Q2 2020 Tecnoglass Inc Earnings Call

Reserves.

We will certainly lower pose your novo reveal copper to a year ago.

That's a we continue to expect the U.S.

To be the primary driver of our growth in the quarters a years ahead.

Our strong balance sheet continues to support our growth ambitions.

[laughter] has strong working capital management.

Cost reduction initiatives that benefits robot high return on today's youth initiatives collectively help.

Also generated the highest cash flow quarter in our history.

And third.

We were able to further improve our net leverage ratio to 2.2 times.

As previously color.

With the various total liquidity level, although holder 36 billion.

As we move into the balance of Twentytwenty.

We have ample financial resources to continue executing our growth strategy well further enhancing our position as a premier architectural glass later in the U.S.

I will now turn the call over two crews to provide additional details on our backlog.

Thank you also Manuel.

Moving to our backlog on slide number five.

Based on our sequential quarter improvement and conversations with many customers. We believe that they want to economic crisis should be behind us.

Polyone elements of our business is that we have.

A multiyear view of projects in our pipeline on the commercial portion of our revenues combined with a rapidly growing residential operation.

We ended the quarter, we have attractive position commercial backlog across the U.S., which grew an impressive 4.8% year over year to a record fire hung around 50 million.

The U.S. represent 88% of our backlog compared to 84% in the second quarter of 2019.

We continue to build upon our U.S. growth as tightly to best in class products and expanding customer relationships with supports our confidence in our us market positioning.

Fortunately most employees are still progressing according to plan now that construction is permitted in all markets. We are working as close as ever with customers to get real time update on project timing to help US best managed promotions can use on working capital turns.

Yes.

We are getting our critical products, so job sites as quickly and efficiently as possible.

Bidding and quoting activity in the U.S. as stay in line with three coverage levels, which marks on encouraging trend for the recovery.

In residential we just a reminder is now fully capture by our backlog we have been very pleased with our continued penetration into lower single family projects. Since we entered top end market in 2017.

In recent months, we have taking our initial steps beyond South Korea and into other markets in central jewelry on the Panhandle.

We have an exciting opportunities to replicate our USA playbook in residential to win constantly relationships and expand our geographic footprint over time.

We sent us housing data yes.

Rick recoveries, taking pace, which add additional candidly to our rapidly growing recommendation in residential.

Before I hand, the call over to something.

I want to make sure that all of our team members know how proud we are of their conclusion.

While the downtime our facility impact our regular cadence of invoice for the quarter. We were extremely pleased to demonstrate our commitment to protecting the well being of our employees customers and partners.

The workplace for patients are we implemented included reconfiguration of frozen.

To incorporate social decent in our best practices, while maximizing productivity.

With most of our vertically integrated operation Colocated when the same campus, we were able to adapt quickly and efficiently.

While market uncertainties understandably persist today, we really we have addressed many factors.

Under our control to continue safely growing with our customers on delivering additional value creation to our all stakeholders as a national and local economies recover.

We'll now turn the call over to Santiago to disclose our financial results and outlook.

Thank you Christian beginning with our capital resources on slide number seven.

A key priority for us during the quarter wants to reinforce our balance sheet strength or continued success.

We made great progress on that front, we generated a record cash flow from operations of approximately 44.3 million.

This was in excess of adjusted EBIT, reflecting aggressive cash management, such as tight cost controls working capital improvements and automation benefits.

With the recent completion of a significant phase of growth investments Capex was largely limit it to maintenance spend.

This collective actions helped improve our total liquidity to 136 million as of June Thirtyth.

A percentage and over 40% increase compared to 95 million at the end of March.

To further de leverage our business too and the second quarter at a comfortable level of 2.2 times net debt to adjusted EBITDA, but not significant maturities until 2022.

From a capital Acacia perspective, we remain prudent in our approach with our near term focus on balance sheet strength and returning a portion of capital to shareholders through our TV.

Looking at the drivers of revenue.

On slide number eight.

The month of April represented the majority of lower revenues for the quarter.

