Tecnoglass Inc (TGLS) 2016 Q3 法說會逐字稿

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

I would now like to turn the conference over to your host, Rodny Nacier with ICR. Thank you, Mr. Nacier; you may begin.

Thank you for joining us for Tecnoglass's third-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, and Santiago Giraldo, Deputy CFO. 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 within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our future financial performance, future growth, and future acquisitions. These statements are based on Tecnoglass's current expectations or beliefs and are subject to uncertainty and changes in circumstances.

Actual results may differ in a material nature from those expressed or implied by any of the statements herein, due to changes in economic, business, competitive, and/or regulatory factors, and other risks and uncertainties affecting the operations of Tecnoglass's [figures]. These risks, uncertainties, and contingencies are indicated from time to time in Tecnoglass's filings with the Securities and Exchange Commission. The information discussed during the call is presented in light of such risks.

Further, investors should keep in mind that Tecnoglass's financial results in any particular period may not be indicative of future results. Tecnoglass is under no obligation to and expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events, changes in assumptions, or otherwise. I will now turn the call over to Jose Manuel.

Thank you, Rodny, and thank everyone for participating on today's call. I will begin with a review of third-quarter highlights. Santiago will then discuss more details on our operations, our financial results, balance sheet, and outlook.

Proceeding with our financial highlights on slide 4. Tecnoglass is a leading manufacturer of architectural glass, windows, and associated aluminum products for the global commercial and residential construction industry. We have grown our business significantly since 2012, with a significant majority of that growth coming from the US.

The positive momentum in our overall business continued into the second half of 2016. We outpaced industry growth in our primary US and Colombian markets to deliver 27% growth in net sales. We experienced a strong progress across our diversified footprint. In the US, we gained additional market share with revenues up 16.1% year over year, increasing for the 15th straight quarter. In Latin America, we performed extremely well, with Colombian revenues up 51% in local currency.

We grew operating income by 42% and increased adjusted EBITDA by 21%. This profit growth was derived by our growth in sales, coupled with our low-cost, efficient, and vertically integrated operations, which continued to provide us with a sustainable platform to provide industry-leading margins.

Turning to slide number 5, our progress throughout the America is evident in our backlog. We drove 12% year over year to a record $402 million, with a good mix of project wins in all served regions. We also increased backlog from $398 million at June 30, representing the eighth quarter of growth, which reinforces the strength of our strategy, product diversity and widening customer relationships.

Favorable demand in our commercial construction end markets is also a contributing factor. The building environment was strong throughout the third quarter and remains very active. We ended the quarter with good visibility on our multiyear project pipeline and we are actively pursuing new projects to grow our business.

I will now turn the call over to Santiago to provide additional details on our operations, results, and outlook. Santiago?

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

Turning to slide 6. Looking more closely at our backlog by geography, a significant portion of our growth in recent years reflects our targeted efforts to use our dominant stronghold in Florida to expand into other US markets through our longstanding commitment to quality, innovation, and service.

This US expansion continues to drive high margins in our business, and we now operate in a growing list of highly populated areas, such as Baltimore, California, New York, New Jersey, and Texas. To be clear, while we have received a healthy amount of quotes in new markets, we also continue to see a lot of quoting activity in our Florida base.

Overall, approximately 60% of our backlog was for the US market, supporting our expectation for the US to continue to represent the largest share of our business.

In Colombia, the improving economy and rising income per capita is supporting a strong pipeline of commercial construction activity. We are further capitalizing on our local leadership position to produce outpaced market growth. This rapid growth is reflected in backlog, which has a strong mix of Colombian projects compared to a year ago.

Moving to slide number 7. Our end markets are primarily commercial, which tends to lag residential by one or two years and provide some visibility on coming growth or contraction in out years. As you can see in our backlog trend, approximately 90% of our business comes from commercial, which includes multifamily projects.

In these commercial markets, we continued to experience a favorable pace of activity throughout our footprint in mid- and high-rise rental buildings, office buildings, and hotels. The remainder of our business is residentially focused, which remains a potential long-term opportunity as we introduce new products as part of our short-term strategy.

