeing as a result?
Hi, this is José. Listen, the tariffs and the increase in salaries have been good for us because most of our products we buy, we source in Colombia, and the finished product does not have a tariff coming into the U.S., but the raw materials. We see all of our competitors increasing their prices from 6%-10%, and we haven't increased the price to keep gaining market, and we see that as a good sign. Maybe next year we'll increase a little bit, but not as much as our competition because we want to keep penetrating new markets and gaining a foothold in the U.S.
Understood. Maybe my last one here is, just on the cash flow, definitely an improvement year-over-year, but still slightly negative in the quarter. Just given your lower CapEx requirements going forward, should we expect positive free cash flow in the back half of the year?
Yeah, there's a seasonal effect here. Julio, all taxes get paid in the first half of the year, you do have a seasonal effect. What you see in relation to operating cash flow is mainly related to build-up of inventory as we see higher activity in the second half of the year. AR is actually, from a DSO perspective, it's trended down, but obviously on a higher amount of sales, you're also going to have a little bit of usage there. That being said, given the seasonal effect that I just mentioned, we are foreseeing the second half of the year as being cash flow positive. As a follow-up, CapEx should remain very muted, and in line with what we had guided for the year at approximately $10 million, which if you see six months into it, we're basically trending right on at about $4.8 million or so.
That's helpful. Thanks for taking my questions and good luck in the back half of the year.
Take care. Thank you, Julio.
There are no further questions in the queue. I'd like to hand the call back to management for closing comments.
Daes.
Okay. Thank you everybody for taking the call. As we said, we are expecting much better results in the second half and continued growth into 2019. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.