© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
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. second 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 would now turn the conference over to your host, Rodny Nacier, Investor Relations. Mr. Nacier, you may begin.
Thank you for joining us for Tecnoglass' second quarter 2019 conference call. A copy of the slide presentation to accompany this call may be obtained on the Investors section of the Tecnoglass website. Our speakers for today's call are Chief Executive Officer, Jose Manuel Daes, Chief Operating Officer, Chris Daes and Chief Financial Officer, Santiago Giraldo.
I would like to remind everyone that matters discussed on 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 four.
Thank you Rodny and thank you everyone for participating on today's call. We closed out the first half of 2019 with record levels of gross profit, adjusted EBITDA and backlog. Second quarter total revenues increased 28% to $113.9 million, marking our ninth straight quarter of record revenues. This success was largely driven by continued rapid expansion in residential and overall market share gains. The U.S. continues to represent the larger mix of our business, increasing to 87% of our second quarter revenues. This compares to 79% a year ago.
Furthermore, we generated cash flow from operations of $14 million in the second quarter, reflecting increased profitability and enhanced working capital management. On this positive momentum, we increased adjusted EBITDA by 41% to $25.8 million. This adjusted EBITDA growth resulted from our continued successful U.S. market penetration and other product mix. The strength of our low-cost, efficient and vertically integrated operations was evident. This continues to provide a sustainable platform to drive industry leading margins.
In addition, in May 2019, we completed our previously announced float-glass joint venture with Saint-Gobain. This was a very positive step for our company. We expect the JV to continue to enhance our vertical integration strategy, secure our float-glass supply and generate significant synergies over the coming years. The joint venture has already contributed to our results. It added about $1 million to our adjusted EBITDA in two month of operation during the quarter. This is an encouraging start.
Our joint venture is well-timed and we are rapidly expanding backlog and sales. In response to strong demand, we were also pleased to complete the expansion of our aluminum extrusion facilities in July. This modern state-of-the-art facility will help us to more efficiently serve the incremental aluminum demand throughout our markets. We are now even better situated to advance our competitive position in the U.S.
Our additional high return investments to automate key operations at several of our glass and aluminum facilities remain on track to be completed by year end. We expect these capacity upgrades to increase the efficiency of our operations and better position us to generate attractive returns as we execute against our backlog of projects.
Overall, we are very pleased with our positive momentum combined with our growing backlog, which provide us with a strong multiyear visibility. We are confident in the strength of our business and expect to continue gaining share in U.S. commercial and residential construction activity. We are energized by our year-to-year of great progress, which supports our increased full year outlook for revenue and adjusted EBITDA.
I will now turn the call over to Chris to provide additional details on our backlog.
Thank you Jose Manuel. Moving to our backlog on slide six. We ended the quarter with an attractively positioned backlog across a growing number of U.S. markets. Our second quarter backlog grew an impressive 6% year-over-year to a record level of $535 million. This reinforced the strength of our strategy, product diversity and broadening customer relationships. Each completed project elevates our reputation for excellence and our business is benefiting as a result.
The second quarter backlog level represents more than 1.3 times our last 12 months revenue, which is very encouraging. The U.S. market continues to represent an increasing portion of our business, comprising approximately 84% of our backlog. This compares to 79% in the second quarter of 2018. We continue to experience favorable residential and commercial construction conditions in the U.S. Our experienced sales team recently added several project wins to our portfolio in the state of New York, Texas and Washington. This reflects our ongoing efforts to diversify our geographic presence and product mix in very good markets with solid economic fundamentals throughout the U.S.
Additionally, our alliance with Schüco is allowing us to further accelerate growth in the U.S. markets. We were recently awarded several exciting projects with Schüco product lines in the Northeast, which are reflected in backlog. Our strategic footprint penetration into the residential market and our structural competitive advantages continue to support our ability to capitalize on strong bidding activity. As a result, our revenues are reflecting record levels of invoicing at industry-leading margins.
Additionally, the continued outperformance in our key operating metrics underpinned by our focus on innovation throughout our high return projects, talented sales teams and strategic partnerships and improved productivity. Our performance in the residential market in the U.S. continues to surpass our expectations and support our upwardly revised growth outlook for 2019. As a reminder, many of our single-family projects are typically shorter cycles and underrepresented in backlog.
