Tecnoglass Inc (TGLS) 2016 Q1 法說會逐字稿

Greetings and welcome to the Tecnoglass first-quarter 2016 earnings call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Rodney Nasier, Investor Relations. Thank you. Mr. Nasier, you may begin.

Good morning and thank you for joining us for Tecnoglass' first-quarter 2016 conference call. A copy of the slide presentation to accompany this call may be obtained on the Investors section of the Tecnoglass website at www.Tecnoglass.com.

Our speakers for the call today will be Jose Manuel Daes, Chief Executive Officer; Christian Daes, Chief Operating Officer; and Santiago Giraldo, Deputy CFO.

Moving to Slide 2, before turning to call over to Jose Manuel, I would 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 the 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.

Thank you, Rodney, and thanks, everyone, for participating on today's call.

Turning to Slide number 3, we have made continuous strives to grow our business during the first quarter of 2016 to further build our position as a leading producer of architectural glass and windows in the US and Latin America. In the first quarter, we produced total revenue growth of 28% on a constant currency basis. We experienced a strong progress across our diversified footprint.

Our expanded US operations represented over 60% of our revenues, reflecting our established position in the States and the strong relationships to continue benefiting from the recovery in US commercial construction activity, especially in South Florida. In fact, our revenues in the US have risen for 13 consecutive quarters. We are positioned to continue this trend with our quarter-end backlog up 20% to $385 million compared to the prior year, largely weighted towards the US.

In Latin America, we performed admirably without revenues in Colombia up 43% on a constant currency basis and our other markets, including Panama, growing 73%. On this positive momentum, we increased adjusted EBITDA by 43% to $50.3 million in the first quarter, excluding the impact of foreign-exchange gains and losses. This adjusted EBITDA growth was helped by our low-cost, efficient operations, which continue to provide a sustainable platform to drive industry-leading margins.

We also benefited from extensive vertical integration operations. Internal sourcing of soft coat from in-house production began to show up in results by the end of the first quarter. This is driving significant cost savings and a strategic benefit which we expect to be more pronounced as we move forward in 2016. Beyond the soft coat facility, we also have several exciting energy-saving initiatives and productivity enhancements underway to improve our processes, which Christian will discuss further.

We are committed to generating value for our shareholders as a US-listed, publicly traded company. We started 2016 with a strong pace of activity and made good progress towards our full-year adjusted EBITDA goal of $85 million.

To complement our rapidly expanding operations, we are also actively strengthening our financial infrastructure and, as you see, reporting acumen to improve our overall business.

Regarding our 2015 10-K and the previously announced review of certain non-cash accounting items, we continue to work closely together with our Board, along with our current and predecessor independent registered public accounting firms, to file as soon as possible. We are pleased that our first-quarter 2016 results already incorporate the presentation of our financial statements, which we expect to incorporate into past and future filings.

In summary, our first-quarter results are a direct reflection of the market leading glass and window company that we have created. Our strategic investment in capacity, products, and people, combined with our business development activities and growing product portfolio, provide us with a firm foundation to achieve another year of adjusted EBITDA improvement. We remain very excited about our outlook and the opportunity to generate shareholder value in 2016 and beyond.

With that said, I will turn the call over to Christian to provide some highlights on our business and operation. Christian?

Thank you, Jose, and good morning to all of you on the line.

Turning to Slide number 4, demand in our commercial construction end market is growing. Our product offerings are expanding. Our reputation is widening, and our operating efficiencies are improving.

These positive factors are reflected in our backlog, which continues to grow and provides us with a strong visibility on our project pipeline.

Our backlog at quarter end was $385 million, up $65 million, or 20%, from first quarter 2015, marking the seventh consecutive quarter of year-over-year improvement. We also increased backlog from $375 million at December 31. At March 31, approximately 65% of our backlog was for the US market, followed by Colombia at 25%, supporting our expectation for the US to represent an increasing share of our business.

The bidding environment was strong throughout the first quarter and remained active in April. We are capitalizing our improving demand on winning new customers in new and existing markets. Each completed project elevates our profile, and our business is benefiting as a result. Our new in-demand products are helping to build customers' loyalty and repeat business, which firmly situates our Company for continued growth in each of our key regions, especially in the US.

