Q4 2019 Earnings Call
Greetings and welcome to the Tecnoglass Inc. fourth quarter and full year 2019 earnings conference call.
This time, all participants are they listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone Keypad. As reminder, this conference is being recorded and it's now my pleasure to introduce your host Brad Crate Investor Relations.
Thank you you may begin thank you for joining us for Tecnor Watson is fourth quarter and full year 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, our Chief Executive Officer.
They then well bias.
Operating officer, Chris Diet.
And Chief Financial Officer, Santiago Girl.
I'd like to remind everyone that matters discussed in this call except for historical information.
Our forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.
Including statements regarding future financial performance.
Future growth and future acquisition.
These statements are based on Tecnoglass, his current expectations or beliefs and are subject to uncertainty and changes in circumstances.
Actual results may differ in a material nature from those expressed or implied by the statements herein due to changes in economic business competitive indoor regulatory factors.
Other risks and uncertainties affecting the operation techno weapons business.
These risks uncertainties and contingencies.
Our indicated from time to time and TEGNA West is filings with the FCC.
The information discussed during the call is presented in light of such risks.
Further investor if you keep in mind that TEGNA glasses financial results in any particular period may not be indicative of future results.
Second the west is under no obligation to you and expressly disclaims any obligation to update or alter its forward looking statements whether as a result of new information future then changes in assumptions or otherwise.
I will now turn the call over to Jose Min, one beginning on slide number four.
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We continue to generate Rick when it was a project backlog, we just stood at $542 million at the end of 2000 night.
Backlog increased 5% year over year right hardly a person's didn't I talked a brilliant when some positive reception.
Brian you often Gordon wants it.
Backlog, who each quarter on a sequential basis through the year, primarily in the U.S., which now represent 90% lot backlog compared to 82%.
I was on a.
The quarter four bug, you'll be able to represent more than 1.3 times, our trailing 12 month really really well I'm, even more impressive 1.5 times when excluding versus then show. So we could do not get capturing our backlog.
We couldn't even to see sonys levels of quoting on bidding activity I mean, we harvest drone based on what Bbds that gives us go.
And our goals for 2000 Glenn.
The book size. It took says about Brazil Angels overruns, primarily well prestigious an elite coldlight continue to earn a new business with residential now accounting for over 80% of are you have been.
Well, you're in 2019 single family residential through increased by an impressive 78% surpassing our expectations.
The commercial side.
We had several exciting probably Whingeing then you want to keeping your recoveries.
Given the robust torture activity. Many markets, we are very low unemployment rate in the U.S.. So close to Merck experience, they were complaining which was somewhat into cars or into 2003.
Overall, didnt bitumen remain very positive.
Oh really aren't many possibilities I'm not an aluminum policy. They are coming on line out a great time to talk to your bidding for me something.
Are we on PC based business overtime, given our strong backlog.
We did $2 importantly, we continue to focus our airports well now do you customers entering new markets I'm, providing best in class service.
Well, we are growing our backlog we are being married go we bought on volume and price you didn't focus on sustaining our industry leading mark.
Yeah. This strong on the bottom line over high performance probes that should allow us to something well, we thought there I know in mark.
We look forward when all the your overall both market grossing films adjusted EBIDA, we benefit from our books all done there's people didn't get any sure.
Now I'll turn the call over to some jago well the scores Oakley yarns yield results a market.
Thank you Christian.
Beginning with our financial highlights on slide number eight.
During 2019, we expanded our business into new geographies capture an increasing amount or the value chain through our vertically integrated auto invested in our facilities and implemented cost saving to me.
2019, we like these collective efforts, we double digit growth in sales gross profit and adjusted it'd be though.
<unk> you record levels in each of those metrics for the full year 2019.
This is a true statement of work teams ability to execute our strategy and attractive high growth markets.
The fourth quarter, we did see temporary impacts on our labor on the U.S. sales and gross margin aside from those labor dynamics, we close out the year with good momentum, which I will just costing them on it.
For the year, we were pleased to generate very strong operating cash flow 27 million.
