Edited Transcript of TGLS earnings conference call or presentation 8-May-20 1:00pm GMT – Yahoo Finance

Bogota May 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Tecnoglass Inc earnings conference call or presentation Friday, May 8, 2020 at 1:00:00pm GMT

* Christian T. Daes

Tecnoglass Inc. - COO & Director

Tecnoglass Inc. - CEO & Director

Tecnoglass Inc. - CFO & Head of IR

B. Riley FBR, Inc., Research Division - Analyst

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

Greetings, and welcome to the Tecnoglass Inc. First Quarter 2020 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Rodny Nacier, Investor Relations. Thank you, sir. You may begin.

Thank you for joining us for Tecnoglass' First Quarter 2020 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, Jos Manuel Daes; Chief Operating Officer, Chris Daes; and Chief Financial Officer, Santiago Giraldo.

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 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 discussing -- 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 Jos Manuel, beginning on Slide #4.

Jos Manuel Daes, Tecnoglass Inc. - CEO & Director [3]

Thank you, Rodny, and thank you, everyone, for participating on today's call. To start, I would like to say that I'm incredibly proud of all of our team members who have shown such incredible strength in the face of adversity during the COVID-19 outbreak. Our thoughts are with all those impacted by this unfortunate situation. We are moving through unprecedented times, and our top priority is protecting the health and safety of our employees and others. Fortunately, all of our operations, along with most of our customers' operations in the U.S. and Latin America, have been deemed essential, and we continue to serve customers safely and responsibly.

Looking at our first quarter results. We started the year tracking relatively in line with our plan in January and February. In March, as COVID-19 began to rapidly spread in many of our markets, the majority of national and local governments issued shelter-in-place orders. This impacted our invoicing activity into the end of the quarter with visibility on demand trends quickly becoming lessened. Our year-over-year sales performance also reflected an exceptionally strong prior year March, which Santiago will discuss in more detail.

On the operational side, our teams delivered solid results. We produced our highest first quarter gross margin and adjusted EBITDA margin since 2016. Favorable raw material pricing and a higher mix of product revenue were the main reasons for the large improvement. We were also pleased to start realizing the benefits of our high-return automation initiatives. Our selling efforts remain focused on further penetrating key U.S. markets and gaining footholds in additional cities. In the quarter, 90% of our revenue and 89% of backlog was in the U.S. and our expansion in residential continued, representing 19% of our U.S. business over the past year.

While the world has changed a lot since our last updated call, our diverse geographic footprint, lean cost structure and a strong balance sheet position give us confidence in our ability to continue winning business even in this uncertain environment. Over our 36-year history, we have successfully overcome difficult times. During the Great Recession of 2008, we grew the business and generated profits engineered to emerge as a much stronger company. I have full confidence in our ability to do so again this time.

In our now larger and more vertical integrated platform, we are even better prepared to navigate through the current environment. While we are much bigger today, we still represent only around 1% of the U.S. architectural glass industry. So there remain many opportunities to capture revenue and gain share as demonstrated by our strong backlog. We expect to accelerate our advantages as the markets recover.

We have a strong cash position and capital resources to face the bumpy road ahead. We are taking additional actions to improve our cost structure, cash flow and balance sheet to not only adapt our business to the current environment but also affect any structural changes that will help situate our business for long-term success as we emerge from this volatile period.

I will now turn the call over to Chris to provide additional details on our COVID-19 response and backlog.

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Christian T. Daes, Tecnoglass Inc. - COO & Director [4]

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Thank you, Jos Manuel. Beginning with our COVID-19 response on Slide #5. Over the last couple of months, we have implemented a robust response plan and have also taken many proactive measures to strengthen our business and balance sheet as the global economy experiences the impact of COVID-19 pandemic. Similar to the U.S., in Colombia, there are stay-at-home orders still widely in effect. We are operating under a special inception granted to companies that support the construction and infrastructure sectors.

As we continue to manufacture and install our critical products, in many cases, we have gone beyond guidelines from local governments and CDC to protect the well-being of our employees, customers and partners. We have implemented remote working policies, enhanced sanitation practices and minimized group gatherings, among other measures. We have also taken more in-depth initiatives to protect our employees, such as the temporary suspension of manufacturing operations for 3 weeks in late March and early April. This enabled us to successfully install workplace protections and implement a comprehensive plan to incorporate social distancing and other best practices into our production and logistical processes.

The late March timing allow us to move more scheduled deliveries into April as some customers delay shipments while they assess the varying patchwork of government orders getting introduced around that time. While this did limit our ability to invoice projects during that time, since mid-April, we have quickly ramped it back up and made up for a significant portion of the pause in invoicing activity. We retained the labor force while the plant was shut down by using vacation day slots, where possible, so we were able to resume operations relatively efficiently.