Moving to Slide number 5, since our inception, vertical integration has been a very important component of our global competitive advantage. Our new soft coat plant added in 2015 has significantly enhanced our vertically integrated operations and placed us among a handful of global manufacturers with this production capability. We previously sourced our soft coat class externally as a raw material for use in our windows and tempered glass production processes, so we were especially thrilled to successfully scale up production to meet all of our internal soft coat production needs by the end of the first quarter. Our internal demand is now consuming approximately 20% of the soft coat system total 6 million square feet of capacity, which we expect to generate savings in the range of $6 million to $8 million for the full year 2016. This leaves us with significantly more than enough soft coat capacity to supply external customers over time in both new and existing markets. We continue to believe that the new soft coat facility can generate $200 million to $250 million in additional revenues as we ramp up excess capacity over the next several years. This is a very exciting growth opportunity for Tecnoglass.

Turning to Slide number 6, beyond our soft coat investment, we have several other production and operational enhancements which we participate, that which we anticipate will generate attractive returns.

On the cost side, we are planning energy-saving initiatives to improve efficiencies. These include solar-paneled rooms to generate low-cost energy. In addition, we are in the earlier stages of building a new natural gas plant to generate reduced energy consumption and use our own emissions as cogeneration. In our production processes, we are introducing lean manufacturing practices to gain manufacturing and logistical efficiencies across our 2.3 million square-foot plant.

Concerning our investments to support growth, we have two additional reduction lines coming online in the second half of 2016. Especially, we have a new laminating line and a new insulated line which will help us increase output at our glass tempering facility, mainly using our internal supplies of coat glass. With our increased output, we are -- we are also starting two additional furnaces in the second half of the year to process incremental volume. Collectively, these investments will help us more efficiently expand production capabilities to better serve our customers.

Turning to Slide number 7, as I just discussed, we continue to improve our well-located, low-cost and efficient capacity throughout the continuation of successful multi-year investment. Producing glass is a capital-intensive but also a very manual process. We have efficient access to a highly talented workforce and we estimate our fully loaded labor costs are, on an average, six times lower than the US industry peers. When combined with very favorable logistics from our strategic location in Barranquilla, Colombia, these advantages are very difficult to replicate in other parts of the world. So with these advantages, we believe we have a very sustainable level-cost position in all the regions that we serve. As a result, we have a very defensible industry-leading margin to generate meaningful profit and cash flow in our business over the long-term.

Turning to Slide number 8, looking at new products, our program product line, introduced in November of 2015, continues to experience strong demand. The program allows for the reduction of high-quality cylindrical safety glass and has the capability to produce large-size bent temper, heat strengthened and laminated glass. We are now one of the few manufacturers in the industry with the ability to deliver these products.

During the first half of 2016, we are also on track to introduce our TecnoAir product line using the new technologies to produce the thinnest safety architectural glass in the world. Beyond these products, we have a healthy research and development pipeline to build on our strong culture of innovation and further strengthen our market-leading position.

In closing, our operations and strategy are driving growth in our business and we are investing in our very efficient platform to drive additional margins and cash flow. We expect our growth in US and Latin American markets to continue as we move forward in 2016, driven by a strong demand and quality of our products and the dedication of our entire team.

With that review, I now would like to introduce you to Santiago Giraldo as our new Deputy CFO. Santiago joined our Company as a senior member for our finance team in early 2016. He was formerly Chief Financial Officer and head of Business Development and Strategy at Ocensa, a subsidiary within the [Copetrory] Group, the country's largest company, which is currently traded on the New York Stock Exchange and the Colombian Stock Exchange. Prior to his CFO position, he has spent 15 years in corporate banking in the United States at Citigroup, JPMorgan and Wells Fargo. He has considerable experience in capital markets, bank debt, derivatives, treasury, M&A and equity-related transactions. His professional experience and financial acumen are highly aligned with the direction of Tecnoglass.

Santiago succeeded Sergio Barake as Deputy CFO in April of this year. Sergio decided to resign to pursue other business interests. Sergio was a significant contributor to the improvement of our Company during this time -- during his time with us. He will remain in an advisory role for the foreseeable future to assist with the seamless transition within our financial operations. On behalf of Tecnoglass, we thank him for his efforts.

With that, I will now turn the call to Santiago Giraldo to provide additional color on our financial results, Balance sheet, and outlook.

Thank you, Christian. During the first quarter of 2016, we produce substantial revenue growth to achieve a 43% expansion in adjusted EBITDA. I will provide an overview of the results, beginning with Slide number 9.

