Tecnoglass Inc.
Q1 2016 Earnings Call Transcript

Published: 11 May 2016

[Operator:]

Greetings and welcome to the Tecnoglass First Quarter 2016 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Rodney Nasier [ph], Investor Relations. Thank you, Mr. Nasier. You may begin.

[Rodney Nasier:]

Good morning and thank you for joining us for Tecnoglass’ first quarter 2016 conference call. A copy of the slide presentation to accompany this call may be obtained on the Investors section of the Tecnoglass website at www.tecnoglass.com. Our speakers for the call today will be José Manuel Daes, Chief Executive Officer; Christian Daes, Chief Operating Officer; and Santiago Giraldo, Deputy CFO. Moving to Slide 2, before turning the call over to José Manuel, I would 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 statements regarding future financial performance, future growth and future acquisitions. These statements are based on Tecnoglass’ current expectations or beliefs and are subject to uncertainty and changes in circumstances. Actual results may differ in a material nature from those expressed or implied by the statements herein due to the 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’ filing 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 José Manuel.

[José Manuel Daes:]

Thank you, Rodney and thanks everyone for participating on today’s call. Turning to Slide #3, we have made continuous strides to grow our business during the first quarter of 2016 to further build on our position as the leading producer of architectural glass and windows in the U.S. and Latin America. In the first quarter, we produced total revenue growth of 28% on a constant currency basis. We experienced a strong progress across our diversified footprint. Our expanded U.S. operations represented over 60% of our revenues reflecting our established position in the States and the strong relationships to continue benefiting from the recovery in U.S. commercial construction activity, especially in South Florida. In fact, our revenues in the U.S. have risen for 13 consecutive quarters. We are positioned to continue this trend with our quarter end backlog up 20% to $385 million compared to the prior year largely weighted towards the U.S. In Latin America, we performed unbelievably with our revenues in Colombia up 43% on a constant currency basis and our other markets, including Panama growing 73%. On this positive momentum, we increased adjusted EBITDA by 43% to $15.3 million in the first quarter, excluding the impact of foreign exchange gains and losses. This adjusted EBITDA growth was helped by our low cost efficient operations we continue to provide, a sustainable platform to drive industry leading value. We also benefited from expanding vertical integration operations. Internal sourcing of soft coat from greenhouse production began to show up in results by the end of the first quarter. This is driving significant cost savings and strategic benefit, which we expect to be more pronounced as we move forward in 2016. Beyond the soft coat facility, we also have several exciting energy saving initiatives and productivity enhancements underway to improve our processes, which Christian will disclose further. We are committed to generating value for our shareholders as a U.S. listed publicly traded company. We started 2016 with a strong pace of activity and made good progress towards our full year adjusted EBITDA goal of $85 million. To complement our rapidly expanding operations, we are also actively strengthening our financial infrastructure and SEC reporting acumen to improve our overall business. Regarding our 2015 10-K and the previously announced review of certain non-cash accounting items, we continue to work closely together with our board, along with our current and predecessor independent registered public accounting firms to file as soon as possible. We are pleased that our first quarter 2016 results already incorporated the presentation of our financial statements, which we expect to incorporate into past and future filings. In summary, our first quarter results are a reflection of the market leading glass and window company that we have created. Our strategic investment in capacity, products and people combined with our business development activities and growing product portfolio provide us with a firm foundation to achieve another year of adjusted EBITDA improvement. We remain very excited about our outlook and then automatically generate shareholder value in 2016 and beyond. With that said, I will turn the call over to Christian to provide some highlights on our business and operations. Christian?

[Christian Daes:]