We entered this pandemic at the strong point in our company's history with a financial position along with the capital resources to effectively support our global operations. We are focused on maintaining that financial flexibility and generating cash flow. We have implemented strict cost controls, reduced operating expenses and limit all noncritical capital expenditures beyond the completion of initiatives started in 2019.

We have significant contractual flexibility to make quick staffing decisions for the majority of our workforce given that a large part of our operating force is contracted through temp agencies. We are taking a balanced approach to protecting jobs, where possible, while ensuring our cash preservation goals are achieved. We will continue to be prudent with our resources and capital allocation. The actions that we have taken will not only help us mitigate the impacts of any near-term demand challenges related to the pandemic but are also designed to allow for accelerated share gains and deliver more profitable growth as we emerge from this crisis.

Moving to our backlog on Slide #6. A value element of our business is that we have a multiyear view of projects in our pipeline on the commercial portion of our revenues. Our quarter end backlog was $545 million, up 5.8% year-over-year primarily in the U.S., which now represents 89% of our backlog compared to 83% in the first quarter of 2019. As the COVID-19 crisis continue, we are closely monitoring its impact on the broader macro environment and, specifically, how this might influence the timing of projects compared to initial invoicing schedules.

On the bright side, most projects are still proceeding according to plan in markets where construction activity is permitted. However, visibility is much lower than usual as we are reasonably assuming that some projects get delayed or temporarily put on hold. To that point, we have seen delays in some commercial projects in the Northeast U.S., such as in the New York area, where the local authorities have entirely prioritized combating the pandemic.

Overall building activity in the U.S. has remained relatively stable for the first 4 months of 2020 through April, which is encouraging as we read into underlying demand beneath the COVID-19-related market disruptions. Our sales teams are seeing continued quoting activity. And based on conversation with developers, most are looking to get projects off the ground once they are able to get favorable finance in place.

In residential, which is not captured by our backlog, we have been very pleased with our continued penetration into more single-family projects, which we enter that end market in 2017. Recent U.S. housing start data suggest residential projects are feeling the effect of shelter-in-place orders and other economic uncertainties. In our business, we still have a rapidly growing presence with our new product offerings to capture additional share regardless of the demand environment.

Overall, the conversations for most national and local governments are gradually shifting to the timing and pace of lifting shelter in place and restoring battered economies. In this environment, we have to remain flexible to tailor our operation base on how we see demand evolving. For us, we have the benefit of a vertically integrated operation to scale up and down quickly. We will continue to focus on optimizing our liquidity, growing backlog through our focused business development and sales program and delivering quality service to our customers during this volatile period.

I will now turn the call over to Santiago to discuss our financial results and outlook.

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Santiago Giraldo, Tecnoglass Inc. - CFO & Head of IR [5]

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Thank you, Christian. Beginning with our capital resources on Slide #8. In recent years, we have made progress to reduce leverage, enhance cash flow and generally strengthen our balance sheet metrics. During the first quarter, we generated cash flow from operations of approximately $550,000. The first quarter is seasonally a low point of our cash flow given timing of interest and tax payments but improved by $6.3 million compared to the prior year quarter. This partly reflects aggressive actions to preserve cash, including tight cost controls and working capital improvements. Our CapEx increased by approximately $2.5 million, mainly reflecting scheduled annual maintenance at our production facility plus approximately $3 million of final payments for a high-return automation investments completed in 2019. As a result, we expect CapEx to be largely front-loaded in 2020.

Since the end of the first quarter, we have continued to build our liquidity position. Our cash preservation measures are paying off. And at an abundance of caution, we also drew down an additional $10 million on our available lines of credit to begin May with approximately $50 million of cash and total liquidity of approximately $105 million, including available lines of credit. The structure of our long-term capital resources are set up well for the current environment. Our senior notes in the amount of $210 million do not mature until 2022. Beyond that, our credit facilities extend through 2024 in a weighted average maturity on lines of credit of roughly 4.7 years out.

Looking at our net leverage. We ended the quarter at 2.4x, which was down 0.6x compared to the prior year quarter and up slightly from December 31. This sequential increase is partly due to $6.5 million of CapEx during the period to complete our automation initiatives and major maintenance and $4 million FX impact on cash held in local currencies. We believe our balance sheet is properly structured to face the challenges ahead. We have no covenants worth discussing at this time, and we have over $55 million available to us on our lines of credit. We are prepared to draw down additional capital as needed but do not see a reason to do so at this time based on our other cash-building efforts.