Looking at our revenue bridges on a reported basis, total revenues increased 16.8%. For a more balanced comparison on a constant currency basis with FX rates held flat at 2015 levels, revenue increased 28.2% year-over-year, excluding a $6 million impact from unfavorable foreign currency to Colombian sales. This was meaningful progress, led by considerable strength in our Latin American operations and continued growth in the US. This FX impact was primarily felt in our revenues from Colombia, which in local currency, or on a constant currency basis, increased 43.3% for the first quarter but compensated by reduced cost, as we will see ahead.

The increased sales reflect an accelerated pace of activity in the different regions within our footprint. Unfavorable foreign currency resulted in reporting Colombia revenues up 8.9% compared to the prior-year quarter. In the US, revenues improved 15.8% to $60.8 million for the first quarter, reflecting increased project activity in Florida and diversification to a range of projects in other states, including New York, New Jersey, Baltimore-Washington area, and Texas. Additionally, some delayed project activity from the fourth quarter contributed to the growth as well. Overall, the US represented over 60% of our first-quarter revenues and essentially stable compared to the prior-year quarter.

Turning to Slide 10, adjusted EBITDA grew 43% to $15.3 million for the first quarter. Before I walk you through the bridge, I would like to highlight an update to our adjusted EBITDA methodology to exclude the impact of foreign-exchange gains and losses related to monetary balance sheet accounts.

Our reported results include the impact of changes in foreign exchange. Several quarters ago, we began highlighting the explicit impact of foreign exchange in our quarterly performance bridges. After a careful review, we made the decision beginning this quarter to update adjusted EBITDA to neutralize the impact of foreign exchange gains and losses related to the effect on FX rate on monetary balance sheet accounts. This allows for a more clear picture of the Company's core operating results in comparison to prior years and our full-year outlook, which is always excluded these specific foreign-exchange impacts.

Adjusted EBITDA also excludes non-cash gains in both periods related to changes in the fair value of warrants and earn-out shares. We included an adjusted EBITDA reconciliation table in our earnings release today for the past five quarters, reflecting these updates for your modeling purposes.

Looking at the bridge, as a starting point, our adjusted EBITDA in the prior-year quarter of $10.7 million excludes an FX gain of $3.5 million compared to an FX loss of $1.3 million in the first quarter of 2016. These FX gains and losses are now excluded from the bridge. With that said, I will provide you with the operating impacts on our better adjusted EBITDA performance in the first quarter of 2016 versus the prior-year quarter.

Beginning with gross profit, we had an improvement of $4.5 million, comprised of $3.1 million related to volume along with additional benefits from price and product mix. Costs of aluminum are lower year-over-year, benefiting results by remaining stable in recent months. These improvements, along with the inclusion of all the other income, more than offset $1 million of additional SG&A spend, mainly related to expenses associated with our recently closed credit facility and other expenses.

As a percentage of revenues, SG&A improved 130 basis points year-over-year to 19.1% with increased revenues more than offsetting higher costs like shipping and handling related to additional sales to coastal and non-coastal markets in the US. Overall, we are very pleased with the core improvement in our adjusted EBITDA.

Moving to Slide number 11, our gross profit and gross margin each improved from the prior year's first quarter, reflecting investments we made in our operations. Gross profit in Q1 2016 rose by $4.5 million from last year's first quarter while gross margin for the quarter improved by 220 basis points to 38% from 35.8% in the prior-year quarter.

As a reminder, gross margin now excludes shipping costs, which were reclassified as SG&A for this and comparative historical periods, beginning in the fourth quarter of 2015. We included a table in an earnings release highlighting this shipping reclassification for the past five quarters, which has no impact on our operating income in any period.

For the first quarter, operating income increased to $15.1 million with an operating margin of 25%, up from $10 million or 19.2% of operating margin in the prior-year quarter. Notably, operating income includes a non-cash gain on the fair value of earn-out shares of $3.7 million in the first quarter of 2016 and a gain of $2 million in the prior-year quarter. These non-cash items -- non-cash earn-out shares are now included in operating income for GAAP purposes following our most recent review of accounting methodology but excluded from our adjusted EBITDA.

For the first quarter, our net income was $13.1 million, or $0.45 per share, as compared to net income of $11.9 million, or $0.42 per share, in the prior-year quarter. Excluding the changes in non-cash warrants and earn-out liability, adjusted net income for the first quarter was $3.5 million, or $0.12 per share, compared to net income of $4.8 million, or $0.17 per share, per diluted share, in the prior-year quarter. This difference in adjusted net income was primarily due to higher gross profit, which was more than offset by a $1.3 million foreign currency transaction loss in the first quarter of 2016 compared to a $3.5 million foreign currency gain in the prior-year quarter.