Thank you, José and good morning to all of you on the line. Turning to Slide #4, demand in our commercial construction end market is growing. Our product offerings are expanding. Our reputation is widening. And our operating efficiencies are improving. These positive factors are reflected in our backlog, which continues to grow and provides us with a strong visibility on our project pipeline. Our backlog at quarter end was $385 million, up $65 million or 20% from first quarter 2015 marking the seventh consecutive quarter of year-over-year improvement. We also increased backlog from $375 million at December 31. At March 31, approximately 65% of our backlog was for the U.S. market, followed by Colombia at 25% supporting our expectation for the U.S. to represent an increasing share of our business. The bidding environment was strong throughout the first quarter and remained active in April. We are capitalizing our improving demand and winning new customers in new and existing markets. Each completed project elevates our profile and our business is benefiting as a result. Our new-in-demand products are helping to build customers’ loyalty and repeat business, which firmly situates our company for continued growth in each of our key regions, especially in the U.S. Moving to Slide #5, since our inception, vertical integration has been a very important component of our global competitive advantage. Our new soft coat plant added in 2015 has significantly enhanced our vertically integrated operations and placed us among a handful of global manufacturers with this production capability. We previously sourced our soft coat glass externally as a raw material for using our windows and tempered glass production processes. So, we were especially thrilled to successfully scale up production to meet all of our internal soft coat production needs by the end of the first quarter. Our internal demand is now consuming approximately 20% of the soft coat system, total 6 million square feet of capacity, which we expect to generate savings in the range of $6 million to $8 million for the full year 2016. This leaves us with significantly more than enough soft coat capacity to supply external customers over time in both new and existing markets. We continue to believe that the new soft coat facility can generate $200 million to $250 million in additional revenues as we ramp up excess capacity over the next several years. This is very exciting growth opportunity for Tecnoglass. Turning to Slide #6, beyond our soft coat investment, we have several other production and operational enhancements, which we participate – which we anticipate will generate attractive returns. On the cost side, we are planning energy-saving initiatives to improve efficiencies. This includes solar panel roof to generate low cost energy. In addition, we are in the early stages of building a new natural gas plant to generate reduced energy consumption and use our own emissions as cogeneration. In our production process that we are introducing lean manufacturing practices to gain manufacture and logistical efficiencies across our 2.3 million square foot plant. Concerning our investments to support growth, we have two additional production lines coming online in the second half of 2016. Especially, we have a new laminating line and a new insulating line, which will help us increase output on our glass tempering facility, mainly using our internal supply soft coat glass. With our increased output, we are also installing two additional furnaces in the second half of the year to process incremental volume. Collectively, these investments will help us more efficiently expand production capabilities to serve – to better serve our customers. Turning to Slide #7, as I have discussed we continue to improve our well-located, low-cost and efficient capacity throughout a continuation of successful multiyear investment. Producing glasses is a capital investment intensive – is a capital intensive, but also very manual process. We have efficient access to highly talented workforce and we estimate our fully loaded labor costs are on an average 6x lower than the U.S. industry peers. When combined with very favorable logistics from our strategic location in Barranquilla, Colombia, these advantages are very difficult to replicate in other parts of the world. So with these advantages, we believe we have a very sustainable low cost position in all the regions that we serve. As a result, we have a very defensible industry leading margin to generate meaningful profit and cash flow in our business over the long-term. Turning to Slide #8, looking at new products, our ProBend product line, introduced in November 2015, continues to experience a strong demand. ProBend allows for the production of high quality cylindrical safety glass that has the capability to produce – and has the capability to produce large size bend temper, heat strengthened and laminated glass. We are now one of the few manufacturers in the industry with the ability to deliver these products. During the first half of 2016, we are also on track to introduce our TecnoAir product line using a new technology to produce the thinnest safety architectural glass in the world. Beyond these products, we have a healthy research and development pipeline to build on our strong culture of innovation and further strengthen our market leading position. In closing, our operations and the strategy are driving growth in our business and we are investing in our very efficient platform to drive additional margins and cash flow. We expect our growth in U.S. and Latin American markets to continue as we move forward in 2016, driven by a strong demand and quality of our products and the dedication of our entire team. With that review, I now would like introduce you to Santiago Giraldo as our new Deputy CFO. Santiago joined our company as a senior member for our finance team in early 2016. He was formerly Chief Financial Officer and Head of Business Development and Strategy at Ocensa, a subsidiary within the Ecopetrol Group, the country’s largest company which is currently traded in the New York Stock Exchange and the Colombian Stock Exchange. Prior to his CFO position, he spent 15 years in corporate banking in the United States at Citigroup, JPMorgan and Wells Fargo. He has considerable experience in capital market, bank debt, derivatives, treasury, M&A and equity related transactions. His professional experience and financial acumen are highly aligned with the direction of Tecnoglass. Santiago succeeded Sergio Barake as Deputy CFO in April of this year. Sergio decided to resign to pursue other business interest. Sergio was significant contributor to the improvement of our company during his time with us. He will remain in an advisory role for the foreseeable future to assist with the seamless transition within our financial operations. On behalf of Tecnoglass, we thank him for his efforts. With that, I will now turn the call to Santiago Giraldo to provide additional color on our financial results, balance sheet and outlook.

[Santiago Giraldo:]