In conclusion, we are very pleased with our results to-date in 2019. We continue to target new customer relationships and leverage our widening U.S. footprint. We are activity enhancing the quality of our projects to expand our business in a disciplined manner. Given our strong pipeline of business, we look forward to several additional catalysts from our discussed partnerships and the high return investment. This should support our ability to continue growing our business by providing excellent service and high-quality architectural glass products to our customers.
I will now turn the call over to Santiago to discuss our financial results and markets.
Thank you Christian. Beginning with our financial highlights on slide number eight. In the second quarter, we substantially improved our results across nearly all metrics including sales, adjusted EBITDA, margins and adjusted net income. We accomplished this while continuing to rapidly penetrate the U.S. market, especially in residential where sales more than doubled compared to the prior year quarter.
We spent $10.1 million on CapEx in the second quarter, most of it gear towards opportunistic high return investments and efficiency initiatives. Our operating cash flow performance in the quarter of $14 million reflects our efforts to improve our management of working capital and a higher mix of residential revenues, which typically carry a shorter collection cycle. We ended the quarter with a strong cash position of $48 million and a net leverage ratio of 2.4 times, down from 2.8 times last year. This balance sheet strength supports our growth initiatives and operational enhancements as we move forward.
Looking at the drivers of revenue on slide number nine. We reported our ninth straight quarter record revenues, which were up 28% to $113.9 million for the second quarter. Continued outperformance in the U.S. drove the strength in second quarter sales with the U.S. increasing by 42.2% year-over-year to $99.3 million. The U.S. primarily reflected stronger residential invoicing, healthy commercial construction activity, market share gains and some price and mix improvement. Solid U.S. momentum is more than offsetting the softer demand environment in our LatAm regions.
In fact, with the significant shift in our business to the U.S. during the five past years, the United States actually represents a higher percentage of Tecnoglass revenue mix as compared to the percentage mix of revenue generated in the United States by most of our U.S.-based building product peers. On a trailing 12-month basis, as of the second quarter 2019, the U.S. represented approximately 85% of Tecnoglass total revenues. This compares to an average of 79% for the U.S.-based building products peer group. This is an impressive accomplishment for Tecnoglass and further establishes as the premier U.S. listed building products company.
Looking at the drivers of adjusted EBITDA on slide number 10. Adjusted EBITDA increased 41.1% to a record $25.8 million from the prior year quarter. This produced an adjusted EBITDA margin of 22.6%. Gross profit increased 57.6% to a record $38.8 million in the second quarter, representing a 34.1% gross margin. This compared to a gross margin of 27.7% in the prior year quarter. Our improvement in gross margin primarily reflected greater operating efficiencies and a favorable mix of higher margin products across our footprint. Excluding nonrecurring cost of approximately $3.6 million in the prior year quarter, gross margin improved approximately 240 basis points year-over-year.
As part of our structural competitive advantages, raw material cost increases and labor constraints affecting some of our U.S.-based peers have still not had a material impact on our manufacturing costs. We were especially pleased to improve our operating expenses as a percent of revenue by 100 basis points year-over-year to 18.1% in the second quarter. This reflected higher revenues, tight cost controls and strong operating leverage on personnel and professional fees. Excluding one-time items, operating expenses would have been 17.8% as a percentage of total revenues compared to 18.9% in the prior year quarter.
Looking at our continued expansion into residential market on slide number 12. As a note, we refer to U.S. single-family residential as a residential business. We classify all other sales, including medium and high-rise condos as commercial. In 2017, we entered the U.S. single-family market and have rapidly scaled that business. This expansion has far exceeded our initial expectations, representing 16% of our U.S. revenues in the last 12 months as of the second quarter 2019. This is up from 3% of U.S. revenues just two years ago. Second quarter residential sales more than doubled from prior year quarter.