From a capital allocation perspective, our primary objective at this time is to preserve cash and return a portion of capital to shareholders through our dividend. Based on our current install capacity as a result of our completed automation investments, we don't foresee material growth CapEx investments in the short term. In our joint venture with Saint-Gobain, we previously communicated the plan to begin construction of the second float glass plant in 2020. The float glass plant calls for funding to be entirely arranged at the JV level with the JV partners providing a backstop on a pro rata basis for any additional funding needs. Given the current market climate, we are reviewing the project time line as we reassess near-term demand and internal return thresholds. The permitting is expected to be completed soon so the project can get off the ground once market conditions are conducive to do so. Overall, we ended the quarter with a strong capital position and have further fortified our balance sheet to effectively navigate the evolving economic environment.

Looking at the drivers of revenue on Slide #9. Based on the timing of invoicing and projects in the prior year, on our last update call, we indicated that we will have a challenging prior year comparison in the first quarter. During January and February of 2020, revenues track relatively in line with our expectations and essentially on par with the prior year quarter. This was good because we had 5 more days of downtime in January for scheduled maintenance at our Colombia manufacturing facility compared to the prior year quarter. That means 5 less days of invoicing due to planned maintenance.

The month of March represented a decline in revenues for the quarter. In the prior year month of March, the level of invoicing was well above trend due to the timing of closing-out projects. However, looking at March of 2020, our revenue were impacted by 9 fewer invoicing days as we temporarily suspended planned operations from March 23 to April 13. As Chris mentioned, we took the downtime to implement processes and protocols at the plants for safer production flows after engaging with customers on delivery schedules given the uncertain outcomes of the rapid U.S. outbreak of COVID-19 in mid-March, causing disruptions to customer construction schedules.

For efficiency, we used the initial phase of the Colombian government stay-at-home orders to prepare the plan to resume full operations under a safe environment to prioritize our employees' health. As previously stated, we have been operating under an essential business exemption as a key supplier to the infrastructure and construction sectors even as the stay home order remains in place as of today. Through the month of April, the U.S. demand environment improved as customers gained confidence in their ability to proceed with projects, most of which are essential work. Since resuming operations on April 14 and, have added shifts to address pent-up demand.

Looking at the drivers of adjusted EBITDA on Slide #10. Despite the unfavorable impact to revenue from the COVID-19-related issues in March, we were pleased to improve adjusted EBITDA as a percent of sales by 350 basis points to 23.3% compared to 19.7% in the prior year quarter. In dollars, adjusted EBITDA was $20.3 million compared to $21.1 million or 19.7% of sales with lower revenues partly offset by a 510 basis points improvement in gross margin to 34.9% for the quarter. The improvement in gross margin primarily reflected lower raw material costs, a higher mix of revenue from manufacturing products versus installation as well as greater operating efficiencies from our implementation of automation initiatives in 2019.

SG&A was lower by $0.3 million as we continue to manage expenses and as we incur in less variable costs given lower revenues. As mentioned, we are trimming costs given the ongoing market volatility. We have made good progress on this front. Our lean, highly efficient and vertically integrated operations, along with our dedicated employee base, leave us confident in our ability to efficiently match our costs with our demand. We will continue to source additional avenues to improve efficiencies and maintain our industry-leading margins.

Looking at our markets on Slide #12. For the most part, we are supporting customers in any market where construction is permitted. While we have made good progress to diversify outside of Florida, that state still represents a significant market for us. In that state, construction is essential and housing is considered critical infrastructure. So that is assuring for a large part of our revenues and customer base. More broadly, approximately 85% of first quarter 2020 backlog is in states or jurisdictions that have designated suppliers of products or services to the construction sector as an essential business. In some markets where we have a notable presence, such as New York and Pennsylvania, we have projects proceeding under certain extensions. But for the most part, construction activity is limited. On an encouraging note, several U.S. states, including Florida and Texas, have begun easing general restrictions. In Colombia, the country is under a nationwide shelter-in-place order through at least May 25, but we expect the general exemption for infrastructure and construction projects to continue.

Moving to our 2020 outlook on Slide 14. We have withdrawn our previously provided full year 2020 financial outlook for revenue and adjusted EBITDA. Our backlog has historically provided a high degree of visibility for commercial revenues over a 12-month period. Our prior outlook issued before the COVID-19 pandemic represented existing projects in backlog plus anticipated demand from our continued expansion into the single-family residential end market. Our commercial backlog remains firm in the short term, but we do have lower visibility on the timing of project invoicing through the year-end 2020 as deliveries will depend on the ongoing COVID situation in each market that we serve. For single family, housing starts declined in March and are expected to remain depressed in the near term.

In the second half of April, daily revenues were higher than levels seen prior to the temporary suspension of our plant. Given that the plant was being adapted to meet COVID sanitary standards during the first half of April, on a revenue per day basis for the days that we were operational, revenues increased by an encouraging 15% per invoicing day in April compared to March. We attribute the majority of that month-over-month improvement to backfilling of orders and the remainder to relatively stronger underlying demand. While we expect second quarter of 2020 revenues to be lower compared to the prior year quarter, we currently anticipate sequential improvement on a month-to-month basis through June. Given the unprecedented nature of the current economic climate, the remainder of 2020 cannot be estimated with precision at this time.