Thank you, Christian. During the first quarter of 2016, we produced substantial revenue growth to achieve a 43% expansion in adjusted EBITDA. I will provide an overview of the results, beginning with Slide #9. Looking at our revenue bridges, on a reported basis, total revenues increased 16.8%, for a more balanced comparison, on a constant currency basis, with FX rates held flat at 2015 levels, revenue increased 28.2% year-over-year, excluding a $6 million impact from unfavorable foreign currency to Colombian sales. This was meaningful progress led by considerable strength in our Latin American operations and continued growth in the U.S. This FX impact was primarily felt in our revenues from Colombia, which in local currency or on a constant currency basis, increased 43.3% for the first quarter, but compensated by reduced cost as we will see ahead. The increased sales reflect an accelerated pace of activity in the different regions within our footprint. Unfavorable foreign currency resulted in reported Columbia revenues up 8.9% compared to the prior year quarter. In the U.S., revenues improved 15.8% to $60.8 million for the first quarter, reflecting increased project activity in Florida and diversification to a range of projects in other states including New York, New Jersey, Baltimore-Washington area and Texas. Additionally, some delayed projects activity from the fourth quarter contributed to the growth as well. Overall, the U.S. represented over 60% of our first quarter revenues and essentially stable compared to the prior year quarter. Turning to Slide 10, adjusted EBITDA grew 43% to $15.3 million for the first quarter. Before I walk you through the bridge, I would like to highlight an update to our adjusted EBITDA methodology to exclude the impact of foreign exchange gains and losses related to monetary balance sheet accounts. Our reported results include the impact of changes in foreign exchange. Several quarters ago, we began highlighting the explicit impact of foreign exchange in our quarterly performance bridges. After a careful review, we made the decision, beginning this quarter to update adjusted EBITDA to neutralize the impact of foreign exchange gains and losses related to the effect on FX rate on monetary balance sheet accounts. This allows for a more clear picture of the company’s core operating results in comparison to prior years and our full year outlook, which has always excluded these specific foreign exchange impacts. Adjusted EBITDA also excludes non-cash gains in both periods related to changes in the fair value of warrants and earn-out shares. We included an adjusted EBITDA reconciliation table in our earnings release today for the past five quarters, reflecting these updates for your modeling purposes. Looking at the bridge as a starting point on our adjusted EBITDA, in the prior year quarter of $10.7 million, excludes an FX gain of $3.5 million compared to an FX loss of $1.3 million in the first quarter of 2016. These FX gains and losses are now excluded from the bridge. With that said, I will provide you with the operating impacts on our better adjusted EBITDA performance in the first quarter of 2016 versus the prior year quarter. Beginning with gross profit, we had an improvement of $4.5 million comprised of $3.1 million related to volume, along with additional benefits from price and product mix. Cost of aluminum are lower year-over-year benefiting results by remaining stable in recent months. These improvements, along with the inclusion of other income more than offset $1 million of additional SG&A spend mainly related to expenses associated with our recently closed credit facility and other expenses. As a percentage of revenues, SG&A improved 130 basis points year-over-year to 19.1%, with increased revenues more than offsetting higher costs like shipping and handling related to additional sales to coastal and non-coastal market in the U.S. Overall, we are very pleased with the core improvement in our adjusted EBITDA. Moving to Slide #11, our gross profit and gross margin each improved for the prior year’s first quarter reflecting investments we made in our operations. Gross profit in Q1 2016 rose by $4.5 million from the last year’s first quarter, while gross margin for the quarter improved by 220 basis points to 38% from 35.8% in the prior year quarter. As a reminder, gross margin now excludes shipping cost, which were reclassified as SG&A for these and comparative historical periods beginning in the fourth quarter of 2015. We included a table in our earnings release highlighting the shipping reclassification for the past five quarters, which has no impact on our operating income in any period. For the first quarter, operating income increased to $15.1 million, with an operating margin of 25%, up from $10 million or a 19.2% of operating margin in the prior year quarter. Notably, operating income includes a non-cash gain on the fair value of earn-out shares of $3.7 million in the first quarter of 2016 and a gain of $2 million in the prior year quarter. These non-cash items – non-cash earn-out shares our now included in operating income for GAAP purposes following our most recent review of accounting methodology, but excluded from our adjusted EBITDA. For the first quarter, our net income was $13.1 million or $0.45 per share as compared to net income of $11.9 million or $0.42 per share in the prior year quarter. Excluding the changes in non-cash warrant and earn-out liability, adjusted net income for the first quarter was $3.5 million or $0.12 per share compared to net income of $4.8 million or $0.17 per diluted share in the prior year quarter. This difference in adjusted net income was primarily due to higher gross profit, which was more than offset by a $1.3 million foreign currency transaction loss in the first quarter of 2016 compared to a $3.5 million foreign currency gain in the prior year quarter. The implied tax rate to derive adjusted net income was approximately 54% compared to 24% in the prior year quarter. We expect that with the rebalancing of our debt through the recently closed U.S. dollar and peso-denominated credit facility and with a more stable foreign exchange rate, as we have seen during the last several weeks, this effect will be reduced during the year. The difference in the tax rate is mainly due to the timing of nondeductible expenses under Colombian tax rules, which can vary from quarter to quarter. That said our full year 2016 outlook for adjusted net income still incorporates a 41% adjusted tax rate, which is more consistent with our long term normalized tax rate of around 40%. Turning to balance sheet and liquidity on the Slide #12, during the first quarter of 2016, cash from operations was at $10.1 million net use of cash, largely related to working capital built to support growth in 2016. For the first quarter, we invested CapEx of $7 million between maintenance and growth CapEx related to the aforementioned new lines and furnaces. In January of 2016, we entered into a new $109.5 million, 7-year senior secured credit facility. The facility extended the maturity of our significant majority of our debt by 7 years, while also lowering our cost of borrowing and providing an efficient source of liquidity to continue growing our business. We used the proceeds from the new facility to refinance $83.5 million of existing debt with the remaining $26 million being used to support working capital and general corporate purposes. On March 31, 2016, our cash position stood at $43.2 million, which includes $25 million in short-term investments and long-term debt was $186 million, which also includes capital leases. Moving to Slide 13, we started the year on firm footing and we remain optimistic on our prospects for 2016. Based on improving commercial construction markets, continuing market share gains and improving operational efficiencies, we are pleased to reiterate our full year 2016 outlook. We expect total revenue to grow approximately 20% and adjusted EBITDA to increase to $85 million. Our top line outlook is supported by the expansion in our backlog, and we see additional benefits to our bottom line for new products and processes, such as our increased vertical integration and other cost savings initiatives. With that, we thank you for your continued support. We will be happy to answer any questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Jeremy Hamblin with Dougherty & Company. Please proceed with your question.