Primarily due to that to non invoicing weeks during the first half of them on.

As we have discussed on todays call, we experienced a significant demand recovery.

Jobs.

So monthly revenue improvement as the quarter progress.

The sequential revenue improvement was mainly in the U.S., which represented 97% of revenues for the quarter with revenues from Latin America being slow to recover as construction sites continue to prepare for safe operations.

US revenues for the quarter, where 79.1 million.

Compared to 99.3 million in the prior year quarter.

It's important to remember that a majority of the revenue not eat boys during the quarter represent active projects in backlog, which we expect to de lever in future quarters.

Adjusting for those two non invoicing weights are you as revenue was down in the high single digit for <unk> percent range, which we believe was more reflective of our market environment.

Additionally in the prior year, the second quarter 219 represented our highest revenue quarter on record.

Which provided for a difficult year over year compares.

In June and July are you as revenue was down a more modest mid single digits helped in part by residential so we feel good about the direction of are you as business into a third quarter.

In Colombia, and other Latin American countries. The steep decline in revenue was a function of significant business disruptions.

We experienced delayed activity with many customers that have been slow to adopt the extensive preparations require a job sites throughout the year to Barry Harvey 19 guidelines revenues in Latin America remain in the early stages of recovery.

Looking at the drivers of adjusted EBITDA on slide number nine.

We focus our efforts on operational excellence to achieve record margins in gross profit operating income on adjusted EBITDA for the quarter.

We improved adjusted EBITDA as a percent of sales by an impressive 580 basis points to 28.

<unk>, 4% compared to 22.6% in the prior year quarter.

In dollars adjusted EBITDA was 23.3 million compared to 25.8 million.

With lower revenues, mostly offset by a 470 basis point improvement in gross margin to 38.8% in a 4 million dollar reduction in as DNA.

Hey improvement in gross margin, primarily reflected lower raw material costs attributable to lower aluminum prices lower direct labor and material waste from our automation initiatives as strong dollar unfavorable mix of revenue during the quarter.

We expect continued year over year margin improvement for the rest of the here given some sustainable benefits related to our automation investments and weak local currency for the rest of the here.

The reduction in as DNA was primarily driven by less variable cost related to shipping travel and commissions given lower revenues in the quarter.

We continue to monitor areas, where we can limit cost we are encouraged by improvements in our markets over the past couple of months.

We believe that our lead highly efficient and vertically integrated operations leave us in a great place to maintain our industry, leading margins as we look to capitalize on their recovery.

Looking at the activity in our markets on slide number 11.

Consistent with our revenue trend and recent improvement in the architectural billing index, we believe that the worst of that endemic related economy impacts are behind us.

You are activity is normalizing as many economies continue to reopen and customers pickup the pace on projects Cobbett 19 outbreak in Florida has not had an adverse impact on our major projects in Dod Mark.

On the residential side, we're seeing promising trends at indicate that the rebound taking place.

A long runway.

Increasing housing starts in a strong order growth reported by many large public homebuilders continue to provide evidence that the new residential demand is strong.

I suppose I mentioned earlier.

In June we reach a monthly record for residential orders.

We typically see our residential orders translate into invoicing over 60 to 90 day period.

Especially then so now represent 19% of are you as revenue and he is likely to remain the fastest growing portion of RBC.

Moving to our outlook on slide number 13.

We are encouraged by our pace of activity into the month of July.

We are working closely with our customers to service existing projects and we are gaining share as opportunities arise to outperform mark.

Based on our current momentum and invoice invoicing schedule, we expect sequential monthly revenue to grow as we move through the third quarter.

We expect the U.S. to represent a significant majority of our revenues through the year.

We growth led by single family residential sales.

Our exceptional growth margin performance in the second quarter included returns on automation initiatives, which are contributing to results as planned.

During the quarter, we also benefited from favorable timing of input costs and manufacturing versus installation revenue.

I'll start market satellites, we expect gross margins to trend back towards a normalized level in the low to mid Thirtys range.