In summary, we entered the year with a good momentum on solid operating platform supported by a strong capital base. As we move through the uncertain period ahead, we are focused on cash management and taking necessary actions to deliver strong cash flow while safely serving customers. We will continue to monitor and adjust plans for our business that are aligned with our expectation to emerge as a stronger company when global market conditions begin to improve.

With that, we will be happy to answer your questions. Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mike Shlisky with Dougherty & Company.

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Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [2]

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So I wanted to ask about your sort of near-term invoicing schedule and where the real concerns on the backlog are. I mean at this point, when you started the year into the spring time, if a building is halfway finished or even partially finished, they're not going to stop building that building at this point. They're going to see it kind of all the way through the end. So my guess is the current project, the very near-term backlog isn't going to change much other than maybe some timing differences. I guess my question is, is your worry more about the end of year backlog at this point or 2021 projects? Do you feel pretty good about what has to be delivered this year? Quarter-to-quarter, perhaps, there's not that much. There's some question, but sort of end of year is kind of the more concerning to you because of the new projects that might come onboard.

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Jos Manuel Daes, Tecnoglass Inc. - CEO & Director [3]

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Well, this is Jos. We feel very confident about this year. We have a strong backlog, and all the projects are continuing, especially the ones that are even 20%, 30% up. We've seen a couple of delayed projects. But last week, for example, one of them just restarted and said that they already logged the financing. So for this year, we see still a strong demand. And next year, we have a good backlog for next year. And we are starting to see people talking again about closing because they're going to open New York. In Boston, there is a lot of work. In Texas, they haven't closed anything. We're very confident that the world is going to keep going.

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Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [4]

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Okay. And then what's been your ability to kind of do business within the 4 walls in Colombia with other people who are outside those 4 walls, things like getting trucking services, some of your outside contractors, food service and other items that have to be brought in every day? Because you're under an exemption, that might be okay for you. But have your various outside provider has been able to help you out as well since April 14? Or...

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Jos Manuel Daes, Tecnoglass Inc. - CEO & Director [5]

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No. We haven't had any problems, contractors or anything, especially in Colombia. Construction is already back to work. We were sent home for 3 weeks. We try to keep a piece open through those 3 weeks. Unfortunately, obviously, that hit the sales being a little bit lower than expected. But it's all over now. We've been working for the last now 4 weeks, and we're doing record numbers of invoicing every day. So we expect to have a very decent quarter, for example, now in the second quarter, obviously, taking into consideration that the first 13 days of April, we were close. But things look good. Supply looks good. Demand looks good, and we are trying to build 2021, the end of 2021. And that is going to be done also with a lot of retail, which is not in our backlog, but is a residential event. But that is very strong today and is continued to grow in our company.

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Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [6]

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Okay. Maybe just one more for me. Obviously, a very strong job on EBITDA margins in the quarter. I guess do you think you've reached a whole new range or a plateau from margins since you made some of those improvements in the fourth and first quarter here to your automation? Or was there anything kind of cut on a kind of temporary basis to kind of offset some of the volume declines in the quarter?

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Santiago Giraldo, Tecnoglass Inc. - CFO & Head of IR [7]

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Mike, this is Santiago. Basically, some of it was done through raw material efficiency. We're seeing less raw material costs against contracts that were already in place. So we do expect that to continue moving forward. Another piece of that was the mix of business with the installation business closing out some projects. So you basically had some more manufacturing revenues rather than installation. So in large part, it's going to depend on the mix quarter-over-quarter. But on a structural basis, I think that the rest of the year, you can expect efficiencies both from lower raw material and efficiencies related to automation. As we had mentioned earlier in the year and even in previous conversations, we do expect to gain efficiencies on a gross margin basis. So I think it's going to depend more or less on what happens on mix quarter-over-quarter, but there is certainly structural things that would allow us to gain efficiencies from a gross margin perspective.

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Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [8]

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Just to follow up, Santiago. The large amounts of buildings you had here in just in the last few weeks in April, was that heavy on the closeout activity?

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Santiago Giraldo, Tecnoglass Inc. - CFO & Head of IR [9]

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I missed the first part of your question, Mike.

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Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [10]

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Yes. The high level of invoicing that's happened in the last few weeks since you came back to work, the mix there have been high on the closeouts.

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Santiago Giraldo, Tecnoglass Inc. - CFO & Head of IR [11]

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Yes. Yes. It's been constant with what we've seen so far throughout the year. It's been in line.

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Operator [12]

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Edited Transcript of TGLS earnings conference call or presentation 8-May-20 1:00pm GMT - Yahoo Finance