[Jeremy Hamblin:]

Good afternoon. Thanks for taking the questions guys. I wanted to first ask about the sales guidance for the year and just get a sense for – it’s impressive that you grew your backlog again. As we look into the second half of the year, your sales in the U.S. were only up 16% in the first quarter. I think that’s the lowest growth rate since Q1 2013. How should we be thinking about that geographic segment throughout the rest of the year? Was there anything specific to Q1? What are the general trends that you are seeing in the U.S. portion of your business?

[José Manuel Daes:]

We are going to – this is José, Jeremy. We are going to keep improving our sales in the U.S. We see strong demand for our products not only in Florida, but everywhere else and we see the share of sales to the U.S. increasing. I mean, they are going to keep increasing even dramatically. We see strong coating – I mean, we have now over $100 million to close in the next 2, 3 months. So, we don’t see the slowdown that anybody is looking at, maybe for 2018, but for this year and the next, we are mostly very confident that the sales in the U.S. are going to keep growing and growing steadily and substantially.

[Jeremy Hamblin:]

Just as a follow-up to that, you mentioned on your last call that there were some delayed projects in the U.S. in the fourth quarter that held your sales growth in the U.S. down. Did you continue to see that in the first quarter? Where do those projects stand in terms of timeline to completion? Is that part of the reason why we saw little less growth in Q1?

[José Manuel Daes:]

Yes, that is exactly the reason why, but now those projects are accelerating, because they were delayed not for reasons of non-sales or whatever, but lack of for example foundation, lack of concrete, delays on the architectural plans or whatever and now they are rushing to finish because they have deadline with the customers. So now we are seeing the increased demand in trying to close those buildings. We are launching with our sales and you are going to see that in the next quarter.

[Jeremy Hamblin:]

Okay. So should I be thinking about, for the U.S. segment in particular that the 17% growth in the first quarter, will that – I am sorry, 16% growth in the first quarter, will that represent the lowest growth rate that we should be seeing the rest of the year or are you expecting an acceleration from that on a year-over-year basis?

[José Manuel Daes:]

Yes, I do.

[Jeremy Hamblin:]

Okay, great. Thank you. I wanted to also follow-up and ask on the cost – I am sorry, the soft coat savings, in terms of the first quarter what was the total savings related to that. You mentioned that you got up to kind of full ramp by the end of the quarter, how much of the savings came in Q1 from that. And then what should we be thinking as we get to the end of the year, if you have guided to $6 million to $8 million in total savings, does that mean by the time we get to the fourth quarter that you would be saving, let’s say $3 million a quarter or $2.5 million a quarter, how should I be thinking about it?

[José Manuel Daes:]

I believe in the first quarter, it was around $1 million only, because as you can tell the slow growth in the U.S. and most of the soft coat is sold in the U.S. But as the quarters progress, we are going to be saving more and we are going to reach, I believe from $6 million to $8 million. That’s going to be around $1.5 million to $2 million per quarter. But then, looking forward for next year, then the savings is going to translate into new businesses, which means that instead of doing the 800,000 to 1 million square feet of soft coat glass, which we used to buy, we are going to be trying to sell 1.5 million to 2 million square feet of soft coat and that’s going to give us a lot of revenue, a lot of really good revenue with the bases cost that we have now.

[Jeremy Hamblin:]

Does that imply – when you say selling 1.5 million to 2 million of soft coat glass, is that finished product or are you talking about the potential use of selling stock sheets of coated glass?

[José Manuel Daes:]

Both, we are working on both. But mostly we would like to sell finished product. We are not in the stock sheet business in a way. Even though we are now talking to two or three customers, potential customers to sell them, because we have the capacity, to fill the capacity is good to do it, but the real good business is to fill the capacity with finished product, that would be ideal. That would catapult our business, catapult our sales and increase our profit by ten-fold.

