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Edited Transcript of TGLS earnings conference call or presentation 12-May-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Tecnoglass Inc Earnings Call

Bogota May 18, 2017 (Thomson StreetEvents) -- Edited Transcript of Tecnoglass Inc earnings conference call or presentation Friday, May 12, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian T. Daes

Tecnoglass Inc. - COO and Director

* José Manuel Daes

Tecnoglass Inc. - CEO and Director

* Rodny Nacier

ICR, LLC - SVP

* Santiago Giraldo

Tecnoglass Inc. - Head of IR and Deputy CFO

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Conference Call Participants

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* Alexander John Rygiel

FBR Capital Markets & Co., Research Division - Co-Head of Diversified Industrials in Equity Research

* Jeremy Hamblin

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to Tecnoglass' First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Mr. Rodny Nacier, Investor Relations. Thank you. You may begin.

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Rodny Nacier, ICR, LLC - SVP [2]

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Thank you for joining us for Tecnoglass' First Quarter 2017 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 today's call are José Manuel Daes, Chief Executive Officer; Chris Daes, Chief Operating Officer; and Santiago Giraldo, Deputy CFO.

Moving to Slide 2. Before turning the call over to José, I'd like to remind everyone that matters discussed in this call, except for historical information, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including 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 vary in a material nature from those expressed or implied by the statements herein due to changes in economic, business, competitive and/or regulatory factors and other risks and uncertainties affecting the operations of Tecnoglass' business. These risks, uncertainties and contingencies are indicated from time to time in Tecnoglass' filings with the Securities and Exchange Commission. The information 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.

Now I'll turn the call over to José Manuel, beginning on Slide #4.

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [3]

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Thank you, Rodny, and thanks, everyone, for participating on today's call. I will begin with a review of our first quarter highlights. Chris will then discuss our operating highlights in greater detail, followed by Santiago, who will take us through our market update, financial results and outlook. We have a high level of exciting development in our business since the beginning of 2017, including an expanded backlog, a very complementary acquisition, entry into several new markets and a strengthened capital position, amongst other notable accomplishments. Collectively, our actions demonstrate our ability to further enhance our leadership positions in new and existing markets. As a result, we ended the quarter well-situated to produce another year of outpaced growth on our highly efficient low-cost operations.

Our growth potential is reinforced by our quarter-end backlog, up 23% year-over-year to a record $474 million. The GM&P acquisition contributed $50 million to the quarter 1 backlog. The project pipeline in our legacy business expanded by $28 million to $424 million, representing a 7% increase versus quarter 4 and 10% above the prior year quarter, mainly as a result of the strong activity in our key markets.

We continue to feel good about our markets based on the stable coating and building activity. We have ample financial capacity to capitalize on our project pipeline following another quarter of positive free cash flow generation. This is made possible by our lean manufacturing initiatives and improving working capital metrics on our largely built-out plant network. We are generating cash while investing in highly selective capacity enhancements or efficiency initiatives, such as our recently installed solar panels on our soft coat facility. This represents the first phase of a multiyear investment to reduce energy consumption and lower our tax cost.

Our GM&P acquisition is off to a great start, with first quarter 2017 sales improvement reflecting our significantly strengthened and vertically-integrated U.S. presence. The integration of these assets is progressing according to plan, and we took an immediate step forward by establishing a GM&P West branch. We now have access to new opportunities in California and Washington State and we expect to start growing backlog in coming quarters.

During the quarter, we also made progress on our global growth objectives by opening a sales office in Pordenone, Italy. From there, we can serve and expand new markets, mainly Europe and the Middle East. We have hit the floor running in the Europe and Middle East region, with a contract already signed in Lusail, Qatar, for a significant development worth approximately [USD 30 million], which give us a foothold in the rapidly-growing city that is preparing to host the 2022 World Cup.

In regards to returns, yesterday, we were very pleased to announce our plan to increase our dividend by 12% to an annualized rate of $0.56 per share, beginning with our third quarter 2017 distribution. We believe this augmented payout reinforces our commitment to our dividend policy, which we continue to view as an effective means to return a portion of excess capital to shareholders. The refinancing of our debt in quarter 1 lowered our borrowing costs and improved our capital structure. We ended the quarter with a very flexible balance sheet to continue to enhance value as we execute on our growth objectives and maintain a very attractive dividend policy. Overall, we are encouraged by the very sturdy foundation we continue to build for Tecnoglass, which supports our unchanged outlook for 2017.

I will now turn the call over to Chris to provide additional details on our operating highlights.

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

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Thank you, Jose Manuel, and good morning to everyone on the line.

Moving to our first quarter 2017 results summary on Slide #5.

We have grown our business significantly since 2014, with the majority of that growth coming from the U.S. During the first quarter, we grew top line revenue by 3.1% compared to the prior year period. This growth was mainly attributable to the addition of 1 month of GM&P revenues in the U.S., which more than offset a shift in the timing of 3 large commercial U.S. projects in our backlog to subsequent quarters during the year and delayed construction activity in Colombia. U.S.-based revenues were 70% of total sales compared to 63% in first quarter 2016. Adjusted EBITDA of $13.7 million continue to represent a strong margin at 20.9% of sales, driven by our low-cost vertically-integrated operations. That being said, compared to the prior year quarter, EBITDA and the associated margins were adversely impacted by higher fixed cost to support our unchanged 2017 growth expectation, which should drive margin expansions as we progress through the year.