The implied tax rate to derive adjusted net income was approximately 54% compared to 24% in the prior-year quarter. We expect that, with the rebalancing of our debt through the recently closed US dollar and peso-denominated credit facility and with a more stable foreign exchange rate, as we have seen during the last several weeks, this effect will be reduced during the year.

The difference in the tax rate is mainly due to the timing of nondeductible expenses under Colombian tax rules, which can vary from quarter to quarter. That said, our full-year 2016 outlook for adjusted net income still incorporates a 41% adjusted tax rate, which is more consistent with our long-term normalized tax rate of around 40%.

Turning to balance sheet and liquidity on Slide number 12, during the first quarter of 2016, cash from operations was a $10.1 million net use of cash, largely related to working capital build to support growth in 2016. For the first quarter, we invested CapEx of $7 million between maintenance and growth CapEx related to the aforementioned new lines and furnaces.

In January of 2016, we entered to a new $109.5 million seven-year senior secured credit facility. The facility extended the maturity of our significant majority of our debt by seven years while also lowering our cost of borrowing and providing an efficient source of liquidity to continue growing our business. We used the proceeds from the new facility to refinance $83.5 million of existing debt with the remaining $26 million being used to support working capital and general corporate purposes.

On March 31, 2016, our cash position stood at $43.2 million, which includes $25 million in short-term investments. And long-term debt was $186 million, which also includes capital leases.

Moving to Slide 13, we started the year on firm footing, and we remain optimistic on our prospects for 2016. Based on improving commercial construction markets, continued market share gains and improving operational efficiencies, we are pleased to reiterate our full-year 2016 outlook. We expect total revenue to grow approximately 20% and adjusted EBITDA to increase to $85 million. Our topline outlook is supported by the expansion in our backlog, and we see additional benefits to our bottom line for new products and processes such as our increased vertical integration and other cost savings initiatives.

With that, we thank you for your continued support. We will be happy to answer any questions.

(Operator Instructions). Jeremy Hamblin, Dougherty & Company.

I wanted to first ask about the sales guidance for the year and just get a sense for -- it's impressive that you grew your backlog again. As we look into the second half of the year, your sales in the US were only up 16% in the first quarter. I think that's the lowest growth rate since Q1 2013. How should we thinking about that geographic segment throughout the rest of the year? Was there anything specific to Q1? What are the general trends that you are seeing in the US portion of your business?

We are going to -- this is Jose, Jeremy. We are going to keep improving our sales in the US. We see strong demand for our products not only in Florida but everywhere else, and we see the share of sales to the US increasing. They are going to keep increasing very dramatically here. We see a strong quoting -- we have now over $100 to close in the next two to three months, so we don't see the slowdown that every is looking at, maybe for 2018, but for this year and the next, we are mostly very confident that the sales in US are going to keep growing and growing steadily and substantially.

Just as a follow-up to that, you mentioned on your last call that there were some delayed projects in the US in the fourth quarter that held your sales growth in the US down. Did you continue to see that in the first quarter? Where do those projects stand in terms of timeline to completion? Is that part of the reason why we saw a little less growth in Q1?

Yes, that is exactly the reason why. But now those projects are accelerating because they were delayed not for reasons of non-sales or whatever, but lack of, for example, foundation, lack of concrete, delays of the architectural plans or whatever. And now they are rushing to finish because they have deadlines with their customers. So now we are seeing increased demand in trying to close those buildings. We are rushing with ourselves, and you are going to see that in the next quarter.

Okay. So, should I be thinking about, for the US segment in particular, that the 17% growth in the first quarter -- will that -- or, I'm sorry, 16% growth in the first quarter -- will that represent the lowest growth rate that we should be seeing in the rest of the year? You are expecting an acceleration from that on a year-over-year basis?

Yes, I do.

Okay, great. Thank you.

I wanted to also follow up and ask on the soft coat savings. In terms of the first quarter, what was the total savings related to that? You mentioned that you got up to kind of full ramp by the end of the quarter. How much of the savings came in Q1 from that?

And then what should we be thinking as we get to the end of the year? If you've guided to $6 million to $8 million in total savings, does that mean, by the time we get to the fourth quarter, that you would be saving, let's say, $3 million a quarter or $2.5 million a quarter? How should I be thinking about that?