[Jeremy Hamblin:]

Okay. I understand that difference. Just in terms of thinking about the margin difference of selling it, just the stock sheet versus finished products, finished glass, what is the margin difference?

[José Manuel Daes:]

Well, as you sell just the stock sheet, you sell a lot, but the margin is around 30%, the gross margin. With our finished product, it’s 45%. And then the price difference, the price difference is that – a stock sheet you sell for around $16 to $20, finished product you sell for $80 a square feet. There is a big difference.

[Jeremy Hamblin:]

That’s helpful color. Thank you. I wanted to just understand. You mentioned that you have $28 million related to the new debt facility, the credit facility – I am sorry, $26 million available for general corporate purposes, can you just give me some ideas of where you might spend that money going forward, what might you invest that in?

[José Manuel Daes:]

Well, we are investing right now. We have invested some of that money into a new extrusion press. We are buying at the moment some more equipment to do more insulated, more laminated, more tempering. We are adding capacity because we see strong demand. I mean we cannot cope with the amount of quoting that we have to do. So the demand is there.

[Jeremy Hamblin:]

Okay. So the softness in the kind of the Florida, Southeast Florida high-rise market that some people have spoken to, you are not really seeing that to the same degree that they are?

[José Manuel Daes:]

Well, the softness – let me explain to you, Jeremy. There are different sectors to the high-rise and medium-rise buildings and commercials. The softness is in the high end commercial properties condominiums. I mean there is a point that has been reached where you cannot sell more $3 million, $4 million, $5 million condos. But there is a strong demand now for rentals and we just closed three new buildings yesterday for rentals. And we are doing a lot of work in the Tampa area in Atlanta with the related group for rentals. And we see a lot of new buildings for hotels and for offices and for mix uses. So the demand is there maybe in different areas, but to us it’s the same thing and we believe that we have got the other thing.

[Jeremy Hamblin:]

Okay, great, exciting. Let me ask, also I have to ask about the 10-K and the status of that, I know that your team has been working very hard on that, in terms of just understanding the remaining issue, the last release indicated that you have – there has been resolution and agreement among yourselves as well as both auditing firms on most of the issues with one exception and that would be on the earn-out provision related back to the 2013 transaction, can you give me a sense of where that stands today and what the remaining issue is, is it the accounting treatment, is it a disagreement from your company’s perspective versus how the auditors want to treat it, can you maybe just provide some additional color on that, Santiago?

[Santiago Giraldo:]

Yes. This is Santiago, Jeremy. Basically, you are correct. What is holding us on the closing of the 10-K is related to the accounting treatment of the earn-out shares. We are continuing to work with both our auditors, our current and predecessor auditors, into agreeing on the methodology to be able to account properly for those instruments. As of now, we continue to have basically, daily calls and we are working in conjunction with both of them to be able to come to some common ground in an accounting position that is amenable to all the – to the company and the auditors. But as of now, this is the only point as we have released on the previous 8-K, that is holding us from being able to file and finalize our 10-K for the 2015 period.

[Jeremy Hamblin:]

Is there a positive movement related to this, does it feel like it’s stalled out or is this something where it feels like this could be resolved before the end of May?

[Santiago Giraldo:]

No, there is definitely positive movements, we are being engaging in, I would say daily calls with both teams. The stalling took place at first because they had to understand what the issue was and what the proposing new treatment for the earn-out shares was. But now that it has been understood by everybody, we are making positive movement towards the closing. I would hope that we are able to close this very soon as soon as possible. I couldn’t commit to a specific date, but what I do tell you is that we are making positive movement on both ends.

[Jeremy Hamblin:]

Okay, great.

[José Manuel Daes:]

But I don’t see – Jeremy, I don’t see why it would take more than this month. I mean, they – unless they finally decide not to agree with each other, which we will have to go to the SEC and tell them you make a decision, because we cannot make it. And if they don’t make up their minds, either one, this is unbelievable.

[Jeremy Hamblin:]

Okay. Let me ask finally about the dividend that you have mentioned. And in terms of I think on the last call, Christian, you had mentioned that it was discussed with the board. Is there any progress on that front? Is it something where you are going to wait to get resolution on the 10-K before initiating dividend, can you give any status update on that?

[José Manuel Daes:]

I believe we have to wait for the 10-K. I am not sure whether the S3 and S4, I believe we have to wait. I am not really sure about the reason why, because the last time I spoke to my lawyer about it, he said we have to wait, but I will find out exactly and give you an update. We want to give the dividend as soon as possible. I mean, we are all for it. We have the cash and we have just been holding for the warrant exchange. But even if the warrant exchange doesn’t took place we believe everybody else is waiting for the dividend and we want to give it.

[Jeremy Hamblin:]

Okay, great. Thanks for taking my questions. Best of luck this year. I am glad to hear you are making progress in the 10-K.

