Tecnoglass Inc. Q1 FY2020 Earnings Call

Greetings and welcome to the Tecnoglass Inc. First Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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, Jose 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 operation of Tecnoglass' business. These risks, uncertainties, and contingencies are indicated from time to time in Tecnoglass' filings with the Securities and Exchange Commission. The information discussed during the call is presented in light of such risks. Further, investors should keep in mind that Tecnoglass' financial results in any particular period may not be indicative of future results. Tecnoglass is under no obligation to and expressly disclaims any obligation to update or alter its forward-looking statements whether as a result of new information, future events, changes in assumptions or otherwise. I will now turn the call over to Jose Manuel beginning on slide number 4.

Thank you, Rodny and thank you everyone for participating in 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 those impacted by this unfortunate situation. We're 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 are being deemed essential, and we continue to serve customers safely and responsibly. On the operational side, our team delivered solid results. We produced our highest first quarter gross margin and adjusted EBITDA margin since 2016. Favorable material pricing and the higher mix of total revenue were the main reasons for the large improvement. We were also pleased to start realizing the benefits of high-return automation initiatives. Our selling efforts remain focused on further penetrating key U.S. markets and gaining foothold in a visual series. 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 update 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 each year to emerge as a much stronger company. I have full confidence in our ability to do so again this time, and our now larger and more vertically 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, 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 avoid 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 effect any stock loss changes that we have shifted to aid our business for long-term success as we emerge from this volatile period. I'll now turn the call over to Chris to provide additional details on our COVID-19 response and backlog.

Thank you, Jose Manuel. Beginning with our COVID-19 response on slide number five. Over the last couple of months, we have implemented robust response plans and have also taken many proactive measures to strengthen our business and balance sheets as the global economy experiences the impact of the 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 exemption granted to companies that support the construction and infrastructure sector. As we continue to manufacture and install our critical products, in many cases, we have gone beyond guidelines from local governments and the 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 three weeks in late March and early April. These 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 allowed us to move more scheduled deliveries into April as some customers delayed shipments while they assessed the varying patchwork of government orders getting interviews around that time. While these limits our ability to invoice projects during that time, since mid-April, we have quickly ramped back up and made up for a significant portion of the POS or invoicing activity. We've retained the labor force while the plant was shut down by using vacation days where possible. So we were able to resume operations relatively efficiently. We entered this pandemic at a 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 limited all non-critical 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. 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 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 number six. A valuable element of our business is that we have a multi-year view of projects in our pipeline for 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 continues, we are closely monitoring its impact on the broader macro-environment and specifically how these might influence the timing of projects compared to the initial invoicing schedules. On the bright side, most projects are still processed according to planning markets where construction activity is permitted. However, visibility is much lower than usual, 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 bidding activity in the U.S. has remained relatively stable for the first four 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 coring activity and based on conversation with developers, most are looking to get projects off the ground once they are able to get financing in place. Residential, which is not captured by our backlog, we have been very pleased with our continued penetration into more single-family projects since we entered that end market in 2017. Recent U.S. housing start data suggests 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 better economies. In this environment, we have remained flexible to tailor our operations based 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 these volatile periods. I will now turn the call over to Santiago to discuss our financial results and outlook.

Thank you, Chris. Beginning with our capital resources on slide number eight. 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 essentially a low point for cash flow given the 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 and approximately $3 million of final payments for 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 in our abundance of caution, we also drew down an additional $10 million on our available lines of credit to bring us to 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 at a weighted average maturity, on lines of credit are roughly 4.7 years out. Looking at our net leverage, we ended the quarter at 2.4 times, which was down 0.6 times compared to the prior year quarter and up slightly from December 31st. The sequential increase is partly due to $6.5 million of CapEx during the period to complete our automation initiatives and major maintenance, along with a $4 million FX impact on cash sales in local currency. We believe our balance sheet is appropriately 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 dividends. Based on our current installed 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 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 timeline 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 number nine. Based on the timing of invoicing on projects in the prior year, on our last update call, we indicated that we would have a challenging prior year comparison in the first quarter. During January and February of 2020, revenues tracked relatively in line with our expectations and essentially on par with the prior year quarter. This was good because we had five more days of downtime in January for scheduled maintenance at our Colombian manufacturing facility compared to the prior year quarter. That means five fewer days of invoicing due to plant 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 revenues were impacted by nine fewer invoicing days as we temporarily suspended plant operations from March 23rd to April 13th. 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 plant to resume full operations in 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-at-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. Teams resumed operations on April 14th, and we have added shifts to address pent-up demand. Looking at the drivers of adjusted EBITDA on slide number 10. Despite the unfavorable impact on revenue from the COVID-19 related issues in March, we were pleased to improve adjusted EBITDA as a percentage 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. We lowered revenues, partially offset by a 510 basis point 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 would incur in less variable costs given lower revenue. As mentioned, we're 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 number 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 spaces of jurisdictions that have designated suppliers or 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. House deliveries will depend on the ongoing COVID situation in each market that we serve. For single-family housing starts, declining in March 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. Even though 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 good momentum on solid operating platforms supported by a strong capital base. As we move into 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.