Allowing us to generate positive free cash flow was successfully completing our high return capacity and automation initiatives.
Highlights our continued focus on enhancing our working capital management may lead to tighter inventory control and managing account receivables.
We spent 25 million on topics for the year, we the majority of that geared toward the capacity upgrades and automation initiatives.
We think are working teams for completing these operational enhancements on time and we've seen budget.
We ended the year, we've got strong cash position of 48 million in and that leverage ratio of 2.3 times.
From 2.6 times last year.
He's balance sheet strength supports our growth initiatives I'm previously announced investments.
The plan construction of our second float.
Facility, you're not going but.
In regard to our capital structure, our new simplified dividend methodology, which was said these costs earlier in the coal allows for to continue return of a fortune of capital to shareholders, while eliminating that I alluded the impact of stock dividends through existing shares.
Yeah, Weve ice class portion approximate the aggregate value of cash dividend that we have made during most of our recent four quarters.
And that yield inline with our dividend paying peers.
I was another simplification to our capital structure in December we announced our plan delisting from the Colombian a stock exchange our move to an exclusive listing on NASDAQ. He's a line with the evolution of our business on the movement of our shareholder base the U.S.
In addition, we will say I'm and money on the administrative requirements associated with multiple exchange.
We expect to complete the Colombian you list them by the end of 2000 important.
Looking at the drivers of revenue on slide number nine.
Continued outperformance in the U.S. drove the majority of fourth quarter sales growth, which increased 4% to 101.4 million.
The U.S., primarily reflect that stronger residential invoicing and healthy commercial construction activity.
It was partially offset by delays are on T. commercial projects, representing an estimated 5 million of the bird invoicing.
As we mentioned earlier the delays were mainly due to temporary labor constrained.
Hearings by our customers.
I mean overall robust commercial construction activity.
Latin America, we were pleased with better to expected fourth quarter performance in Colombia, where revenues grew 9.2% year over a year and 7.4% excluding FX.
For the year, the U.S. continue to Mark an increasing mix of our business representing approximately 85% apart total revenue.
This compares to an average of approximately 80% or are you as base building products peer group.
Looking at the drivers of adjusted EBITDA on Slide number 10.
Adjusted EBITDA for the fourth quarter 2019, what stable year over year, a 21 and a hot meals.
Representing an adjusted EBITDA margin of 21.2%.
Adjusted EBITDA for the full year increased 14.4% to a record 92.4 million representing a margin of 21.4%.
Gross profit was 29.3 million, representing a 28.9% gross margin.
Beats compared to gross profit of 34.1 million in the prior year quarter, representing a gross margin of 34.9%.
But different in gross margin for the quarter was primarily related to higher U.S. labor costs.
It was mainly related to installation revenues and subcontracting cost.
We started to more labor intensive aspects of our business.
The impact wasn't most pronounced in the southeast work gnomic recovering to strongest in the U.S.
Well much lesser extend our fourth quarter gross margin was adversely impacted by modestly higher aluminum cost per unit.
Attributable to higher cost inventory purchased earlier in the year.
I'll provide some context here the aluminum impact was mainly felt on the residential side of the business.
Well, we typically lucky in raw aluminum supply for commercial projects in backlog are faster pace versus actual business is more exposed to move seen aluminium spot prices and the timing of raw material inventories flowing through the piano.
So the yearend, we got work through they hire at cost aluminum in inventory rose margin in the fourth quarter also included approximately one and <unk> million of nonrecurring costs to finalize the implementation testing and start up of our high return automation projects out of production.
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Despite these adverse impacts during the quarter. We ended 2019 with a record full year gross profit.
135.8 million.
We anticipate that the efficiency savings from our timely completion of automation initiatives. Among other actions will help to mitigate any continuation of these higher labor costs.
Our operating expenses a percentage of revenue improved by 200 basis points year over year.
18.3% in the fourth quarter.
This reflects operating leverage on higher revenues, coupled with ongoing company wide initiatives to improve as DNA, mainly on shipping and handling and personal cost.
Which we discussed last quarter.