New product introductions, expanded customer relationships and our proven ability to execute with a quality-first approach have led to continued share gains in this segment of our business. In the U.S., we still only represent a fraction of the approximately $30 billion architectural glass and aluminum industry with an estimated two-thirds of the market opportunity in the residential end segment. We believe that our collective efforts in the residential segment along with our more established commercial reputation will allow us to continue to grow faster than the national average. With this in mind, we see significant upside in our business to capture a rising share of residential and overall market share in the U.S.
Moving to our high return investments on slide number 13. In May, we were excited to complete our float-glass joint venture with Saint-Gobain, which reinforces our vertical integration strategy. The JV is strategic from an operational standpoint and will drive significant synergies over time. The JV secures float-glass supply and improves purchasing economics while elevating our global profile with customers, suppliers, architects and other industry participants.
In terms of financial contribution, the JV sells float-glass to Tecnoglass and third parties which allow us to report our pro rata share of profits in net income and adjusted EBITDA. During the second quarter, the JV added approximately $1 million to adjusted EBITDA, representing about two months of activity from the early May close of the transaction to the end of the second quarter. Beyond the existing JV operation, we continue to expect to start the construction of a second state-of-the-art plant nearby our headquarters in Barranquilla by the end of 2019. Separately, in July 2019 we brought online our expanded aluminum production capacity. This is expected to increase our aluminum production capacity by 25% within certain new lines in response to strong customer demand for aluminum products. Our other investments in automation at our glass and aluminum facilities remain on track to be completed by the end of 2019. As of June 30, 2019, we have deployed approximately 60% out of the total anticipated capital investments of approximately $20 million for the capacity automation and expansion. We intend to fund the remaining portion with cash in hand or existing debt capital resources.
Moving to our 2019 outlook on slide number 15. We continue to expect strong top and bottom line growth in full year 2019. Based on solid execution year-to-date, better end market visibility and continued confidence in the execution of our strategy, we are raising outlook for full year 2019 revenues to grow to a range of $415 million to $430 million. We anticipate the majority of revenue growth to come from the U.S. helped partially by innovative new products, project types, geographic expansion and single-family residential.
As explained on prior calls, the implied year-over-year percentage growth in the first half is higher compared to the back half year-over-year growth based on the anticipated timing of invoicing in 2019 compared to 2018. Q1 2019 revenue was abnormally high and that quarter is typically our seasonally smallest quarter. So the first half had easier comps.
Based on our increased sales outlook and anticipated mix of revenues, we are raising our full year adjusted EBITDA outlook to be in the range of $90 million to $98 million. This outlook assumes favorable operating leverage of higher revenues and a higher mix of sales from manufacturing operations. Additionally, the outlook incorporates our unchanged share of adjusted EBITDA from the Saint-Gobain joint venture, which began contributing to our results in the second quarter of 2019 as contemplated in our original outlook. Furthermore, we expect lower SG&A as a percentage of sales based on incremental revenues and leverage attained with ongoing cost control efforts.
In closing, we are well situated to achieve another strong year of growth and improvement in our business. Our high return investments, vertically integrated low-cost operations, new partnerships and our proven ability to execute in the U.S., all give us confidence in our ability to meet our revised growth objectives while maintaining 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.
[Operator Instructions]. Our first question comes from Tim Wojs, Baird. Please proceed with your question.
Hi everybody. Good morning. Nice job on the results.
Good morning Tim. Thanks.
Thank you.
Thank you.
So maybe just starting on residential, could you maybe just talk us through the drivers of the strengths that you have seen year-to-date, because I know you maybe a little bit more cautiously optimistic on that business entering the year? So I guess where we were six months ago versus where we are today? What's been that the upside driver to that business relative to your expectations?
Hi Tim. Jose Daes here. Well, we are new in the market. We have been in the residential only for the last three years and our product has had a really good acceptance. When people use our product compared to the competition, they love it. We have a great reputation in high-rises. And a lot of homeowners embraced the product, the quality of the glass and that's why we are growing like crazy. But that doesn't mean that we can keep growing 150%. When you have nothing, you grow really fast. Then we are going to keep growing, but obviously we hope at that pace, but I don't think so. Look, maybe 20%, 30% a year.
Okay. Is it new? Are you signing more distributors? And you are seeing an expanded distribution? Or is it really the sellthrough through your current distribution is really what's that?