Moving to slide number 8. During the third quarter, we gained additional market share in the US as we continued to broaden our customer relationships and strengthen our presence in new markets across an increasingly diversified footprint. Our expansion is also benefiting from the favorable construction recovery and limited excess production capacity. Even though the multifamily high-rise building activity in south Florida may soften in the future, we are compensating with other types of projects, such as rentals, office buildings, high rises, and hotels, as previously mentioned.

The ABI index continues to support an expansionary environment, with most of that growth in the southeast, where we enjoy our strongest leadership positions. The ABI rating is further supported by the Dodge data, which shows us -- shows US construction activity up 10% in 2016 and poised for low double-digit growth in 2017, including office and store construction, which represent a large part of our business.

Furthermore, I'd like to add a few points which are specific to our business. Number one, we typically bid on large multimillion-dollar projects which have long lead times, allowing us to prepare for a pipeline of non-project activity, as you can see in our backlog. Number two, we sell a diversified set of windows and glass products, which help us broaden our exposure to several types of commercial project activity. Number three, our focus on new product introductions continues to win us new contracts and increased business with current customers. Finally, our strategy, manufacturing capacity, location, and access to talented labor gives us a very sustainable competitive cost advantage.

Moving on to slide number 9. We believe our primary growth channels are in the US longer term. That said, we have had phenomenal success in Colombia during the past several years. The Colombia economy continues on its positive growth trajectory. The Colombian GDP is growing at a steady low single-digit pace, held by a widening middle class and expanding economy focused on construction and infrastructure development.

To that point, on the bottom right chart, construction licenses in Colombia increased 25% in 2015, and based on quoting activity we have seen year to date, we're fairly confident that statistics on built areas remain very robust in 2016. And I'll add -- we'll add as the number one glass and windows company in this market, we have advantageous position versus foreign peers, given our local manufacturing footprint, deep customer relationships, and a low cost structure.

We ended the quarter with good visibility on our multiyear project pipelines in Colombia, and we are actively pursuing new projects to grow our business. While we cannot control the pace of the commercial recovery in the US, Colombia, or Latin America, the commercial activity I discussed today in our markets gives us confidence that we can continue to grow our sales faster than the architectural glass and windows industry for the upcoming years. We are very nicely situated and truly believe we have a unique position in a very attractive industry across the US and Latin America.

Moving to slide 11, I'd like to briefly recap our business strategy, which has worked exceptionally well for Tecnoglass. The activity that Jose discussed represents the combination of these positive attributes of our business. We are continuously investing in our state-of-the-art facilities to enhance our production efficiencies and produce high-performing products to broaden our project base. This is further supported by a commitment to quality and innovation, which we are able to achieve on multiple points of our vertically integrated value chain. And we -- our plant, strategically located down the road from the most northern ports in Latin America, we can maintain fast and reliable delivery to our over 900 global customers.

Moving to slide 12. We are actively investing in our manufacturing facilities to address continued growth and incremental backlog. We are also actively implementing lean manufacturing practices to gain manufacturing and logistical efficiencies across our 2.7 million square-foot plant.

On prior calls, we had provided updates on select investments underway in 2016 to address capacity. On this slide, we [debut] some of the key capacity figures throughout our vertically integrated operations to give us a sense of how we are investing in our business at a measured pace to meet our growth objectives. As you can see, we have the capacity to grow our business 30% to 50% across most production processes.

In our tempering facility for Tecnoglass SA, we installed a new insulated glass unit. We are installing one tempering line, one silk screening automatic machine, and one new insulated line in a new co-located plant that adds to the other lines installed this year. These additions will help us increase output at our glass tempering facility, mainly using our internal supplied soft coat glass. At our soft coat glass facility, internal demand is consuming 20% of the soft coat system, which remains on target versus regional projections and still leaves us significant room for external sales over time.