Thank you. One moment while we post our first question. Our first question comes from Mike Shlisky with Dougherty & Company. Please proceed with your question.

Good morning.

Morning, Mike.

I wanted to inquire about your invoicing schedule in the near term and your main concerns regarding the backlog. Given that it's now spring and some buildings are only halfway or partially completed, it seems like starting new construction at this point would be unlikely to happen. My assumption is that the current projects and the near-term backlog won’t see significant changes, apart from some timing adjustments. Are you more concerned about the backlog at the end of the year or the projects for 2021? Do you feel confident about what needs to be delivered this year? Although there might be some uncertainties from quarter to quarter, is the end of the year your greater concern because of potential new projects?

Well, this is Jose. We feel very confident about this year. We have a strong backlog and all the projects are continuing. Especially there was 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 still have 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 are very confident that the world is going to keep going.

Okay. And then what's been your ability to kind of do business within the four walls in Colombia with other people who are outside those four walls? So 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 providers been able to help you out as well, since April 14?

We haven't had any problems on tractors or anything, especially in Colombia, construction is already back to work. We were sent home for three weeks. We tried to keep a piece open through those three weeks; unfortunately, that hit the sales and been a little bit lower than expected. But it's all over now. We've been working for the last four weeks, and we're doing record numbers of invoicing every day. So we expect to have a very decent quarter, for example, now the second quarter, obviously taking into consideration that the first 13 days of April we were closed, but things look good, supply looks good, demand looks good, and we are trying to build for 2021, the end of 2021 which is going to be done also with a lot of retail, which is not in our backlog, but it is a residential event that is very strong today and is continuing to grow in our company.

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

Hi, 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 installation business closing out some projects. So, basically, you 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 are certainly structural things that would allow us to gain efficiencies from a gross margin perspective.

I just help this Santiago. The large amounts of drilling you had here just in the last few weeks in April, was that heavy on the closeout activity?

I missed the first part of your question, Mike. Could you repeat?

The high level of invoicing that's had in the last few weeks that you came back to work? And if there have been high on closeout?

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

Okay. Thanks so much. I'll pass it along.

Yes. Thank you.

Our next question comes from Tim Wojs with Baird. Please proceed with your question.

Good morning, everyone. I hope you are all safe. I appreciate the detailed slides. My first question is about the residential business. How would you assess its performance in the first quarter compared to your expectations? Are you anticipating similar month-over-month improvement as we move into the second quarter?

Hello. This is Jose. We've been doing really good. We surpassed our expectations for the first quarter because even though we didn't work in the first two weeks in January, and we closed for three weeks, we can have almost two weeks in March. We invoiced a lot more than we did in the first quarter of 2019. And we see strong demand in April and we keep receiving. The residential businesses are day-by-day business. And we've seen a lot of demand in the past couple of weeks that we're open. We expect to grow by 20% this year.

Okay. So despite everything the residential business should still grow pretty meaningfully in 2020. That's good to hear. And then maybe just, Santiago, on liquidity. I think you mentioned working capital and that should be positive in 2020 and it's been used in the last couple of years. I know it depends on a sales rate, but any sort of big picture guardrails that you might be able to give us in terms of what working capital might improve by?

It will primarily depend on sales. Our inventory management is quite efficient, and you've seen it decrease again this quarter. The key factor will be how effectively we can collect. Over the past few months, our collection has been steady, and our clients have been continuing their operations without any issues. So, it will be closely tied to our sales performance. However, I believe we can build on what we achieved last year without providing specific numbers. As you might have noticed in the first quarter, we improved operating cash flow by nearly $6.5 million, and I am confident we can enhance that further and achieve better operating cash flow than last year.