This normalized margin is unchanged from our previously communicated a range I had a ready factory in the benefits of automation initiatives.

In summary, we.

We are positioned to successfully navigate the current environment, we are structural advantages for our liquidity position at industry, leading margins as we execute our strategy. During this unprecedented period, we will maintain our focus on safely serving customers aggressively managing costs stay.

Thanks, sitting in our balance sheet and generating returns for our shareholders with that we'll be happy to answer your questions. Operator. Please open the line for questions.

Thank you.

I'll now became the question and answer session.

To join the question Q you May Press Star then one on your telephone keypad.

You'll hear a town acknowledging your request if you're using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then Tim.

Once again to John a question can you. Please press Star then one now.

Our first question comes from Mike Shlisky I've Collyer Securities. Please go ahead.

Good morning, everybody.

For like it looks like 'em horns warning.

It looks like a lot of your EBITDA margin in the quarter allow the growth through the implementation of automation.

I'm, giving you want to quantify how much that might have in the quarter and.

And I appreciate your gross margin commentary I look really comment on house, Hi, Daniel or are these EBITDA margin levels going forward.

Yes, Thanks, Mike.

There was like appeal moving pieces here, obviously, the mix of our revenues place apart.

But we are as we had indicated before we felt that are being able to achieve at least 150 basis points or higher year over year margin was what certainly attainable.

Based on what were seeing with the automation I think we can estimate that at least 200 basis points.

Ah versus the gross margin that we ended up with that 2019.

It is probably not a reasonable run rate to to go with.

Are there of course other moving pieces, depending on an ongoing assess our explained and depending on how that mix of their revenues commonplace, but.

But assuming stable mix I.

I think 200 basis points could make sense year over year going forward.

Thanks for that off one asking about your expansion into central Florida Panhandle.

I guess I was kind of curious whats the next.

Are you might go into after that and the timing of that kind.

Kind of curious to know whether you know if you if you're seeing some rapid growth in some of the housing market here when it makes sense to accelerate your plan to.

Stange residential trends given given the fact that there could be an opportunity to gain some some share as that market comes back here.

[noise] Oh.

We are expanding.

Oh logistical.

The two where could afford to do it real over.

Oh sure Burgers, there's real.

How's it totally be for.

Oh look the commercial there's maybe a small orders remain do for Blazers.

The the Livearea digital just to go to the to the plays a role time.

Totally different so where your exposure there over a frequently.

Voters weaker thus far I suppose weaker.

We are no oak to persist her cola.

There were positive to move all the way it was used to.

The between the here through the adult a year.

Sure.

There's also movie the low boost goes learn where adopters actual bill.

Very small places, where we're pleased to move all the way to the gorilla either.

Well decidedly broad looked for those areas.

There will go the older logistical.

Ah together two to two or be able to do it properly you know because of your go to a banker.

Those are still fairly.

There's been an adult to do it for two or.

Sure.

That makes sense, thanks that color, maybe one last one for me.

So can you just say I consider progress or whether kind of status. If you have on our the refinancing or negotiating or death is due in 2022, yeah I thought there on savings of interest cost or or other other parts of that process at this point.

Absolutely Mike we've been we've been working on that seems the beginning of the year exploring our different options.

Clearly there was a period of time, where there was so much volatility that nothing really could be.

You know expected for certain the good thing is that we're now seeing.

That those options that we were evaluating our our opening up again.

And you know dependent on market conditions, we certainly think that while we do going forward will.

We'll carry interest savings for for the company. So we're well ahead, we're working with different parties to to be able to do that.

We haven't decided what the structure will be.

But in any event each one of the different alternatives that we have in place we'll be at a lower cost than we currently have so from an interest perspective on any P.S. perspective that would be I tell when probably next year and going forward.

Okay. Thanks, so much the answer Oh, yes, I appreciate I'll hop back in Q.

Thanks, Mike.

Our next question comes from Josh Wilson of Raymond James. Please go ahead.