Our full year operating expenses improved by 180 basis points to 17.9%, though sales due to recent similar to the fourth quarter drivers I just mentioned.
Irene shipping cost have remained relatively stable for us given the favorable trade dynamics between Columbia on the U.S.
Overall.
Our highly efficient manufacturing capacity and how sustainable access to talented employees continues to generate strong results.
We remain confident in our ability to generate strong margins on higher sales, while mitigating the impact of what we see as a temporary headwinds in the industry.
We will continue to source additional avenues to improve accretion see I'm gonna do start Cosby.
Looking at the construction demand in our key markets on slide number 12.
U.S. commercial construction activity continues to dominate our business, while residential is becoming an increasingly important important and market for us.
Well I think construction activity low interest rates and consumer spending are expected to drive demand for architectural glass products over the next five years. According to third party sources.
The architectural billing index fusible PVC in all of our key regions.
Justin farther expansion on the commercial site.
Combined with a generally stable to positive outlook on the residential construction, we see macro support for a favorable end market environment in coming years.
We believe that our markets in the U.S., we'll continue to grow faster than the national average.
We also expect it takes sharing our market.
Really driven by enhanced relationships with new customers Rubin execution in a broad range of high value added projects I'm structural differences that allow us to be very competitive while maintaining that quality first approach.
With our exposure to both commercial and single family residential we see significant upside in our business to capture a rising share Oh U.S. demand into the new decade.
In Colombia, GDP growth in 2019 accelerated by 80 basis 0.3, 0.3%.
Additionally, construction permits more than doubled from December.
Taking into account these positive trends with prior volatility we are maintaining a cautiously optimistic outlook for Colombia in 21.
Looking at our continued expansion into the residential market on slide 13.
A reminder, we referred to you a single family residential Hotstar residential business, we classify all other sales, including medium and high rights condos us commercial.
In 2017, we entered the U.S. single family market.
And a rapid growth in these segments of our business continues to surpassed our expectations.
Our residential revenues grew at an impressive 78% in 2019 and now represents 18% of are you as revenue.
Compared to just 3% two years ago.
We see significant potential in our ability to capture additional share of residential demand due to the various positive view as macro factor that I discussed freebies.
Moving on to our high return investments on the slide number 14.
As of the end of 2019, we successfully completed all of our high return growth and efficiency initiatives.
This includes our media or aluminium production capacity expansion in response to strong customer demand for aluminum products.
The fourth quarter, we complete or.
Our other initiatives to automate key operations at several glass and aluminum facilities plant.
As of the end of 2019, we have deployed 18 million of our total and PC paid at 20 million capital investment.
We expect the remaining portion to be spent in early 2020 off their old testing and start up is complete.
In regard to our flow glass joint venture we singled on the previously announced construction of the second state of the yard gloat, well glass plant in Colombia.
He is expected to begin construction in 2020 and expected to be operational by 2022.
We have advance on the permitting the Preconstruction on me straight of aspects to get the project moving us black.
We continue to be encouraged by the additional efficiencies with respect to gain through the expansion of our vertically integrated load glass supply.
Moving to our 2020 outlook on the slide number 16.
We anticipate above industry top and bottom line growth in full year 2020.
For the full year, we expect revenues to grow to a range of 445 to 455 million dollar.
We expect the U.S. represent a significant majority of growth.
Fueled by innovative new products project type geography.
Thank you and part of their penetration to single family the rest again.
Based on these sales outlook and anticipated mix of revenues, we expect full year adjusted EBITDA to be in the range of $97 million to $102 million.
This outlook assumes favorable operating leverage on higher revenues.
And the flow through of high return investments.
We anticipate that these favorable factors together, we as DNA efficiencies, we will offset impacts from increasing labor costs, which we expect to be most pronounced in the first half of 2020.
I'll provide some additional color on the first quarter of 2020, we expect the first quarter to be our smallest quarter for revenues and it'd be though.
This is in line with our typical seasonal U.S. construction trends and also the timing of our factory scheduled annual major maintenance during January.
Vision in the first quarter, we will also have a challenging prior year comparisons due to the unusually strong timing of embossing in the first quarter of 2019, given a spike in residential orders.
