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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings. Welcome to Tecnoglass Inc.'s First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.
I'd now turn the conference over to Rodny Nacier, Investor Relations. Thank you. You may begin.
Thank you for joining us for Tecnoglass' first quarter 2019 conference call. A copy of the slide presentation to accompany the call maybe obtained on the Investors section of the Tecnoglass website. Our speakers for today's call are Jose Manuel Daes, Chief Executive Officer; Chris Daes, Chief Operating Officer; and Santiago Giraldo, Chief Financial Officer.
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 vary in a material nature from those expressed or implied by the statements herein due to changes in economic, business, competitive, and/or regulatory factors and other risks and uncertainties affecting the operations 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 beginning on slide number 4.
Thank you, Rodny, and thank you, everyone, for participating on today's call. We've had an exciting start to 2019, strong momentum continue into the first quarter, allowing us to produce record levels of revenues, adjusted EBITDA and backlog. Total revenues increased 23% to $107.2 million, marking our eight straight record revenue quarter. This was driven by stronger performance in the U.S., where we grew revenue by 46% to $92.1 million, representing 86% of first quarter revenues. This progress built on our multi-year effort to expand our customer reach and geographic presence in this attractive region.
Over the past year, the U.S. has represented 83% of revenue, we continue to experience favorable commercial construction trends, a favorable pricing environment and market share gains along with rapid penetration into the U.S. single-family residential market. A strong U.S. performance more than offset softer result in our Latin American regions, where construction activity remains muted.
A portion of the first quarter sales increase was in part due to approximately $5 million to $7 million of revenues pull forward from the second quarter with installation services growing significantly year-over-year. While, these mix of business favorably impacted gross margins. We were very pleased to limit growth in operating expenses to 5.4% year-over-year, reflecting tight cost controls and the strong operating levels.
In addition to strong results, we have had several exciting business development updates that position us well for the future. Recently form a strategic alliance with Schüco is allowing us to accelerate growth in America and to reach on the served market in the U.S. Recently awarded projects put us in the past to see benefits from a transaction beginning in the middle of 2019.
In May, we closed on our previously announced float glass joint venture with Saint-Gobain. This was a very positive step for our company, which we expect to enhance our vertical integration strategy, secure our float glass supply and generate significant synergies in the years to come.
And later this year, we expect to complete a number enhancement of glass and aluminum facilities to increase production, capacity and ultimate operations. We are excited to post this high-return initiative in place, which we expect to add to our successful track record of implementing lean initiatives and making our low cost plans in a more efficient.
With this capacity enhancement under way, we believe we are well situated to generate attractive returns, as we execute against our expanded backlog. In closing, we were very pleased with our entire team's dedication, to driving extra ordinary result.
Our core operations are strong, no partnerships, ventures and capacity investments are expected to further benefit our business, to address increasing demand. While also elevating our corporate profile and broadening local awareness of our leading architectural glass operation.
Furthermore, we have a solid balance sheet, to drive future growth and invest in additional value enhancing opportunity. We are confident in the strength of our industry leading margin business.
And expert to continue gaining share in U.S. commercial and residential construction activity. As we look to the balance of 2019, we are above for another year of record performance, and look forward to delivering or now reaffirm full year outlook.
I will now turn the call over to Chris, to provide additional details on our backlog.
Thank you, Jose Manuel and good morning to everyone on the line. Moving to our backlog on the slide 6, we ended the first quarter with a record backlog of $518 million, up 3.4% year-over-year.
This compared to $515, million at the end of the 2019 and was primarily due to the solid bidding activity. And project wins throughout the quarter. We are especially pleased, to see the project wins, in diverse geographies in line with our U.S. growth strategy.
Additionally, our Schüco partnership continues to yield positive results, complementing our strong, project pipeline that is allowing us to strengthen our visibility into 2020.
Our ongoing performance in the single-family residential market in the U.S. continues to surpass our expectations. And currently represents our fastest growth opportunity. As a reminder, many of our single-family projects are typically shorter cycle, and on the representing backlog.
The U.S. market continues to represent an increasing portion of our business, comprising approximately 83% of our backlog. And currently, our talent sales team recently added several project wins to our portfolio in the states of New York, Massachusetts and Texas.
This reflects our ongoing efforts before the penetrate U.S. and to expand our mix of business, to regions where economic fundamentals, support long-term demand for architectural glass business.
We continue to see healthy construction activity, within our U.S. markets, including projects. In our less penetrated geographies which currently represents nearly a quarter of our U.S. backlog.
We expect to complete expansion of our aluminum extrusion facilities, in the third quarter of 2019. This should allow us to serve incremental demand throughout our market, especially for aluminum products.