Okay. That's helpful. And then, I guess just last question, just maybe a bigger picture one. But just given your low-cost position, I'm just kind of curious how you would expect Tecnoglass to perform relative to the industry if things would kind of weaken from a backlog perspective as you got into 2020 and 2021?

I have been with the company for 35 or 36 years now, and I have noticed that during crises, we tend to perform better. Since we originated in a low-cost environment and thrive in challenging situations, we are well-equipped to handle them. Looking ahead, we believe Tecnoglass can emerge successfully even amidst the current pandemic. We are focused on increasing sales, improving efficiency, and enhancing our delivery processes, and we expect to continue to see positive results. If we had invoiced a full quarter, we estimate we would have achieved an additional $8 million to $9 million in invoicing and a couple million more in EBITDA than what you've seen today. We are optimistic about our future, and we are working on building our backlog for 2021, particularly in residential projects. Jose can provide further details.

When things go down and demand goes down, since we have better margins than all our peers, we're able to lower the price, be more competitive, get a lot of work and still make money. But we're not chasing that. As long as we see the demand enough to make a good profit, we rather show the good businesses and not gain a lot of ground just on price. If we had idle capacity, of course, we would do it. But for the moment, we're growing with solid businesses with solid profit and that's what we're doing for now.

Okay. Thank you. Good luck with everything, guys.

Thank you.

Thanks, Tim.

Our next question comes from Josh Wilson with Raymond James. Please proceed with your question.

Good morning, and thanks for taking my questions and hope you all are well.

Good morning, Josh.

Good morning, Josh.

Thank you. First one. Could you, Santiago, give us some sense of maybe what CapEx and D&A looks like for the year now?

Yes. So at the beginning we had talked about being less than $10 million. As you heard on the commentary, we expect CapEx to be heavily front-loaded given that we had the remaining pieces of the automation initiatives in Q1. Moving forward, I still think it's going to be less than the $10 million we talked about. We don't foresee any growth CapEx for the remaining of the year. It'll just be mainly maintenance topics and whatever's left on the automation, which is not much.

Okay. And then you mentioned some cost-cutting efforts on the expense side as well. Can you give us a sense of what those might be and how much of it is volume-based?

Yes. So obviously what you would expect is rationalizing, traveling expenses, professional fees, everything you can do from an SG&A front. Obviously, on the cost side, there's only so much you can do since it's a lot of variable costs. The company has prioritized preserving employment. So we're keeping our employees, and with the backlog for the short-term that Christian and Jose were talking about, we're going to need employees. So it's not related to headcount reduction. It's more what we can do on other fronts, mainly related to SG&A and also the efficiencies that are going to come or that are already kind of flowing through related to the automation, as far as having less material waste, and others that's going to help out.

Got it. And what sort of progress have you made in adding single-family resi dealers?

Jose, do you want to take that?

We are continuously adding new dealers. Recently, we opened a distributor in Orlando, which has unique challenges because we previously lacked products for that area due to its location in central Florida, and the products were not hurricane-proof. We took some time to design suitable windows for that climate, and now that distributor is performing well. We are also establishing another distributor in the Panhandle, where we hadn't sold any windows before. Additionally, we are gaining numerous dealers in Miami, Dade, Palm Beach County, and on the West Coast as they recognize our reliability. Our product offerings are unmatched, giving us the confidence to continue growing in the residential market.

One last clarification for me. So, as far as your downtime goes, fair to say that you didn't lose any jobs or your customers weren't impacted because they chose to delay at the same time?

No, we have adapted to being proactive. We were four weeks ahead in deliveries because we prefer to have materials ready at the Port of Miami. This preparation means that strikes, ship issues, or other disruptions don't impact our operations. We managed to take three weeks off during the shelter order without any problems. While it slightly affected our volume, there were no delays in the entire process. Jose can provide more details on this.

We have experienced a couple of job delays in Florida, but one of them has just restarted, as I mentioned earlier. I believe the other two jobs, which are hotels, will resume soon because the hotel sector is currently facing challenges. I expect that by the end of the year, the hotels will be back on track, and we're optimistic that everything will return to normal.

Good luck still. Stay well.

Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time.