[José Manuel Daes:]

You are welcome, Jeremy.

[Operator:]

Our next question comes from the line of David Sandberg with Red Oak Partners. Please proceed with your question.

[David Sandberg:]

Hey, guys. Solid results and thanks for taking the call. I had a couple of questions. Jeremy’s questions answered some of mine. I wanted to hear it from you guys just directly and ask it even though you have already given it in guidance. $70 million over the next three quarters in EBITDA, that’s a pretty big number. That’s all tied to your backlog. Should we be expecting a reduction in backlog as you are pulling here or are you seeing enough demand that the backlog is getting replaced and will stay at this level or possibly even grow through year end?

[José Manuel Daes:]

Well, it’s been growing. Even though we are burning at the highest rate we have been burning backlog. We are invoicing around $25 million per month in the consolidated. And even though that the backlog has been growing, I don’t see any reason why the backlog is going to go down. Because we see I mean, a strong, strong demand for quotes and we are really busy. I mean, we cannot cope with the amount of quotes that we are doing for jobs with our existing and new clients. And for example with existing clients, we did 99% of what we quote for them and we believe it’s going to keep growing, the backlog. We see a strong 2017. I mean as far as today, I cannot promise anything, but unless there is a crash tomorrow, everything looks very bright.

[David Sandberg:]

Great. Couple of more things. So, one of the ways we look at your business given the high fixed cost component, but also these upfront investments you have put the new coating line and more expansion as we look at the incremental margins on revenue growth. And as we look at that, as we look at that I think we calculated 53% of an incremental margin meaning the incremental EBITDA to the incremental revenue in Q1. If we look at the rest of your guidance, it’s actually that numbers goes above 60%. And I don’t know if you guys think about the business the same way or not, but my question would be, hey, has the model changed or improved somewhat based on these upfront investments, where 60% might be the new reality going forward?

[José Manuel Daes:]

I honestly don’t know how to answer that, because I don’t know what numbers are you talking about. We don’t see it that way. We don’t look at the business that way. And as I told you many times, we are improving efficiencies within the company. We hired some help from outside advisers and we are reducing waste. We are reducing, for example, the extra hours. I mean, those efficiencies create better margins and that’s going to be – for example, we sent home 200 people that we didn’t need, because of the new efficiencies and we have a new software system that is going to go into place and that’s going to save a lot more money and a lot more time reducing lead times and reducing waste. And whether that number that you say works or not, I really don’t know, because I don’t know where you got it from. You have to teach me, but I believe the efficiencies are going to be much better. That’s for sure.

[David Sandberg:]

Okay. And then two more questions I had. One is, any update on the related party resolution or maybe the other way to ask it, is this still a priority that you guys do want to resolve when you are able to?

[José Manuel Daes:]

Well, yes, as soon as we file the 10-K, we have a modeling almost ready for the price of the two related party companies. We want to consolidate and show everybody that we are not hiding anything. We are going to buy them at a very, very cheap price compared to all the other companies that have been sold and that will give us not only more transparency, but additional EBITDA of around $3 million.

[David Sandberg:]

Okay, great. And my last question, are there any updates on any of the progress in Europe, Africa or any other areas on the PPG co-branding?

[José Manuel Daes:]

Actually, nowhere on the PPG, but we are working closely with an ally in Europe, specifically Italy. We are quoting two very nice jobs and we might get one of them before the end of the year. There are two very nice big jobs and we hope to start selling in Europe soon.

[David Sandberg:]

Okay, thank you guys for answering the questions. Good quarter.

[José Manuel Daes:]

You are welcome, David.

[Operator:]

Our next question comes from the line of Bob Evans with Pennington Capital. Please proceed with your question.

[Bob Evans:]

Thanks for taking my questions and nice job on the quarter. Can you just follow-up Jeremy’s question again on the dividend? Basically, if I hear you correctly, once the 10-K has been filed and resolved, then we should hear more or shortly thereafter more about a dividend, is that correct?

[José Manuel Daes:]

That is totally correct.

[Bob Evans:]

Okay, thanks. And then can you – Santiago, can you comment a little bit more in terms of the change of how you are presenting EBITDA now versus how you did previously kind of the logic in terms of the presentation there?

[Santiago Giraldo:]

Yes. Basically, what we are trying to do is provide added focus to adjusted EBITDA on the operational metrics. I mean, if you look at the gains and losses related to changes on balance sheet accounts that to us it creates little bit of noise and is not operationally related. The simplest of example that I can provide to you guys is basically keeping in mind that the company has U.S. dollar denominated receivables that when you have a large depreciation of the peso, as we have encountered, in a peso accounting wise, you do have a gain, because those dollars are worth more pesos. So, you start kind of like playing us to these macroeconomic tendencies and you create certain amount of volatility related to realized or unrealized movements on monetary accounts on your payables, on your receivables, on your debt and on your cash that is denominated on U.S. dollars. So what we are looking to do and in line with our guidance that does not incorporate any movements from that, we are trying to isolate that factor to just focus the metric, the adjusted EBITDA metric on operational – on the operations of the company as opposed to kind of including these added line, which tells us nothing in relation to the operation itself, but in relation to gains and losses from peso devaluation or revaluation. So we are just trying to streamline the calculation and just kind of making more cleaner to everybody and align it with our guidance that we have provided.