Thank you good morning, and congrats on the quarter.

Hi, good morning, Josh.

Okay.

But you talk about the improvement you're seeing in quoting them bidding as it relates to the different geographic regions in the U.S.

Yes.

Well, we do school.

Hello.

Well.

Quoting.

Especially all over all around the country lived in South America, because of Colibri Limbaugh's Hill bars Triple the June was a load the there.

It was jewelry was great because everybody.

The words believe their growth figure the job carry Burke.

Well no bug toward believe or that'd be preserve the well we were.

Good so.

Areas, where are those here the Bruce will likely the hotels.

Hotels are we believe.

No no for Hello.

Well the logical Adobe view, Brazil, So Florida are also do live.

Well the rest.

With this bold could there be viewed as a road pills.

Even office buildings are mixed use buildings.

All in place.

The New Yorker boast are there we're going to really grow there were closer yellow.

Oh project so I.

I believe you know the Zoullas is very resilient gold jewelry.

Well go there, but it could so.

Sooner than later everything is going to go back to normal.

And on that topic as it relates to some of them or if the mostly impacted categories. So what are you hearing from your customers in terms of their outlook for office and multifamily.

[noise] well.

Both God forbid luzu or the so Florida will depend a lot of older people throw both for the floor.

Where's the logo on the New York, both to the <unk> capital or people go over.

But.

So that's why a few of the buildings.

<unk> built.

Uh huh.

We still don't see it it looks from Latin America, which is one of the larger smokers, Brazil, Colombia, Venezuela.

Or the Roshe, so we'd have to wait for the.

Sure the done reopens.

I believe.

We're going to have a boulder do though buildings going though because the.

The older already the developers are really the users already.

Just a mono is going to be book over here.

Got it and then Santiago can you give us a sense of what you think capex will be for the year.

Very minimal Josh has as we had indicated before the growth capex on the automation initiatives have been fully completed are fully operational now so for the rest of the year it would be mainly maintenance capex or perhaps a couple of.

Dollars, but.

No not much more than that and that's in line basically with what we had expected for the year.

Good thing is that we had already completed our investments, we're not really having to delay anything with the completion all of these phase where pretty much set.

As far as our install capacity goes for the next few years. So my expectation is that the rest of the way we'll Joe's.

Two mainly maintenance capex.

Got it good luck with the next quarter.

Thanks, John.

Our next question comes from Tim Wallace of Baird. Please go ahead.

Hey, guys. Good morning, nice nice job on the possibility.

My Oh My first question I'd say, that's just really like a quick clarification, the 200 basis points or kind of gross margin going forward is that kind of a go forward comment just on where given the strength there that they or is that kind of what you expected for the full year.

No I think that for the next couple of quarters, we can get a couple of hundred basis points over what we ended up 29 tend to wait till you know if we if we ended up with 31.

Think low to mid Thirtys is that new norm basically I think.

Getting too to that mid Thirtys achievable, but I was I was saying earlier there is a few moving pieces here.

The we can't control raw aluminum prices.

In the into Q a into from in the last Q, there, whereas no was $1400 per tonne, they're back to 1700.

Going forward, we expect to have a little bit more of installation revenues versus manufacturing revenues, but there's a few moving pieces, but there's also some structural things that are gonna being blades and I think that gets us to they won 50 to 200.

Level, which would equate to you know 34, 34.5% I.

As opposed to you know, 32% or so that we had dropped 29 10 way.

Okay. Okay, that's fair and then I'm on the back half.

You can kind of hearing your basis or your mix and installation purses manufacturer to manufacture a couple of more normalized you think you'll still see towards me sorry.

I think you'd be more normalized during the first couple of quarters over these here G. M. P was completing a few large projects.

You know based on our backlog schedule, there due to to ramp up.

Three in Q4.

So you know we should have less about tailwind related to mix.

For next couple of quarters, and that's why you wouldn't expect.

To to be able to reach 38, 38.5% gross margins, partly because of that.