I'll mention the impacts of labor and sales on revenues are mainly a first half by not me.
Accordingly, we expect our year over year growth to be the lowest into first quarter of 2020 and accelerate as we move through the year.
I will mention that at this point, we have not seen any direct impact on our business due to the Corona buyers.
Vision, our supply chains do not have any material overlap with China.
Based on our current backlog schedule, we do not have any impact of the virus incorporating pork 2020 outlook at this time.
That said, we are mindful of the potential disruption that these unfortunate epidemic may potentially costs for our customers during any stage of construction.
Therefore, we will continue to monitor the situation.
Provide update as we've moved through the year.
In summary.
We believe we're well positioned to deliver another year of double digit growth in sales and adjusted EBITDA as we capitalized on the many positive catalyst mentioned on today's call.
We are confident in the trajectory of our business and look forward to executing on our multiyear project pipeline, while actively pursuing additional opportunities to generate attractive returns for our shareholders <unk> 2020 and beyond.
We will be happy to answer your questions. Operator, Please open the line for questions.
Thank you will now be conducting a question answer session. If he would like to ask a question. Please press star one on your telephone keypad.
Information, telling one indicate your line is another question Q. You May proceed start to if he'd like some of your question from the Q for Pat just didn't you think speaker equipment, maybe necessary to pick up your hands that before pressing the star keys, one moment, please only pull for your questions.
Our first question comes from the line of Mike Shlisky with Dougherty and company. Please proceed with your question.
Good morning, guys.
So looking at the guidance for 2025% revenue growth into the middle of the.
Of the range fast lot of 5% I guess I make some sense, but last year as you're up I think 3% on backlog and delivered.
16% growth.
On the topline and you are seeing some good rent trends, which I'd for something like 50 other backlog talk.
I would just would've had a bit higher than the 450 or so revenues for 2020, clearly kind of walk us through some moving parts on the rest business for 2020 are you at this point being very cautious I don't know is to be able to guys, 78% growth again, but any kind of ballpark would be helpful to see if there's any kind of no upside from here.
Yes, Hi, Mike this on T. I've, a couple of things there on the resi, we're still projecting double digit growth a low double digit.
Which we think its cautious like you said, a we Wanna get a little more color as to how these moves along with all the circumstances around.
Everything that's going on but we feel that that's certainly you know a prudent approach at this point in time.
On the commercial side or the timing of the backlog. If you look at it a we grew quite a bit IDN, Oh, 2019, which some of that backlog actually getting invoice toward the end of 2020 and into 2021. So you also want to be mindful of delivery times at the end of 2020 north.
In order to be able to account for data revenue. This year. So there were those were the two main considerations that we had when we guided for for this year.
Okay.
Also want to ask about $5 million, whereas the orders that were pushed out from Q4.
Okay.
Your topline in Q1 or when you have is our backlog such that you might get in Q1, but in the $5 million different business person into Q2 like what's the what's the cadence for that but of course that business.
Have you expect patiently sport for the first half of the year NR and he is really not under our control I mean is more on declines control as to when they come solve some of their operational issues.
So for modeling purposes, I will say Q1 Q2 is probably just the same way to go.
Okay.
Then on the Capex I know it was elevated in 2019 I just didn't student your and your release was there any kind of outlook for 2020 for your Capex budget.
Only much lower than 2019, I think 7 million or so he's a prudent number we still have detailed in all our efficiency investments probably two to 3 million and then the rest being mainly maintenance capex.
Body, certainly a much lower number done 2019 based on what we have going forward.
So I saw the mission kicks in and growth rate, a little more sounds like a little more under control here, maybe not quite well we saw in 2019.
There's a pretty good free cash outlook on for 2020.
Yeah, well you saw was or what we were able to do a deal at the end of 2019, certainly a lot of improvement year over year, mainly on working capital management related to inventory procurement in form of free cash flow perspective, obviously, having a much lower capex will help.
So obviously you know, we're focusing them continue to generate free cash flow and operating cash flow obviously.
Okay got it I'll pass it along thanks, so much that thanks, Mike.