[Bob Evans:]

Okay, that’s helpful. Thank you. And Santiago, can you also comment on the EBITDA trends, how should we think about that as we get through this year, should each kind of quarter build on the next, how should we think about seasonality and then I assume you expect to see continued EBITDA growth next year?

[Santiago Giraldo:]

Yes, that is correct. There is a certain amount of seasonality baked into the company’s model. So if you look at historical EBITDA quarter-by-quarter, you would see that the first quarter of the year has historically been lower for different factors. But as José Manuel has mentioned already, the expectation is for the second quarter and the second half of the year to be substantially higher from what you have seen in the first quarter in order to be able to get to the provided guidance. And as the continued backlog growth supports, you would also imagine that going forward, beyond 2016, you would see an increase on revenues and EBITDA. Of course, you still depend on as to whether the backlog closes or not, but on a great portion of that backlog, there is a high amount of certainty. So I do believe that we will see continued improved results going forward.

[Bob Evans:]

Sure, okay. And finally, how should we think about capacity in terms of how far out have you sold your capacity kind of going into 2017, can you just give us a sense of trend there?

[José Manuel Daes:]

We are increasing the amount of lines that we are purchasing like laminating, insulating and tempering lines, basically before because the capacity – we are working right now like at 85% capacity. And we are increasing the lines because we know that 2017 is going to be a similar year to 2016 with better numbers and that’s why we are building the future.

[Bob Evans:]

Okay, alright. Thank you.

[Operator:]

Our next question comes from the line of Fadrique Balmaseda with Goldman Sachs. Please proceed with your question.

[Fadrique Balmaseda:]

Hi everyone. Thanks for taking my question. I would like José, Santiago, if you can please comment on working capital and anything else which explains the gap between EBITDA and cash flow between this year and net debt increased this quarter? Thanks.

[Santiago Giraldo:]

I am sorry, I couldn’t hear the first part of your question, would you mind repeating it, please?

[Fadrique Balmaseda:]

Sure. I see that both in 2015 and the first quarter of this year, there has been an increase in working capital, so what should we – both in absolute terms and in terms of sales, so what should we expect of working capital?

[Santiago Giraldo:]

With the projected growth, you will obviously expect working capital to continue to increase. We do have a fairly good control on payables and receivables. So we don’t foresee the days sales outstanding or the inventory turnover to change. But as a percentage of sales or as total sales continue to grow and the absolute amount of working capital should continue to increase as well. But it will be supported by our receivables and being able to continue to collect within specified terms. So we don’t continue – we don’t expect the trends to move away from what we currently have. But in absolute terms, if the revenue growth continues, we will expect working capital to continue to rise as well.

[Fadrique Balmaseda:]

Sure. But as a percentage of sales, would you expect it to come down to previous levels or is this a stable level?

[Santiago Giraldo:]

No, I would expect that it should be a little bit higher, not a whole lot. It’s not going to continue to increase exponentially. But in the foreseeable future, we do expect a little bit of an increase on working capital as a percentage of sales.

[Fadrique Balmaseda:]

Okay. And then can you please explain a little further what explains the difference between EBITDA and cash flow, because even though there is positive EBITDA, net debt has increased a fair amount?

[Santiago Giraldo:]

Yes. The net debt has a couple of components in there. There was some capital leases that were undertook. If you were to look at the cash flow statement, there you can see that there were some capital leases taken during the quarter that don’t necessarily reflect new cash going on, because these are capital leases that didn’t necessarily imply new cash coming into the company. And the other – your other question is in relation to cash flow versus EBITDA – and what was the first part of your question, I am sorry.

[Fadrique Balmaseda:]

No, just if you can drive me through the major components of that difference.

[Santiago Giraldo:]

I mean what are you looking at, as opposed to EBITDA of $15.3 million, what are you looking at from the cash flow perspective?

[Fadrique Balmaseda:]

No, I am just looking at the operating metrics are great, but I would expect some kind of cash generation as opposed to important cash decrease, so what is it that I should focus on?

[Santiago Giraldo:]

Yes. The cash decrease is associated mainly with working capital, so if you were to look at operating cash flow, you will see a significant increase on inventories, for instance. What the company has done is take advantage of opportunistic buys. And if you look at our gross margin, it was highly impacted by lower raw materials. So in taking advantage of opportunistic buys, you are able to realize better margins. But that doesn’t necessarily automatically translate into increased sales, but future sales. So you can look at it that way, there is a difference there.