Furthermore, we have initiatives to automate certain processes and optimize production lines, on our facilities we should be even better positioned to advance our competitive position in the U.S., while further augmenting our structural advantages.
Overall, we are bidding on many attractive project across our diversified footprint, leading to a first quarter backlog at a new record level. We have a strong R&D pipeline, of high performance products to build upon our innovative culture as we continue to raise the global profile of our company throughout meaningful partnerships under the occasions to excellent service for our customers. A key element of our successful track record of growth industry-leading margin has been our ability to source and execute high return projects, while remaining focused on innovation productivity and capacity expansion.
I will now turn the call over to Santiago to disclose our financial results on markets.
Thank you, Christian, and good morning to everyone on the line. Beginning with our financial highlights on slide number. We were very pleased with our performance in the first quarter of 2019, we continue to broaden our customer relationships and strengthen our presence in new markets across an increasingly diversified footprint. We are expanding our reach into new markets and project types including multi-family, office buildings, high rises and hotels in addition to our growing single-family residential business segment.
As a result, we drove significant increases in revenues and adjusted EBITDA to new first quarter records. Our operating cash flow performance reflects working capital investments. This includes a build up of inventories to support a strong pipeline of projects being invoice during the first quarter of this year and beyond, while account receivables increase on a nominal basis with strong sales growth, day sales outstanding improve year-over-year with a portion of the balance being associated to retainage work on our installation business.
We spent $3.7 million on CapEx in the first quarter. With maintenance CapEx approximating $1 million and the remainder are geared toward opportunistic high return investments and efficiency initiatives, primarily to address robust demand within our aluminum frame manufacturing operations. As of March 31, we have deploy approximately half of the total anticipated capital investments of approximately $20 million. We expect to fund the remaining portion with cash on hand and existing debt capital resources.
In March, we rates net proceeds of approximately $36.1 million through a follow-on public offering of shares. We ended the quarter with a strong cash position of $62 million in the net leverage ratio of 2.2 times, down from 2.6 times at the end of 2018. These balance sheet strength supports our growth initiatives and operational enhancements moving forward.
Looking at the drivers of revenues on the slide number 9. We reported our 8th straight quarter of record revenue, which were up 23% to $107.2 million for the first quarter. Continued strong performance in the U.S. drove the strength in the first quarter sales. With the U.S. increasing by 46.1% year-over-year to $92.1 million, primarily reflecting continued strength in overall construction activity, market share gains, deeper penetration in single-family residential in a favorable pricing environment. At the end of the first quarter of 2019, the U.S. represented 86% of our total revenues. Furthermore, nearly all of our business lines grew in the U.S. market.
Looking at the drivers of adjusted EBITDA on slide number 10. Adjusted EBITDA increased 15.7% to $21.1 million from the prior year quarter, which produced an adjusted EBITDA margin of 19.7%. First quarter gross margin was 29.8% compared to 30.7% in the prior year quarter these 90 basis points difference was mainly attributable to a higher mix of service revenue year-over-year. This was partially offset by lower labor and energy cost per unit and lower depreciation and amortization costs.
Notably raw material cost increases in labor constraints affecting our U.S.-based peers have still not had a material impact on our manufacturing costs. Higher sales and lower ground and marine transportation costs were the primary drivers of the 270 basis points decrease in reported SG&A to 16.5% of the sales in the first quarter. Our operation continues to be very lean as shown by the SG&A operating leverage generated on a record quarterly sales.
Moving to our high return investments on slide number 12. In May 2019, we completed our previously announced strategic joint venture with Saint-Gobain. As a reminder in January, we purchased a minority position in Saint-Gobain's existing Colombia based subsidiary Vidrio Andino which has annualized sales of approximately $100 million. We were excited to complete this investment which reinforces our vertically integration strategy and elevates our global profile with customers, suppliers, architects and other industry participants.
Through this joint venture we have secured float glass supply, improve purchasing economics, and enhanced our ability to serve customers by having more control over the production process. This should drive better margins over the long term. Permitting processes are already on their way to start construction of our second state-of-the-art plant nearby Barranquilla in the fourth quarter of 2019.
Additionally, as we mentioned, we are making further enhancements on our glass and aluminum facilities to automate various processes, with our plan to increase our installed aluminum manufacturing capacity by approximately 25%.
These enhancements which have been ongoing since the fourth quarter of last year are expected to support our 2.5 times improvement in the efficiency of certain automated lines within glass production. The aluminum capacity expansion is expected to be completed in the third quarter of this year, while full implementation of our automation initiatives is expected to be completed by the end of 2019.