I believe, in the first quarter, it was around $1 million only because, as you can tell, the slow growth in the US, and most of the soft coat is sold in the US. But as the quarters progress, we're going to be saving more and we are going to reach, I believe, from $6 million to $8 million. That's going to be around $1.5 million to $2 million per quarter.

But then looking forward for next year, then the savings is going to translate into new businesses, which means that instead of they are doing 800,000 square feet to 1 million square feet of soft coat glass which we used to buy, we are going to be trying to sell 1.5 million square feet to 2 million square feet of soft coat, and that is going to give a lot of revenue, a lot of really good revenue, with the basis cost that we have now.

Does that imply, when you say selling 1.5 million to 2 million of soft coat glass, is that finished product, or are you talking about the potential use of selling stock sheets of coated glass?

Both. We are working on both, but mostly we would like to sell finished product. We are not in the stock sheet business, you know. Even though we are now talking to two or three customers, potential customers, to serve them because we have the capacity, and to fill the capacity, it is good to do it. But the real good business is to fill the capacity with finished products. That would be ideal. That would catapult our business, catapult our sales and increase our profit by tenfold.

Okay, I understand that difference. Just in terms of thinking about the margin difference of selling it just as stock sheet versus finished product, finished glass, what is the margin difference?

Well, when you sell just a stock sheet, you sell a lot, but the margin is around 30%, the gross margin. With a finished product, it's 45%. The price difference, the price difference is that a stock sheet you sell for around $16 to $20, finished product you sell for $80 a square feet. There's a big difference.

That's helpful color. Thank you. I wanted to just understand; you mentioned that you have $28 million related to the new debt facility, the credit facility -- I'm sorry, $26 million available for general corporate purposes. Can you just give me some ideas of where you might spend that money going forward? What might you invest that in?

Well, we are investing right now. We have invested --

Well, basically -- go ahead, I was (multiple speakers)

We have invested some of that money into a new extrusion press. We are buying, at the moment, some more equipment to do more insulated, more laminated, more tempering. We are adding capacity because we see strong demand. We cannot cope with the amount of quoting that we have to do. So the demand is there.

Okay. So the softness in the Florida, Southeast Florida high-rise market that some people have spoken to, you are not really seeing that to the same degree that they are?

The softness let me explain to you, Jeremy, the different sectors to the high-rise and medium-rise buildings in commercials. The softness is in the high-end commercial properties, condominiums. There is a point that has been reached where you cannot sell more a $3 million and $4 million and $5 million condos. But there is a strong demand now for rentals, and we just closed three new buildings yesterday for rentals. And we are doing a lot of work in the Tampa area, in Atlanta, with a related group for rentals, and we see a lot of new buildings for hotels and for offices and for mixed uses. So the demand is there, maybe in a different area. But to us, it is the same thing that we believe that we've got at the end of the day.

Okay, great. Exciting.

Let me ask also -- I have to ask about the 10-K and the status of that. I know that your team has been working very hard on that. In terms of just understanding the remaining issue, the last release indicated that there has been resolution and agreement among yourselves as well as both auditing firms on most of the issues with one exception, and that would be on the earn-our provision related back to the 2013 transaction. Can you give me a sense of where that stands today and what the remaining issue is? Is it the accounting treatment? Is it a disagreement from your Company's perspective versus how the auditors want to treat it? Can you maybe just provide some additional color on that, Santiago or --?

Yes, yes. This is Santiago. Basically, you are correct. What is holding us on the closing of the 10-K is related to the accounting treatment of the earn-out shares. We are continuing to work with both our auditors, our current and predecessor auditors, into agreeing on the methodology to be able to account properly for those instruments. As of now, we continue to have basically daily calls, and we are working in conjunction with both of them to be able to come to some common ground and an accounting position that is amenable only to the Company and the auditors. But as of now, this is the only point, as we have released on the previous 8-K, that is holding us from being able to file and finalize our 10-K for the 2015 period.

Is there positive movement related to this? Does it feel like it has stalled out? Or is this something where it is like this could be resolved before the end of May?

No, there's definitely positive movements. We have been engaging in, I would say, daily calls with both teams. The stalling took place at first because they had to understand what the issue was and what the proposed new treatment for the earn-out shares was. But now that it has been understood by everybody, we are making a positive movement toward a closing. I would hope that we are able to close this very soon, as soon as possible. I couldn't commit to a specific date, but what I do tell you is that we are making positive movement on both ends.