[Fadrique Balmaseda:]

Okay, understood. Thanks for that.

[Operator:]

Our next question comes from the line of Renzo Dancourt with Blue Banyan [ph]. Please proceed with your question.

[Unidentified Analyst:]

Hi guys. I have one question regarding your business in the U.S., I mean it’s clear to us that you have taken quite a lot of share in the Eastern corridor of the country, can you talk about expanding into other areas of the country as like California?

[José Manuel Daes:]

We have some sales in California, actually we are selling – we have sold a couple of jobs in windows and we have the largest tower on the West Coast, the two Transamerica Tower, I believe is the name. It’s been done with our glass, not our window system, but our glass. Sometimes, it’s easier said and done. And we don’t like to expand so much in so many places that we actually cannot service every city the right way. So from the first couple of experiences going to California, we have decided that we are going to concentrate on the Northeast and Texas, which we already have a stronger hold. And then little by little, we are towards the West again. There is so much work in here, our place of business and then we can provide much better service at – the longer, I mean the longer they are from you, the harder it is to service. So we have to wait until we have fulfilled all the Northeast and the Central U.S. and then we want to go West again.

[Operator:]

Okay. Our next question comes from the line of Carlos Rodríguez with CrediCorp Capital. Please proceed with your question.

[Carlos Rodríguez:]

Good morning. Thank you for the conference call. I have a follow-up question regarding the 10-K do you have any deadline by the SEC in order to submit the 10-K report?

[José Manuel Daes:]

The deadline is, I believe, June...

[Santiago Giraldo:]

June 27. Yes, basically, they provided us with a June 27 date in order to formulate a plan to close out the 10-K. So, it’s not a hard deadline, but it’s a deadline to formulate a plan to basically close out the issue, which is until October I believe it is that we have a final deadline to meet the requirement. That being said, we don’t expect this to take that long of time, not even the June 1 deadline.

[Carlos Rodríguez:]

Okay. And regarding the warrant exchange, can we have an update on that topic, please? In the last conference call, you said that you were eager to close this transaction, but I didn’t see or I didn’t hear anything about this warrant exchange.

[Santiago Giraldo:]

Yes, the warrant exchange continues to be on the pipeline. Basically, we are very, very advanced and unfortunately with the 10-K issue, we were not able to carry out the offering. What we like to do is to be able to close the 10-K and then put this issue behind, so we can move forward with the offering, but we have been working to be able to carry out the transaction once we are finally able to resolve this 10-K issue.

[Carlos Rodríguez:]

Okay. And my last question is regarding Florida, I mean, do you see any risk in the high-end market in Florida? I mean, a lot of condos are being built right now, but the high-end condos prices, it has not reached in the last month, so should we expect a slowdown in this market or is just some kind of momentum right now?

[José Manuel Daes:]

Well, the higher end as I said on the question from Jeremy Hamblin, the high end has slowed down a lot, but we see a strong demand for the lower end, which is the rentals and the mid-rise condominiums, but also a strong demand on the hotels and the offices. We don’t perceive that we are going to slowdown as far as sales, but the condominium side is going to slowdown for at least a year or two until all the condos are fulfilled.

[Carlos Rodríguez:]

Okay, thank you very much.

[José Manuel Daes:]

You are welcome.

[Operator:]

Our final question is a follow-up question from Bob Evans with Pennington Capital. Please proceed with your question,

[Bob Evans:]

Hi. I forgot one other question. As it relates to the warrants, I assume that once your 10-K is filed that we should see the warrants converted shortly thereafter, is that the plan?

[José Manuel Daes:]

We wanted more than anything else. We want to convert the warrants. We want to take out the earn-out shares. And then the other reason try to manage our business in the best way that we know we can and show the world that we are the best company around.

[Bob Evans:]

And pay a dividend?

[José Manuel Daes:]

Of course, that is part of the deal.

[Bob Evans:]

Okay, thank you. Thank you very much. Congratulations on a good quarter.

[José Manuel Daes:]

Thank you, Bob.

[Operator:]

There are no further questions at this time. I would like to turn the call back over to José Manuel Daes for any closing comments.

[José Manuel Daes:]

Well, the closing comment is very optimistic. We see strong demand for our products everywhere. We have streamlined our production and we are doing the same with engineering. And we believe we can keep growing even in a slower market, because our share of the market is very small still. The whole market is optimized and we are going to keep gaining ground whether the market is growing or whether the market is shrinking. We have the lowest cost company. We are going to keep streamlining the company. And we have the best margins. And we are very flexible and fast decision-maker. Please expect the best. Thank you for being on the call. Thank you for the questions and keep optimistic. We are going to show good results.

[Operator:]

This concludes today’s conference. Thank you for your participation. You may now disconnect your lines.