It is both. We are expanding distribution and also we are -- the actual distributors that we have are growing themselves, because we are on time. We are delivering a great product. And like I told you, I mean a homeowner buys the product and the neighborhood comes in. Sees the product, loves it and then they buy and word of mouth and the acceptance of the product is really great. I believe we have the best product in the market for the money.
Okay. And then, Santiago, I mean relative to the Q2 run rate in residential, is there anything to be mindful of in the back of the year, why that current run rate wouldn't continue into the second half?
Well, as you know Tim, that's more a spot type of business. We like to remain cautious, as Jose Manuel just said in here. Q2 was a very strong quarter revenue wise. We hope the tendency continues, but even at that, we are projecting for the full year a growth rate of 30% to 40%. So if it does continue at this rate, that will be upside to the results that we are not baking into our projections and our updated guidance right now.
Okay. So you expect maybe a little less contribution in the back half of the year and it continues, there would be some upside opportunity, okay. And then I guess just when we think about the nonresidential backlog in the U.S. part of the business, where I guess do you see the incremental strength there, because you have actually seen that business accelerate in terms of backlog growth over the last three or four quarters now. And so is it more the outside of Florida is accelerating? Or are you actually seeing Florida start to pick up in the backlog as well?
Well, most of the growth is coming from outside of Florida. Florida keeps being the majority of our backlog, but every time it's less and less. Before, it used to be 100%. And I believe now it is maybe 60%. We are growing in Texas, Boston, New York, Maryland, even in the West Coast we have a few jobs in California.
Okay. And then I will sneak one last one to just Santiago on free cash flow. Any change to how your carry prior free cash flow guidance or cadence was? You talked about, I think, it was supposed to be slightly positive for free cash flow this year. Any improvement there just given EBITDA raise?
Well, yes. If you look at what happened in Q2, we focused on working capital management and we are very successful at managing inventory and getting better terms with our suppliers. Obviously, AR continues to be a use of cash when you are growing higher than 25% year-over-year. But if we can continue the trend, we would expect to certainly provide free cash flow for the full year. We don't give public guidance on operating cash flow or free cash flow, but based on what we were able to accomplish as of Q2, we would hope the tendency continues for the rest of the year.
Okay. Great. Good luck on the back half and congrats.
Thanks.
Thank you.
Our next question is from Alex Rygiel, B. Riley FBR and Company. Please proceed with your question.
Good morning gentleman. Fantastic quarter.
Hi Alex. Good morning.
A couple of quick questions. I know you kind of referenced the fact that Tecnoglass isn't seeing raw material price inflation like some of the U.S. peers. But are you seeing any of it? Or do you see any on the horizon that we should make a note of?
We are not counting on that. The main inputs are obviously aluminum and glass. We are any hike on prices. And what we are seeing in the foreseeable future, is that we are going to be able to keep them stable. And remember that we enter into long term invoicing and long term contracts. So we already have a matching on the input and how we quote to the clients. So not for the foreseeable future.
Excellent. And then I know a couple of quarters ago you had some inflation in transportation cost that was going through SG&A. Any update on that in the second quarter here and how we should think about in the second half of the year?
Yes That was actually a tailwind this quarter and we gained some operating leverage there. There were some things from the logistical perspective that we were able to accomplish in shipping directly to some ports in the Northeast as opposed to shipping through Miami and then trucking to other places. So that's actually helping out and we hope to continue the trend. We haven't seen any material increase on marine transportation, so that's helping out.
And last question. Given the success of the residential business, can you update us on the breath of your product line in that category and it's changed over the last year and your interested in accelerating that growth through M&A?
Yes. Well, we designed two new lines last year. One is the Elite and the other one is the Prestige. And we designed the lines from what we saw the market needed because our previous lacked a few things that the market was asking for. And they have had a great reception. Like I said before, everybody loves it. We see a lot of growth in that line because after our clients choice it, he falls in love with it. And it is easier to install. It is a better looking product, better performance. And we see a lot of growth in that area in the future. I mean, not at the same rates as before, but it's going to keep growing.
Thank you very much.
Thanks Alex.