Looking at the evolution of our presence in the U.S. market on slide number 13. The U.S. continues to be the largest and most evident vehicle of our company's growth. In 2013, the U.S. market represented approximately 40% of our business.
As in first quarter of 2019, the U.S. represented 83% of our LTM sales. These rapid evolution over the last six years have been marked by several key transactions, along with ongoing initiatives to penetrate attractive markets across the country. This includes our 2016 acquisition of ESWindows to more effectively control the distribution of our products and our 2017 addition of GM&P which gave us the ability to directly install our products in projects.
Both GM&P and ESWindows have enhance our vertically integrated platform and further strengthened our structural advantages in key U.S. markets. In 2017, we entered the U.S. single-family market and have rapidly scale that business which we expect to represent over 10% of our revenues in 2019, up from less than 3% just back in 2017.
We believe that our collective markets in the U.S. will continue to grow faster than the national average. We also expect to take share in our market largely driven by enhanced relationships with new customers, proven execution in a broad range of high-value added projects and structural differences that allows to be very competitive, while maintaining a quality first approach.
In the U.S., we still only represent a fraction of the approximately $30 billion architectural glass and aluminum industry. With our exposure to both commercial and single-family residential, we see significant upside in our business to capture a rising share of the U.S. demand.
Moving to our 2019 outlook on slide number 15. We continue to anticipate stronger top and bottom line growth in full year 2019. For the full year, we remain confident in growing revenues to a range of $395 million to $450 million, with the majority of revenue growth expected to be from the U.S. market, helped partially by innovative new products, project types, geographic expansion, and single-family residential. We continue to expect year-over-year percentage growth to be higher in the first half compared to the growth in the back half based on the anticipated timing of invoicing in 2019 compared to 2018.
Based on these reiterated sales outlook and anticipated mix of revenues, we continue to expect full year adjusted EBITDA to be in the range of $85 million to $94 million. This outlook assumes favorable operating leverage on higher revenues and the higher mix of sales from manufacturing operations.
Additionally, the outlook incorporates our share of adjusted EBITDA from the Vidrio Andino joint venture which will begin contributing to our results in the second quarter of 2019.
We will also note that as we mentioned in the first quarter, we saw approximately $5 million to $7 million of revenue pull-forward from the second quarter. As a result, we saw our revenue benefit in the first quarter, so we will see an offsetting revenue impact of $5 million to $7 million in the second quarter. This is purely related to timing of invoicing on some service revenue discuss earlier.
In closing, we remain well-positioned for another year of strong growth in our business, which should allow us to unlock significant value to our shareholders. Our recent high return investments, vertically integrated low cost operations, extensive portfolio of in demand products, new partnerships, and our attractive leverage profile are all moving us in the right direction. We are very confident in our ability to achieve 2019 growth objectives, while further improving our industry-leading margins.
We thank you for your continued support of Tecnoglass. We will be happy to answer your questions. Operator, please open the line for questions.
Thank you. [Operator Instructions] Our first question is from Jeremy Hamblin with Dougherty & Company. Please proceed.
Good morning and congrats on the strong results. I wanted to start with the gross margin that you saw in the quarter. It sounded like you had a much higher mix of service revenues and that was probably the most significant impact, but with the various puts and takes you have the aluminum capacity expansion later this year, Santiago, could you give us a sense for your expectations around kind of the timing and cadence of gross margin as we move throughout the year?
Sure. Hi Jeremy. We are basically looking for gross margins to pick up sequentially. As you said the Q1 gross margin was essentially related to a higher mix of service revenue which over time is going to even out and as we pick up the exceeding capacity on the aluminum front and we are able to pull more manufacturing revenues, gross margin is going to kind of trend up to a low 30s which is what we had discussed in previous calls and what we had guided to. So, this is just a timing issue on service revenue.
And for the year, you're still thinking kind of in that 33% range?
Yes, yes, that will be a target for us.
Okay, great. And then switching gears to your Colombian business which has struggled and I think you've been patient and ask for some patients from investors in terms of thinking about that business. You've continued to see it languish a little bit here. I don't know if Christian or Jose Manuel you want to give some sense of whether we're starting to see traction there. How we should be thinking about that in 2019?
Hello Jeremy, Jose here. I believe 2019 is going to be flat with the last year, but 2020 looks better because now that the election is gone last year, the government seems to be stabilizing. People are starting the projects that they put on hold.
That being said, I mean it's going to pickup but, as a portion of our business is very small now. So maybe it’s going to pickup 10% to 15% next year. We throughout the end is not going to be that much in the overall. We see strong demand, we have really nice backlog for next year also on the U.S. So we're very optimistic.