Okay, great. Good to hear.

Jeremy, I don't see why it would take more than this month, unless they finally decide not to agree with it, other than which we will have to go to the SEC and tell them you make a decision because we cannot make it. If they don't make up their minds, either one -- this is unbelievable.

Okay. Let me ask finally about the dividend that you've mentioned. And in terms of I think, on the last call, Christian, you had mentioned that it was discussed with the Board. Is there any progress on that front? Is it something where you are going to wait to get resolution on the 10-K before initiating the dividend? Can you give a status update on that?

I believe we have to wait for the 10-K. I am not sure whether the S-3 and S-4 -- I believe we have to wait. I am not really sure about the reason why, because the last I spoke to my lawyer about it, he said we have to wait. But I will find out exactly and give you an update. We want to give the dividend as soon as possible. We are all for it. We have the cash. We have just been holding for the warrant exchange. But even if the warrant exchange doesn't take place, we believe everybody else is waiting for the dividend, and we want to give it.

Okay, great. Thanks for taking my questions. Best of luck this year. Glad to hear you are making progress on the 10-K.

David Sandberg, Red Oak Partners.

Solid results and thanks for taking the call. I had a couple of questions. Jeremy's questions answered some of mine. I wanted to hear it from you guys just directly and ask it, even though you've already given it in guidance. $70 million over the next three quarters in EBITDA, that's a pretty big number. That's all tied to your backlog. Should we be expecting a reduction in backlog as you are pulling in here, or are you seeing enough demand that the backlog is getting replaced and will stay at this level or possibly even grow through year end?

Well, it has been growing even though we are burning at the highest rate we have been burning backlog. We are invoicing $25 million per month, even the consolidated. And even though the backlog has been growing, I don't see any reason why the backlog is going to go down because we see a strong, strong demand for quotes, and we are really busy. We cannot cope with the amount of quotes that we are doing for jobs with our existing and new clients. And for example, with existing clients, we did 99% of our quotes for them. And we believe it's going to keep growing, the backlog. We see a strong 2017. As far as today, I cannot promise anything, but unless there is a crash tomorrow, everything looks very bright.

Great. A couple more things. So one of the ways we look at your business, given the high fixed-cost component but also these upfront investments you have put, the new coating line and more expansion, as we look at the incremental margins on revenue and as we look at that, as we look at that, I think we calculated 53% of an incremental margin, meaning the incremental EBITDA to the incremental revenue in Q1. If we look at the rest of your guidance, it's actually -- that number goes above 60%. And I don't know if you guys think about the business the same way or not. But my question would be, hey, has the model changed or improved somewhat based on these investments where 60% might be the new reality going forward?

I honestly don't know how to answer that because I don't know what numbers are you talking about. We don't see it that way. We don't look at the business that way.

And as I told you many times, we are improving efficiencies within the Company. We hired some help from outside advisors, and we are reducing waste. We are reducing, for example, the extra hours. Those efficiencies create better margins and that's going to be -- for example, we sent home 200 people that we didn't need because of the new efficiencies. And we have a new software system that is going to go into place, and that is going to save a lot more money and a lot more time reducing lead times and reducing waste. And whether that number that you say works or not, I really don't know because I don't know where you got it from. You'll have to teach me. But I believe the efficiencies are going to be much better. That's for sure.

Okay. And then two more questions I had. One is any update on the related party resolution? Or maybe the other way to ask it, is this still a priority that you guys do want to resolve when you're able to?

Oh, yes. As soon as we file the 10-K, we have a modeling. We are almost ready for the price of the tune, the related-party company. We want to consolidate and show everybody that we are not hiding anything. We are going to buy them at a very, very cheap price compared to the other companies that have been sold, and that will give us not only more transparency but additional EBITDA of around $3 million.

Okay, great. And my last question -- are there any updates on any of the progress in Europe, Africa, or any other areas on the PPG cobranding?

Actually, not on the PPG, but we are working closely with an ally in Europe, specifically Italy. We are quoting two very nice jobs, and we might get one of them before the end of the year. There are two very nice big jobs and we hope you start selling in Europe soon.

Okay. Thank you guys for answering the questions. Good quarter.

Bob Evans, Pennington Capital.

Nice job on the quarter. Can you just follow up Jeremy's question again on the dividend? Basically, if I hear you correctly, once the 10-K has been filed and resolved, then we should hear more, or shortly thereafter, more about a dividend. Is that correct?