Thank you. Our next question comes from the line of 10 Wise with Baird. Please proceed with your question.
Yeah, Hey, guys good morning.
Good morning alone.
Maybe just a high level question. So relatives I'm just curious your visibility today as you kinda enter 2020.
Relative to prior years, how how would you kind of described that visibility for 2020 relative to how you've had visibility entering up any previous year.
Well I think the exception I wouldn't be more or macro with everything and I'm going on right now.
On on the commercial side, you have a lot of visibility based on the timing of projects. Obviously, you can't control when you can delever the products.
On the resi side, I think where were taking a cautious approach and see how things evolve were still like I was saying projecting double digit growth on the on the resi side.
Last year, we grew 78 per se and obviously, we're not gonna baking the same type of growth for for this year, we expect the positive trend to continue.
But are taking a more measure approach us as we moved through the year and and we can update based on actual results.
Okay. Okay, and then as you think about just a returns on on some of the.
Automation equipment aluminum could you just remind us you know what the benefit to that in 2020 could look like.
He's gonna be pen all on the man, that's you know us as you'll recall in the aluminum front, we spent about $5 million.
In in really the payback on that he's very short it's about 24 months. So if the demand is there and we havent even touch into what's going on in Latam Buddy feel little cutting the trend we've seen some positive trends in the last couple of quarters, we're not baking in any substantial upside there, but if you'd be dose takes plays out there that the.
Trend continues we should be able to fill up that more off of that capacity.
So were expecting quite a quite a quick payback win on those investments to him.
Okay, Okay and then.
Just to make sure I've got it right. Just if you look at gross margins and you and you look at as she ne.
Do you where would you expect the most leverage in 2020 to come from the group. The gross margin minor would you expect that that.
The strongest DNA leverage to continue absolutely, it's definitely going to be on on the on the gross margin line.
We should be able to do 150 to 200 basis points on operating leverage there.
Obviously, there were some one offs these quarter that impacted the results, but beyond that absent any headwinds on U.S. labor remember that we have the automation kicking in in this quarter and were expecting to to drive some synergies there so far.
From a gross margin perspective, we're expecting operating leverage on the edge DNA front. The main leverage that we got 2019 was related to shipping and handling.
We are expecting to shape a bit more into farther places so were being little prudent as to how we model as DNA. So on that front I think is gonna be kind of more flattish and we'll be able to get the leverage on the cost side.
Okay, Okay great.
Appreciate the time guys. Thank you good luck on 2020, thanks Stan.
Thank you. Our next question comes from the line of Josh Wolfson with Raymond James. Please proceed with your question.
Good morning, Thanks for taking my questions.
Morning, Josh.
Wanted to drill down a little more on some of these things here so as it relates to the cadence of sales for the year.
Given the although the head once you've listed for once you do you still expect once you sales to be flat to up year on year.
Yes, I think a flat modeling is he's probably about right then and again, let's remember that we have a pretty tough comp because Q1 of last year had a significant spike in resi sales. This year is is more of a a useful quarter, where we are a couple of weeks for.
Scheduled maintenance.
So the way that we're modeling days, he's kind of a slot Q1, and then ramping up over the year like like you earn the call.
Got it and then as it relates to what your answer to the previous question on gross margin is to make sure I understood. You are looking 450 to 200 basis points and expansion with more so in the back half than maybe less so in the front half given the ongoing labor inflation headwinds is that about.
That's absolutely right.
Okay.
And then in your guidance. So specifically are you assuming Colombian sales are flat or what's the assumption. There. Yes, we are assuming flat sales with the growth coming out of the U.S. schemes Columbia continues.
The positive trend I will now we have seen over the last couple of quarters, then that would be an upside to two results.
Got it and then last one for me.
Your days accounts payable dropped quite a bit you're on here was that just timing or is there have been some adverse shifts there.
No. It's just timing I mean, it depends on where you have what kind of orders will be inventory you have a one point in time so.
We don't expect any structural changes there.
Got it good luck with some export.
Josh.