Okay great. Thanks. And then, to that point you obviously have had a phenomenal run here in the U.S. and clearly capturing market share. I wanted to get a sense of what you're seeing out in the marketplace from competitors, the competitive response to --you moving outside of your dominant region in Florida and obviously seeing contract wins in other geographies across the U.S. whether that's the Northeast Texas or key markets in the Midwest. Are they getting more aggressive on price? What type of competitive response are you seeing as you move into these newer geographies?
Jeremy, in order to penetrate some markets, you have to give a discount because they used to their usual provider always trying with the new supplier is not easy. But after the first or second job when the client gets acquainted with you, everything turns back to normal. We have done great performances in the Northeast and also in Texas. So believe that the margins are going to go up, because now the clients are comfortable that we are going to deliver, that we have a good product and we are responsible.
Okay, great. And then I wanted to come back to your residential business in other areas that you've seen expand. You gave a little bit of color on this last quarter, and I might have missed it on this call. But, in terms of what did you do in Q1 here in the residential side of your business, and how did that compare to Q1 of 2018?
We are increasing the residential, but it's still is a learning curve, like I told you is a totally different animal and we don't wanted to outgrow ourselves and sell too much and then make a mess. We are growing around 20% to 25% a year, which is really nice, I believe with this around $13 million in the first quarter, which is the softest of them all, so around $50 million to $60 million we're going to be happy with that.
Yeah. That would be pretty strong growth. Okay. Last item and just want to clarify Santiago, the commentary around the $5 million to $7 million pull forward. How should we be flowing -- in terms of flowing that through here in Q2, clearly you've been seeing sequential growth going back to 2017? I think what you're implying is we should not expect sequential growth in Q2, but should we be expecting still year-over-year growth in Q2 on the sales line?
Yes, yes, Jeremy, and obviously the $5 million pull forward it's going to decrease what we had originally expected for Q2. That being said, we have good traction in Q2 and Q3 tend to be good quarters and we're expecting Q2 to be along the same lines of Q1 based on the visibility that we have in hand. So certainly strong growth year-over-year, I don't know that from a sequential perspective, we're still going to be able to grow given that pull forward, but definitely strong growth year-over-year from Q2 to Q2.
I'm sorry, maybe I misunderstood. You're expecting Q2 to be up similar in terms of growth rate, like in the 20% range?
No, no, no, no. No, no. No, not because you had the $5 million to $7 million pull-forward which, kind of, benefited the comparison. Like we said, we think that this is going to be the fastest or the strongest growth from a Q versus Q perspective on a percentage basis and that's going to level off from Q2 on.
So from a percentage perspective, it's going to be a more normalized growth year-over-year. And to baking, to get to the midpoint of guidance, you'll have to kind of come closer to high-single digits to low double digits to get to that end.
Understood. All right. Thanks for taking the questions. Good luck, guys.
All right. Thanks, Jeremy.
Our next question is from Julio Romero with Sidoti & Company. Please proceed.
Hi. Good morning.
Good morning, Julio.
I wanted to ask about the enhancements to the glass and aluminum processes. If you could talk about the progress there and I know you mentioned it should be by end of 3Q, but when can we expect that increased capacity to flow through? Does that capacity open up all at once? Or is there sort of a step function to capacity there?
Julio, this is Christian Daes. We expect aluminum expansion do be running by 15 of July and we are on track. As a matter of fact we'll begin installing the new press next week. So we could see, on the third quarter already, results for the additional aluminum capacity, which we believe is going to bring in good profits there.
And on the glass side, we're still on track. The project is supposed to be finalized by October 15. Once that's done, our capacity will not only be twice what we can do today, but also it will be much quicker. So the response to customers will be -- the lead times will be cut by a weak. So we expect to -- this to be really a real turnaround for our customers and to be able to sell a lot of people that we cannot sell them now, because of the lead times on the transportation times that we have.
Okay. Understood it. And with the additional extrusion line and with the furnace and the increased glass capacity, what does that do to your go-forward CapEx needs, maybe on an annualized run rate basis?
No, no, no. After we do this CapEx, I mean, we are done for quite some time on CapEx, probably maintenance will be $4 million to $5 million a year, but everything that we are investing, for example, in the atomized aluminum storage on the glass on the sorting and the -- and all of that that we're doing is going to bring serious cut -- expenses cut and also increase the reliability and the quickness that we're going to be able to give customers. So that will definitely have an impact and we expect to be able to work without investing any more CapEx here.
Okay, helpful. I'll hop back into queue. Thanks very much.
Thank you.