That is totally correct.

Okay, thanks. And then can you -- I tell you what, can you comment a little bit more in terms of the change of how you are presenting EBITDA now versus how you did previously, kind of the logic in terms of the presentation there?

Yes. Basically, what we are trying to do is provide added focus to adjusted EBITDA on the operational metrics. If you look at the gains and losses related to changes on balance sheet accounts, that, to us, it creates a little bit of noise and is not operationally related.

The simplest of examples that I can provide to you guys is basically keeping in mind that the Company has US dollar-denominated receivables that, when you have a large depreciation of the peso, as we have encountered, in a peso accounting-wise, you do have a gain because those dollars are worth more pesos. So you start playing as to these macroeconomic tendencies and you create a certain amount of volatility related to realized or unrealized movements on monetary accounts on your payables, on your receivables, on your debt, and on your cash that is denominated on US dollars.

So, what we are looking to do and in line with our guidance that does not incorporate any movements on that, we're trying to isolate that factor to just focus the metric, the adjusted EBITDA metric, on the operations of the Company as opposed to including this added line, which tells us nothing in relation to the operation itself, but in relation to gains and losses from peso devaluation or revaluation. So we are just trying to streamline the calculation and just going to make it more cleaner to everybody and align it with our guidance that we have provided.

Okay. That's helpful. Thank you. And Santiago, can you also comment on the EBITDA trends? How should we think about that as we get through this year? Should each quarter build on the next? How should we think about seasonality? And then I assume you expect to see continued EBITDA growth next year?

Yes, that is correct. There is a certain amount of seasonality baked into the Company's model. So if you look at historical EBITDA quarter by quarter, you will see that the first quarter of the year has historically been lower for different factors. But, as Jose Manuel had mentioned already, the expectation is for the second quarter and the second half of the year to be substantially higher than what you have seen in the first quarter in order to be able to get to the provided guidance. And as the continued backlog growth supports, you would also imagine that, going forward beyond 2016, you will see an increase on revenues and on EBITDA. Of course, you still depend on as to whether the backlog closes or not. But on a great portion of that backlog, there is a high amount of certainty, so I do believe that we will see continued improved results going forward.

Sure. Okay, and finally, how should we think about capacity in terms of how far out have you sold your capacity going into 2017? Could you just give us a sense of trend there?

We are increasing the amount of lines that we are purchasing like laminating, insulating and tempering lines basically because the capacity is -- we are working right now like at 85% capacity. And we are increasing the lines because we know that 2017 is going to be a similar year to 2016 with better numbers, and that's why we are building the future.

Okay. All right. Thank you.

[Frederic Valmeseda], Goldman Sachs.

I'd like to ask Santiago if he can please comment on working capital and anything else which explains the GAAP beats in EBITDA and cash flow, because I see your net debt increased this quarter.

I'm sorry; I couldn't hear the first part of the question. Would you mind repeating it, please?

Sure. I see that, both in 2015 and the first quarter this year, there has been an increase in working capital.

Yes.

So what should -- both in absolute terms and in terms of sales. So what should we expect of working capital?

With the projected growth, you would obviously expect working capital to continue to increase. We do have fairly good control on payables and receivables, so we don't foresee the day sales outstanding or the inventory turnover to change. But as a percentage of sales or as total sales continue to grow, then the absolute amount of working capital should continue to increase as well. But it will be supported by our receivables and being able to continue to collect within specified terms. So we don't continue -- we don't expect the trends to move away from what we currently have. But in absolute terms, if the revenue growth continues, we will expect working capital to continue to rise as well.

Sure. But as a percentage of sales, would you expect it to come down to previous levels, or is this a stable level?

No, I would expect that it should be a little bit higher, not a whole lot. It's not going to continue to increase exponentially. But in the foreseeable future, we do expect a little bit of an increase from working capital as a percentage of sales.

Okay. And then can you please explain a little further what explains the difference between EBITDA and cash flow, because you ended the risk portion of EBITDA, net debt has increased a fair amount.

Yes, the net debt has a couple of components in there. There was some capital leases that were undertook. If you were to look at the cash flow statement there, you could see that there were some capital leases taken during the quarter that don't necessarily reflect new cash going out because these are Company leases that didn't necessarily imply new cash coming into the Company.

And your other question is in relation to cash flow versus EBITDA. And what was the first part of your question? I'm sorry.

Just if you can drive me through the major component of that difference.