So you know, where we're kind of normalizing for four mix and trying to understand the other moving pieces like I was saying, so chest wall aluminum prices and others.

But in any event like I was saying because of the automation.

You know that said tailwinds on labor cost and whatnot.

We should be able to to get to that mid thirtys.

Okay. Okay. That's clear. Thank you and then just on the residential business is there anyway to frame you know what those 10 orders look like and kind of the new now you know what the second half into residential could be and how that then it can actually how that business can actually perform on it for your basis in 2020 me to leave me in a flat to up there this year now.

[noise] well there was very well.

[noise], Doug so predictable because there's a there's been the operations I mean, we have.

Uh huh.

To close the door, there's already because does.

The third everywhere with the older that with the Liberal six to eight weeks, but the most.

So after that the birds will have their merger before.

So we perform over July was a great Bose.

All those things are starting to really good book, well enough to where the zoo, though.

He was really what I believe I believe we're going to grow it we're gaining market share.

So the.

No. It's all good producers does is a local during the bunker.

The we have Oh, the best Swindle I believe.

A for the rest of Israel merger with a higher appraisers those are physicians.

A residual ER physicians in the paper the glass.

The weird, David we're gonna be bunker vary by barrier, we're going to dual dealers do distributor or so.

Lastly, I believe was really good growth there's no reason not.

Okay, that's great and then I'm going to squeeze one more and.

Just are you guys think any sort of pressure on lead times are labor productivity, my guesses or not I just wanted shot.

[noise] no we're not we're though we're doing really good old I mean.

The surgery the fuel Brewster does too.

Oh, the company with the older Israel.

The teachers use and the expected.

Does this cost I mean, the [laughter].

[laughter] caught a little figures, though were dog useful.

[laughter] pulled the resources or the road closures.

Toward more rules for the mode you.

<unk> for the fusion Israel does open.

Right right well good luck on second half that thanks.

Our next question comes from well Callison of D.A. Davidson. Please go ahead.

Hi, good morning.

Good morning.

Well it looks like you guys had a pretty favorable benefit from the ducks anything selling general and administrative expense I'm wondering is that something that was related to co head at home work on everything that can be expected to continue for the rest of the.

[noise]. So basically you have a portion of that are are related to variable cost, mainly a shipping and handling and commissions. So with the cadence of revenues trendy not you would expect that to two inch up as well.

So there are some kabi related expenses related to traveling for instance that are not there and will not be there until things.

To get to some type of normality.

That being said a skill set was mentioning you know there was a lot of restructuring that was done at the company. So some some of these he's actually just related to restructuring and seeking efficiencies and whatnot.

But the you know them the majority of these would be.

I would say probably 60, 70% of these would be related to variable cost. So we would expect on there are more normalized revenue quarters.

And full monthly invoicing.

For nominal as DNA to to return to a more normalized level.

Okay, Great. That's a that's helpful. Thank you and then.

My last question I'd like to pivot do you have any update on the news flow glass facility that you on had put on hold last quarter.

Oh, Yes, we do we do we.

Due to cool with a Wi.

Well the project will hold or were there to go there were certain garage.

And there was no but to start.

Are the best business, but it's true.

We are no real offensive.

Uh huh.

The shows you the doors, we believe we should do it.

The last month for example was the first laws.

The slowed though we do have virtually bullet though were there.

Well sold though.

So that leaves the demand is very good.

With the.

With the cruisers those that were blood to merger the next.

Two years.

Because the slope loved we'll go ahead.

Really the Globers, though there there's a live.

We ended the year, where we'll have a does oh, well, who will Uh huh.

Oh delivery, we should be but generally the here or March we will decide Doug <unk> dollar beer there.

Okay perfect that answers my question. Thank you very much.

Thanks, well.

This concludes the question and answer session I would like turn the conference back over to let's say Manuel for any closing remarks.

Third do every wonderful bookings you pay the drivers cool.

We will keep a hobby good news for you I believe our toll brothers boys.

To give better results could go to the extra cost a little better mergers merger.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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