Our next question is from Tim Wojs with Robert W. Baird & Company. Please proceed.
Hey, everybody. Good morning. Nice job.
Good morning.
I guess, maybe, if you could talk a little bit, just about what you're seeing from a quoting perspective in the U.S. I know you saw some pretty decent backlog growth. And I would assume, just given the pull-forward and install, that you had, the underlying backlog growth might have been a little bit better than what you've reported. So just, kind of, what you're seeing in the market, I think, would be helpful from a quoting perspective?
Yes, Tim. This is Jose Daes, we are quoting a lot, I mean, the movement in Florida, for example, that was really quite last year. This year we're seeing a lot of movement in quoting in Tampa, Sarasota, Jacksonville, Orlando even in the Miami-Dade, Broward and Palm Beach counties no large projects are on the pipeline.
So we expect the sales to increase for the years to come. And since we are now selling in Boston and New York successfully we have finished some beautiful jobs and people are happy we expect those stage to add up a lot of new buildings for us in the next couple of months.
Okay. So it sounds like you're seeing a pretty good recovery in the Florida activity. I guess second question just on pricing. How is pricing kind of been, I mean I know it's been a modest contribution in Q4 and it sounds like again in Q1. Any way to kind of quantify what the pricing contribution you're seeing to growth in backlog is?
Well Sometimes it depends when you're getting a new client you have to discount your price in order to convince the people to change supplier. But after you do the first or second job everything is normalize and then charge you by what you will be -- and the reliability the quality of the glass, the timing of deliveries and then you can increase the price again. We believe our gross margin is going to stabilize in the 32%, 33% maybe even grow a little bit for years to come because after we give the clients we can increase the prices 2% or 3% 4%.
Just as a follow-up Tim on what you see on backlog is mainly volume because these are contracts that have long lead times and they have been signed for a while as you know. So you're not going to see a whole lot of volume, a whole lot of pricing related increase there is going to be related more to volume than anything else.
Okay. And then when we think about just -- so SG&A as a percentage of sales was a lot lower than what we had modeled. How should we kind of think about that for the year and kind of what's your expectation for any sort of leverage in the remainder of 2019?
Well we've indicated in the past that what we had expected was for operating leverage to come from SG&A which is exactly what you guys saw in Q1. There is no reason to believe that on a nominal basis SG&A will go substantially higher order than the variable cost in there which are mainly commissions and transportation which obviously we don't have a whole lot of control over on the transportation side.
But our target is to be able to maintain a certain stable level of SG&A for the rest of the year outside those variable costs. So we expect to continue gaining leverage on added sales on SG&A. There is no reason why we shouldn't be able to do that.
Okay, great. Good start to the year and good luck on the rest of it.
[Operator Instructions] Our next question is from Joshua Wilson with Raymond James.
I wanted to make sure we're really clear on gross margin. Could you talk about what the impact was on gross margin for the quarter from the sales pull forward, so we can get a sense of what the snap back might eventually be?
Yes. The normalized gross profit as we've discussed in the past is low 30s. So basically you can bake in probably 150 basis points there on the mix of revenue that was pulled forward. And as we discussed earlier, our thought is that over time and for the year, we get back to the normalized levels once the mix of business normalizes as it has been historically.
Got it. And what is your guidance assuming on the cost and what trends are you seeing there?
I'm sorry the guidance on what?
What's baked in for costs?
I'm not following. I'm sorry.
In terms of inflation in either transportation or raw materials?
No. We're not expecting inflation on transportation or raw materials; we are not baking in significant upside costs on that. As we have mentioned before, we have not seen any increase on aluminum or marine transportation.
The only thing that we really saw inflation on last year was land transportation. So we're doing some things to optimize that. But we are not baking in any inflation on those costs. The guidance that we had provided earlier in the year for the full year just baked in somewhat stable cost on that front.
One more clarifying question for me. Did I hear right that your sales guidance assumes -- the Latin American sales are flat year-on-year for the full year?
Yes. That's correct.
And so what is the timing of the snap back to offset the decline we had in the first quarter?
Sequential growth, I mean what we’re expecting is for LatAm to pickup sequentially and not many ups and downs. So what we have baked in is basically stable quarters that are better than Q1 to come back to the same level as 2018 in no particular order based on what we have projected for the jobs that are going to be on in Colombia and LatAm.
Got it. Good luck with the next quarter.
Thanks, Josh.
We have reached the end of our question-and-answer session. I will now turn the call over to Jose Manuel Daes, Chief Executive Officer for closing remarks.
Thank you, everyone for participating in today's call. We hope to keep growing the business and there will be better margins and cash flow. Thank you.
Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.