Turning to slide 13. We have undergone a robust CapEx expansion phase in recent years to stay ahead of sustained growth in customer orders. We had an intense CapEx investment phase in 2015 with the completion of our soft coat facility and other operational enhancements. Collectively, our investments in capacity have helped us more efficiently expand our production capabilities to better serve our customers.

In 2016, our investments have been more targeted, which have driven down CapEx as a percentage of sales to 18.5%, and that leaves us with a strong installed capacity to grow in the years to come. Furthermore, we are pleased to have completed these investments while maintaining prudent debt levels and conservative leverage metrics, with net debt to EBITDA below 3 times. We expect our growth in the US and Latin American markets to continue as we move forward into 2016.

Turning into some recent developments in our business, on slide number 14. In September, we completed a warrant exchange offer with a successful tender of approximately 82% of the outstanding warrants, which has derived in a more robust equity structure and lower volatility in our P&L. The untendered warrants will now expire by December 20, at which point we will fully eliminate such liability.

So through the offering, we were able to attain three main benefits. First, our outstanding shares available to the public increased by 72% to 10.1 million shares through the offer alone. Secondly, we expect our future US GAAP quarterly financial results to better reflect core operating results as a result of reduced quarter-to-quarter volatility from the accounting impact for changes in the fair value of the warrant liability. Finally, the offer improved our leverage position and credit metrics through a substantial reduction of the warrant liability and commensurate increase in shareholders' equity. So overall, we are thrilled to have this exchange completed.

Subsequent to the warrant exchange, we also initiated an annualized dividend of $0.50 per share, representing a 4.6% yield at the time of the announcement in August 2016. The first quarterly payment of $0.125 is on track to commence tomorrow, November 1. We gave stockholders the option to take dividends in cash or stock, of which 80% elected stock. As a result, on November 1 the Company will pay approximately $790,000 in cash and issue 275,000 shares of stock dividends for the first quarterly dividend.

We view this stock/cash combination as a very attractive feature of our newly initiated dividend policy, which returns a portion of excess capital to our shareholders, while providing us increased flexibility to continue investing in our rapidly expanding operations for years to come.

I will provide an overview of our financial results, beginning with slide number 16. During the third quarter 2016, we produced considerable revenue growth, resulting in 21% expansion in adjusted EBITDA. Looking at our revenue bridges, increased sales reflect an accelerated pace of activity in the different regions. On a reported basis, total revenues increased 27.2%. On a constant-currency basis, with FX rates held flat at 2015 levels, revenue increased at a comparable 27.4% year over year, with an only marginal 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.

In the US, revenues improved 16.1% to $50 million for the third quarter, reflecting increased project activity in Florida and diversification to a range of projects in other states, including New York, New Jersey, Baltimore/Washington, and Texas.

Overall, the US represented about 62% of our third-quarter revenues, compared to 59% in the second quarter of 2016. Colombia revenues in local currency or on a constant-currency basis increased 51% for the third quarter on the strength of the healthy construction activity. The unfavorable foreign-currency impact resulted in Colombian revenues up 50.4%, compared to the prior-year quarter.

Turning to slide 17. Adjusted EBITDA grew 21% to about $20 million for the third quarter. As a reminder, adjusted EBITDA excludes the impact of foreign-exchange gains and losses related to the monetary balance-sheet accounts and also excludes an FX gain of $2.4 million, compared to an FX gain of one -- $8.1 million in the prior-year quarter.

Looking at the adjusted EBITDA bridge, improvement was mainly related to a $5.9 million increase in gross profit, comprised of $6.5 million related to volume, marginally offset by price and product mix. This improvement more than offset $0.5 million of additional SG&A spend to support our growth activities. Overall, we are extremely pleased with the core improvement in our adjusted EBITDA.

Moving to slide 18. Here, we provide a more complete picture of our financial results. Q3 gross profit increased 25% to $29.6 million, compared to the prior-year quarter. Gross margin was 37%, compared to 37.7% in the prior-year quarter. SG&A as a percentage of revenues improved 260 basis points year over year to 17.8%, with increased revenues more than offsetting higher shipping costs to serve more distant markets and support lean manufacturing activities.