Thank you. Our next question comes from the line of Julio Romero with Sidoti and company. Please proceed with your question.
Hey, good morning, everyone Arnie Julio you want to Andrew.
Wanted to ask if you could potentially quantify how much of an impact a higher U.S. labor costs had in the fourth quarter and if you're seeing that particular labor constraint in any particular geographic regions of the country or if it's rather just kind of.
Broadly spread out mainly in the southeast <unk> as you heard on it wasn't a lot more related to the installation and and into your question as to how much you want us.
It wasn't about a million in a half the we saw during Q4.
Were monitoring to see what Q1 looks like a we hoped that to be a temporary effect and as you heard and Nicole we're looking to mitigate some of that impact with the with the automation that he's kicking in in the Q1, which will help us with 'em, we labor cost in Colombia.
Okay got it and.
Can you talk about maybe what the final install versus manufacturing sales mix was in 2019 and I know you said you expect greater mix for manufacturing and 2020, but if those U.S. labor headwinds continue if that makes can potentially swing more towards manufacturing that then what is currently embedded in your guide.
It all depends on on the and clients you know we actually have.
A more weighted revenue mix on the manufacturing side in the first quarter. So we do expect you know to have a better gross margin based on that during the first couple of quarters, but at the end that the mix of shipping is going to kind of the pen on on.
Customer orders because you obviously you can ship anything until you get those orders in place.
Got it and just last one for me just housekeeping here.
You happen to have the dollar amount for shipping and handling up on the full year.
It's about 5% of revenues.
For this year is going to be about $8 million from so.
Okay great.
Thanks, very much alright, thank you.
Thank you. Our next question comes from the line of Brett Feldman with D.A. Davidson. Please proceed with your question.
Great. Thank you good morning morning, right.
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Okay. Okay.
Okay, and then just given all the movement in commodity prices as of late <unk>. Maybe you can just update us on kind of the impact to the TNL material cost aluminum and so forth. So we think about 2020 and I assume at this point you haven't any no supply chain disruptions or anything like that.
Yes, that's correct I mean at this point, we haven't seen any it's hard to tell what that's going to look like going for not only for all but but for the industry. In Q4, we do have a little bit about headwind with some higher price style aluminum for for short term orders, but going forward were model.
In.
Commodity prices being somewhat stable, but again, you know well, we'll have to wait to see with what happens with with everything that's going on right now.
Okay.
Okay, well, that's all I had thank you thanks Brent.
Thank you. Our next question is a follow up for Mike Shlisky with Dougherty and company. Please proceed with your question.
Hey, guys. Thanks.
Wanted to circle back on your question any commentary from one of the earlier questions. I'm just said it earlier that on a dollar based business to be flat for this year or is the percentage of sales going to be flat from the previous year.
I'm sorry are you asking if as DNA is going to be flat year over year.
Yeah.
Got you had said that and it was interesting dollar what percent basis, no not on a dollar basis or not percentage basis, I was saying that we don't expect to get significant operating leverage over they hire sales and that's just based on the fact that we're expecting to ship.
Into a lot more kind of farther destinations.
So we are not projecting to be able to get the same shipping and handling efficiencies that we were able to obtain 2019.
But on an absolute on an absolute terms, we are modeling a as you need to be a little bit higher on a dollar basis.
Okay got it got it.
And then secondly, I did notice that the that the president of Columbia assessing the White house for a meeting today with our President I think that's taking place right now as we speak.
I know that your company is one of the better success stories of Colombia.
And so that's what's going to be talking about today in the meeting other any trade or economic discussions you're thinking about taking place [laughter] no.
Uh huh.
Basically the president of Columbia is going to try to make sure that are they.
Free trade agreement continues to go on that the types of the proceeds from put on.
Aluminum for Columbia, maybe taken down.
He is one he wants to make sure President Trump's understand that Colombia, you said partner in the long run on the or we are in a deficit with the U.S. integrated.
Okay.
Thanks Fair enough appreciate it thanks, Mike.
Thank you we have reached the end of our question and answer session I would like to turn the call back over to Mr. Jose Manuel diet for any closing remarks.
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Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.