Our next question is from Josh Wilson, Raymond James. Please proceed with your question.
Thanks. Good morning Jose Manuel, Chris and Santiago. Thanks for taking my questions and congratulations on the quarter.
Hi. Good morning Josh. Thanks.
Thank you.
Thank you.
There has been several moving parts and you cite several tailwinds to gross margin year-on-year. Could you give us some quantification as to what the benefits and maybe any headwinds were to gross margin year-on-year?
Yes. We had certain things here to help out. We were able to gain operating leverage based on the amount of sales that we were able to invoice in the quarter and the mix of sales that were accomplished on the manufacturing versus installation side. But mainly we were able to sell as much with the same headcount. We were able to reduce installation cost. If you recall Q2 of 2018, we had one-offs related to installation cost and GM&P that we were able to streamline. And the other piece there would be energy cost. We are basically doing more business with the same energy cost. So all of those contributed to the operating leverage as far as gross profit goes. There weren't really any headwinds to talk to speak of in the quarter.
And as we look into the back half of the year, any differences between the quarters that we should watch out for?
No. I mean if you look back aside from the pull-forward that we had in the Q2, which changes the mix of business. If you look back at the two or three previous quarters before that, we are kind of running in the mid-30s and that would be the expectation going forward.
Okay. Very good. And anything we need to be aware of in the cadence of the sales you are assuming?
Well, like we said on the call, the first half of the year was going to see higher growth year-over-year based on the timing of invoicing. And remember, that typically the Q1 is normally the lowest one of the year, but this year was abnormally high for us. So we had always acknowledged that the first half of the year was going to have a higher growth year-over-year with the second half probably showing still 7% or so growth at the midpoint. So still very, very strong growth rate for the rest of the year.
The one gain has no lumpiness between 3Q and 40?
No. Not necessarily. Not at this point in time.
If I could sneak one last one in, what are your updated expectations and guidance for the Latin American sales?
We are basically counting on the growth coming from the U.S. Colombia remains muted. Everything from a macro perspective is set in place. Interest rates continue to be low. We just need construction activity to pick up and rebound. So if that takes place in the second half of the year, that will be an upside to results. But otherwise the growth is going to from the U.S. as it has been the case for the last few quarters.
Got it. Good luck with the next quarter.
All right. Thanks.
Thank you.
Our next question comes from Julio Romero, Sidoti & Company. Please proceed with your question.
Hi. Good morning everyone.
Good morning Julio.
I wanted to piggyback on that last question about Colombia. I understand that your outlook for the year kind of embeds a muted outlook for Colombia through this year. How are you thinking about that business for maybe the next year and beyond? I know last quarter you gave us an update that some projects that were previously put on hold were being reevaluated and you see you some stabilization now that the election had passed. So if you could speak to that, if you could?
Julio, even though this election is gone, there has been a lot of turmoil politics wise in Colombia internally. And the project seems to be delayed. Construction is lagging great performance. We hope next year to be a little better than this year, but not so much. We are not counting on a lot. I hope it rebounds and we do better than expected. But I don't Colombia being a driver for a lot of growth for next year.
Just to add to that, Julio, I would imagine the U.S. becomes more than 90% of our business by year end. And that's really been part of the strategy to continue penetrating the U.S. market. So we will serve Colombia and LatAm as it may be fit but the driver of growth is going to be the U.S.
Okay. That's helpful. And you had mentioned that raw material cost that are affecting some of your peers in the U.S. are still not necessarily having impact on cost and that's certainly encouraging. How about on a demand side? We are hearing rising cost are delaying projects and causing some headwind to the kind of across the construction spectrum. So are you seeing that at all in some of your customers? And could you speak to that a little bit?
No. We are not seeing that at all. On the contrary, we are seeing a strong rebound in Florida, especially that Tampa, West Palm Beach. I mean, it's unbelievable the amount. Especially for example, in the hotel sector in Orlando, even in Miami, there are like 10,000 rooms being built. It is going to be built for next year that we are negotiating the projects. We hope to increase the backlog, if we close at least half of those projects.