Operating income increased to $15.3 million from $10.8 million, with operating margin up 200 basis points to 19.2%. Reported operating income is impacted by FX exchange, but non-cash items, such as the gain or loss on earnout shares and warrant liabilities, are reported below the operating line.

GAAP net loss was $7.9 million or a $0.20 loss per share, as compared to a net loss of $1.9 million or an $0.08 loss per share in the prior-year quarter. Excluding the changes in non-cash warrant and earnout share liabilities, adjusted net income for the third quarter was $7.6 million or $0.20 per share, compared to an adjusted net income of $10.7 million or $0.42 per diluted share in the prior-year quarter.

Notably, Q3 adjusted net income included a significantly lower foreign-currency gain of $2.4 million, in compared to a foreign-currency gain of $8.1 million the prior-year quarter. Along with higher interest expense that was more than offset by higher -- that more than offset higher operating income.

The implied tax rate to derive adjusted net income was approximately 44% in the current- and prior-year quarters, with both periods impacted by the timing of nondeductible expenses under Colombian tax rule, which can vary from quarter to quarter. We continue to expect our long-term normalized tax rate to an approximate 40%.

Turning to the balance sheet on slide number 19. At September 30, our cash position stood at $18.1 million and long-term debt was $202.6 million, which include capital leases. As a result of the warrant exchange, $26.3 million was moved from the liability side of the equation to the shareholders' equity upon completion of the offer.

Moving to the outlook on slide number 20. Our strategic investments in capacity, products, and people, combined with our business development activities and growing project portfolio, provide us with a firm foundation to achieve another year of very good adjusted EBITDA improvement. Our improving backlog continues to translate into an upward trend of positive results in net sales and adjusted EBITDA.

As a result, we reaffirm our full-year revenue outlook growth of 20%, representing revenues of $288 million. We also reaffirm the adjusted EBITDA range of $70 million to $75 million, implying roughly a 32% growth at the midpoint compared to $55 million in 2015, which also excludes FX gains and losses.

The entire Tecnoglass team is pleased with the expectation to deliver another year of double-digit growth in net sales and adjusted EBITDA, which is well ahead of industry growth rates. We remain very excited about the opportunity to generate shareholder value in 2016 and beyond.

We thank you for your continued support. We'll be happy to answer your questions. Operator, please open the line to questions.

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

Congratulations on another strong quarter. I wanted to start by just asking about the sales guidance for the fourth quarter. You know, the implied figure is right around $70 million, a step down from what you saw, obviously, the last two quarters, and just want to make sure I understand that you did see strong backlog growth again. Is this just seasonality? Is this because you have greater exposure into US markets than you ever had before? Just can you provide some color on the step-down on sales from the run rates that you've seen the last couple of quarters? Or is it just specific to individual projects?

I'll take (multiple speakers)

Jeremy, let me explain. We close the factory around the 20 or 22nd of December, so we have one week left to work. And number two, we are being conservative. We hope to do a little more than that. But as I said, we close one week and we want to play it conservative.

Okay, great, understood. And then in terms of -- in a similar vein, just looking forward, you do -- the $400 million plus in backlog provides nice visibility on 2017. Just in terms of the industry, we understand that you are taking share. How do you think the industry is shaping up? Would you expect your peers also to see nice growth heading into next year? Do you feel like market conditions remain strong?

Yes, I do, I do. We are not only in the market to sell windows. But we also sell glass and aluminum to some of our competitors, and everybody is increasing.

So we believe the market is strong and we believe everybody is going to grow, I don't know if at our pace or not. But the market has weakened in a few spots. Like, for example, in south Florida, we see the slowdown in commercial high-rise for multifamily condos. But, by the same token, we are seeing a lot of hotels, commercial properties for offices and shopping centers, and a lot of rentals now. I mean, rentals is really strong, high-rise for rentals. So one thing compensates the other.

And this is -- we're moving away from Florida a lot. We are gaining a lot of ground in Boston, Chicago, and Philadelphia.