What are you looking at? As opposed to EBITDA of $15.3 million, what are you looking at from the cash flow perspective?

I'm just looking at the operating metrics are great, but I would expect some kind of cash generation as opposed to a (technical difficulty) cash decrease. So what is it that I should focus on in that sense?

Yes, the cash decrease associated mainly with working capital. So if you were to look at the operating cash flow, you will see a significant increase on inventories, for instance. What the Company has done is take advantage of opportunistic buys. And if you look at our gross margin, it was highly impacted by lower raw materials. So in taking advantage of opportunistic buys, you are able to realize better margins, but that doesn't necessarily automatically translate into increased sales but future sales. So you can look at it that way. There's a difference there.

Okay, understood. Thanks for that.

Renzo Dancourt, [Boubanyon].

I've got one question regarding your business in the US. It's clear to us that you have taken quite a lot of share in the Eastern corridor of the country. Can you talk about expanding into other areas of the country, as like California?

We have some sales in California, actually. We have sold a couple of jobs in windows and we have the largest tower on the West coast, the new Transamerica Tower, I believe, is the name, has been done with our glass, another window system with our glass. Sometimes it's easier said than done, and we don't like to expand so much in so many places that we actually cannot service every city the right way. So from the first couple of experiences going to California, we have decided that we're going to concentrate on the Northeast and Texas, which we already have a stronger hold, and then, little by little, work towards the west again. There is so much work near our place of business that we can provide much better service that -- the longer they are from you, the harder it is to service. So we have to wait until we have fulfilled all the Northeast and the Central US until we want to go west again.

Carlos Rodriguez, Credicorp Capital.

I have a final question regarding the 10-K. Do you have any deadlines by the SEC in order to (technical difficulty) 10-K report?

The deadline is, I believe, June --

June 27.

Yes.

Basically, they provided us with a June 27 date in order to formulate a plan to close out the 10-K. So, it's not a hard deadline, but it is a deadline to formulate a plan to basically close out the issue, which is until October, I believe it is, that we have a final deadline to meet the requirement. That being said, we don't expect this to take that long of time, not even the June 1 deadline.

Okay. Regarding the warrants and the warrant exchange, can we have an update on that topic, please? Last conference call, you said that you were eager to close this transaction. But I didn't see or I didn't hear anything about this warrant exchange.

Yes, the warrant exchange continues to be on the pipeline, basically. We are very, very advanced. And unfortunately, with the 10-K issue, we were not able to carry out the offering. What we'd like to do is to be able to close the 10-K and put this issue behind so we can move forward with the offering. But we have been working to be able to carry out the transaction once we are finally able to resolve this 10-K issue.

Okay. And my last question is regarding Florida. Do you see any risk in the higher-end market in Florida? A lot of condos are being built right now, but the high income prices it has not reached in the last month. But should we expect a slowdown in this market, or it's just some kind of commencing right now?

Well, the high end, as I said on the question from Jeremy Hamblin, the high end has slowed down a lot, but we see a strong demand for the lower end, which is the rentals and the mid-rise condominiums but also a strong demand on hotels and offices. We don't perceive that we are going to slow down as far as sales, but the condominium side is going to slow down for at least a year or two until all the condos are fulfilled.

Okay, thank you very much.

Bob Evans, Pennington Capital.

I forgot one other question. As it relates to the warrants, I assume that, once your 10-K is filed, that we should see the warrants converted shortly thereafter. Is that the plan?

We want it more than anything else. We want to convert the warrants. We want to take out the earn-out shares and get it over with and try to manage our business the best way that we know we can and show the world that we are the best Company around.

And pay a dividend?

Of course. That is part of the deal.

Okay, thank you. Thank you very much. Congratulations on a good quarter.

There are no further questions at this time. I would like to turn the call back over to Jose Manuel Daes for any closing comments.

Well, the closing comment is very optimistic. We see a strong demand for our product everywhere. We have streamlined our production, and we are doing the same with engineering. And we believe we could keep growing even in a slower market because our share of the market is very small still. The whole market is automized, and we are going to keep gaining ground whether the market is growing or whether the market is shrinking. We have the lowest-cost company. We are going to keep streamlining the Company. We have the best margins, and we are very flexible and fast decision-makers.

Please expect the best. Thank you for being on the call. Thank you for the questions. And keep optimistic. We're going to show good results.

This concludes today's conference. Thank you for your participation. You may now disconnect your lines.