Got it. Maybe my follow-up to that is just, are these rising material costs that are causing hesitancy to others, causing maybe an uptick in inquiries on your side? Have you been seeing that at all?
No.
Okay. Very good. Thanks very much.
Thanks Julio.
Our next question is from Zane Karimi, D.A. Davidson. Please proceed with your question
Hi. Good morning. This is Zane, on for Brent. Congrats on the quarter.
Hi Zane. Thank you.
Hi Zane. How are you doing?
So first off on the backlog increase, I know you kind of touched it a little earlier, but what segments of the U.S. market are you seeing the most improvement low or mid rise? And then on top of that, with regards to weather through the south, Southeast as well as the Norhteast, can you quantify any sort of impact you saw there?
We are growing a lot in the Northeast because, remember that we are new. We have been doing business outside of Florida for maybe the last three or four years. And from the day that you get a job until you finish it, it takes at least two to two-and-a-half years. So now that the customers are seeing that perform and that we are on-time and the quality of the product, in the end we are getting new repeated more jobs.
For example, the other day we were in Chicago and we did a hotel. We did a great job at the hotel and we went to a customer and the customer said, I want the windows the same that are in the hotel X. And we said, well those are our windows. We did that hotel. And that train just started like a couple of meters by and you don't hear the noise. The windows are great, the quality of the glass.
So we are growing there because of our performance and that's why we believe we are going to keep growing outside of Florida more than in Florida because in Florida, well, you have a lot. When you have a lot, there is not that much room to grow.
Just to summarize and add to that to your question, the Northeast is the area of greater growth, beyond what Jose was talking about, Chicago, Texas and the West Coast.
Okay. Thank you for that. And then kind of thinking about any sort of aluminum capacity in particular and when you expect more meaningful contribution from the expansion? Or how long until you get to a full production capacity there?
Well, finally I got to answer a question. Thank you. We are fully operational today. We have a new line in place that is actually as of August 1, you are seeing full production and also new paint line. So we expect to see hit on EBITDA right away because aluminum is an incremental business. We have plenty of orders for the new line and also the glass sorting system and everything that we are doing on that site and the aluminum sorting system is coming along. We expect to be also on time by the late September, beginning of October rolling and that will bring lot of efficiencies. And actually we are doing everything that it takes to be a more profitable company. Even if we stay with the same sales, if we are able to increase sales like we are doing things today, good job of my brother, we are going to be able to see a lot more benefits for the company in the near future.
Thank you for the color there and congrats and good luck for the next quarter.
Thank you.
Our next question comes from Miguel Ospina, Compass Group. Please proceed with your question.
Hi Tim. Thank you for the presentation. I would like to know your outlook for free cash flow generation and what are you going to do to improve it just because when I see EBITDA it grows a lot, but free cash flow continues to be very low. So for example you have generated close to $50 million in EBITDA but free cash flow has only been close to $5 million. Thank you.
Thanks Miguel. We do not provide guidance on free cash flow, but I will answer your question. If you look at the growth year-over-year, it will be above 25%. And when you are growing 25%, your working capital demands are substantial. So when you look at EBITDA, obviously working capital is not included in there. However if you look at what we did in Q2, we were able to greatly improve inventory management and get better terms from suppliers. So we are getting there but growing 25% is not an easy proposition. The other thing is that when you are investing in CapEx to grow your operations and become more profitable, you are not going to see that realize right away, but once the investments that you make start getting realized. So that's some color. We hope to continue basically the working capital management as efficiently as we were able to do it in Q2 and increasing profitability, which will drive cash flow in time. And if at some point, the growth tapers then you don't have as much for use on AR as we have in the past.
Thank you Santiago. But would you say that CapEx could be lower next year? Does it make sense? Or it could be a similar to 2019?
No. It will be significantly lower unless we find new opportunities. But if you ask me today, it will be probably one quarter of our gross this year. So we certainly don't expect to be even close to half of we did this year. So definitely, it will be lower.
Thank you.
We have reached the end of the question-and-answer session and I will now turn the call back over to Jose Manuel Daes, Chief Executive Officer, for closing marks.
Thank you everyone for participating in today's call. We hope to keep working for shareholders and keeping the good news coming. Thank you.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.