Great. I also want to -- I'm not sure if Christian was on the line, but I wanted to ask about the progress being made on the soft coat production facility. And I know that got off to a slower start this year than had been planned. Any status update on that, when you expect to achieve the $6 million to $8 million in annual savings run rate that you had forecast about a year ago?

Christian is not on the line, but I can answer that.

The thing is this, Jeremy. What we have found now that most of the glass that is sold with soft coat, it's insulated. We were not prepared enough for insulated lines. So we added two insulated lines, and we're adding one more in January and perhaps another one in June in order for us to sell the additional capacity we have in soft coat. That is what is happening.

So it sounds like that the expectation would be to get to that savings run rate by the middle of next year. Is that accurate?

Yes.

Okay. What about in terms of -- I know there had been -- one of the issues was that you had started some projects using externally sourced soft coated glass and, wanting to make sure to please customers, did not want to transition to your proprietary product. Have you mostly transitioned at this point to not have any leftover projects that had PPG glass, as opposed to the Tecnoglass? Are we kind of through that phase?

Yes, we are mostly out of it. We are like 85% done. There remains two or three jobs that we just need to finish and that will be it. We hope by March or May we may end up with -- I mean, all the backlog we have on the PPG glass.

The problem with transition is that no matter what you do, since our machine is a lot newer than theirs, the color difference, even though it's slight, there is a difference, and we didn't want to mix one glass with the other because then it might look different and we'll have a lot of trouble.

Okay, understood. Just shifting gears here, a question I think for Santiago on the share counts. Could you just walk me through? I see on slide 14 the results of the dividend election. There is a quote in here for roughly 31.6 million shares. Is that basic shares outstanding or is that the diluted count?

That includes 1.5 million of earnout shares that have not been released, Jeremy. So as of now, what you see is closer to 30 million and what you will have on a fully diluted count is the remaining warrants that have not been exercised, plus the 1.5 million that I just mentioned. That will get you to a full diluted count of about 31.6 million.

Okay, and then modeling going forward, we should be thinking there is probably going to be a similar election profile to take stock dividends and so we could be adding roughly 275,000 to 300,000 shares per quarter to the basic share count.

Yes, actually there was an 8-K filed this morning reiterating that Energy Holding Corp. as majority shareholder is committed to take in stock for the three next quarters. So it's a fair assumption to model a similar breakdown on the election.

Okay. I wanted to just ask one other question related to input costs and what you're seeing. We have seen a little bit of a rise in aluminum costs over the last month or two. Just in terms of -- could you comment on what you're seeing overall on input costs? And as it relates to your gross profit, you saw a nice acceleration on gross profit, almost 300 basis points from the second quarter, and we know there were some things specific to El Nino in Q2, but how should we be thinking about gross margins moving forward? Is this kind of 36% to 37% range a pretty good estimate on that?

Yes, I think that's a fair assumption and a conservative way of looking at it.

We mostly try to make our raw materials cost as a pass-through in the way that we structure our contracts, so despite of what volatility you may see on raw material prices, you should expect us to maintain -- to be able to maintain our margins going forward. We would always like to get a pickup of additional spread in there, but being conservative I would model it at that range, between 36%, 37%.

To this effect on products mix, I saw that was a slight drag in the quarter. Given the backlog, the visibility you have there, how should we be thinking about product mix as a contributor to gross margins for 2017?

I don't know if Jose Manuel has a different opinion, but I think you would continue to focus on a lot of commercial-type construction and just kind of model it flat. I think it would be too risky to assume otherwise, given the composition of the current backlog. I think you would just assume that product and product mix, which probably not changed margins significantly, and everything is just going to come more from the volume side of the equation.

Understood. Congratulations. I'll hop back in the queue to let others ask questions.

There are no other questions in the queue. I'd like to hand the call back over to management for closing comments.

Okay, thank you, everybody, for participating in today's call and for the continuing interest in Tecnoglass. We look forward to speaking again soon. 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.