Moving to our backlog on Slide #6. Demand for our products was strong throughout the quarter, resulting in a healthy backlog at quarter end, up 23.1% to a record $474 million compared to $385 million at the end of the prior year quarter. This backlog growth includes a $50 million contribution from the GM&P acquisition and an expansion of legacy backlog by $39 million year-over-year. For a more balanced comparison, we also show fourth quarter backlog on a pro forma basis to demonstrate the significant traction for our products and services during first quarter.

It is important to note that we have revised our fourth quarter 2016 pro forma backlog to $444 million versus the prior stated figure of $479 million, which we discussed last quarter. The revised figure of $444 million correctly excludes inter-company sales, which were inadvertently included in the $479 million figure on our prior quarter. With that said, on a pro forma basis, backlog increased by an impressive $30 million compared to fourth quarter 2016, partly reflecting pent-up demand in addition to our ongoing effort to expand our geographic footprint, enter the new niche market and introduce new products. We ended the quarter with a good visibility on a multiyear project pipeline and are already taking steps to further diversify our geographic and end market exposure in a disciplined manner.

Looking to our end market mix in backlog on Slide #7. Our end markets are more than 90% commercial, which includes multi-family projects. We continue to experience a stable pace of coating activity. Single family residential represents about 4% of backlog, and represents largely a untapped market for us. We are seeing good traction with our Prestige and Elite product lines recently introduced in the fourth quarter of 2016. Year-to-date, we are planning to surpass our target of roughly $10 million of residential sales for the year. We expect to ramp up this quarter to a range of $20 million to $25 million of sales in 2018, given the strong interest in these new products. As we make larger inroads into the residential market, we expect this market to become a larger and more significant portion of our project backlog. Historically, our commercial focus has allowed us to maintain relatively long lead times in backlogs with higher visibility on coming growth and contraction in out years. Along this line, our business efforts on the residential side are mainly focused on larger regional and national business, where we can meaningfully scale on orders.

Looking at our geographic breakdown on Slide #8. As represented by first quarter '17 backlog composition, the recent addition of GM&P reinforce our commitment to the Florida market, while significantly enhancing our vertically-integrated operation and providing future opportunities to reach new markets in the U.S. To that point, we have already begun diversifying our business efforts in the West Coast, and we expect to populate our backlog in time with a range of attractive projects. Additionally, the Europe and the Middle East feature significant upside to our business, which we will discuss shortly.

In Colombia, during the coming quarters, we expect activity to ramp up over the year as we catch up on delayed construction activity.

Turning to Slide 9. I would like to share with you more details on our recent energy and tax-saving initiatives currently underway. In the first quarter 2017, we began a significant green initiative to reduce our external energy consumption. We completed the first stage of a multiphase project that will generate approximately 10 megawatts of solar panel power from over 30,000 solar panels at our flagship manufacturing facility in Barranquilla, Colombia. During the first phase, which is now fully operational, we installed nearly 8,000 panels or 2.5 megawatts of power on the soft coat facility. We expect each phase of the multiyear investment totaling $15 million to generate payback periods of less than 3 years as we reduce energy consumption needs by over 20% and reap significant tax savings provided by the Colombian government's efforts to go green. A key element for our successful track record of producing industry-leading margin has been our ability to source and execute high-return projects focused on innovation, productivity and capacity expansion. This solar initiative is directly aligned with that aim, and we look forward exploring additional opportunities to improve our business.

Moving to our market update on Slide #11. Before turning the call over to Santiago, I will provide a bit more color on some exciting new market expansions, which we touched on earlier. With the addition of GM&P, we accelerated our path to entering a target list of new markets through GM&P's deep and expansive customer relationships. The West Coast represents a very attractive opportunity, with a number of metro areas that we have been [installing] for a very long time and that are experiencing a strong commercial demand. With the immediate startup of our GM&P West operation, we have already identified a number of projects that fit with our product offering. We are very encouraged by the business environment so far, particularly in San Francisco and Seattle, where we now have projects in our backlogs. These 2 cities are sound and the logistics makes sense, with the Panama Canal providing very efficient access to most West Coast markets.

In the Europe and Middle East region, we have an immense opportunity ahead of us. In March, we opened a sales branch in Pordenone, Italy, which mark our debut in our -- into European and the Middle East region. This was made possible after years of cultivating relationships with local partners with extensive market knowledge. The European community is showing signs of recovery, with rising consumer confidence and a strong pent-up demand. In the Middle East, the growth opportunity lie in the ongoing cultural shift to higher-end architectural glass, which feature superior and customizable performance versus locally-sourced commodity products traditionally used. We were very excited to sign a contract for a project in Lusail, Qatar for [$30 million], which give us a unique foothold on a city being built from scratch at a total investment of $45 billion to 2020. Our measured approach to a global expansion has worked very well for Tecnoglass. These new market entries are consistent with our successful track record, and we look forward to scaling our [nation] over time.

I will now turn the call to Santiago to give you an update on our core markets, financial results and outlook.

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

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Thank you, Christian, and good morning to everyone on the line.

Turning to our U.S. market update on Slide #12. During the first quarter, we continued to broaden our customer relationships and strengthen our presence in new markets across an increasingly diversified footprint. Our backlog is benefiting from our expanding reach to new markets and project types, including multi-family, office buildings, high rises and hotels. Underlying U.S. demand is strong and reinforced by a positive outlook suggested by the ABI Index for the sixth consecutive year, especially in our key regions. Additionally, FMI data continues to suggest a mid-single-digit growth environment for 2017 nonresidential spending.

Turning to our Colombian market update on Slide #13. Underlying market dynamics are consistent with expectations at the beginning of the year, with GDP growth outlook at about 2.3% for the year. In Colombia, sales were down during the first quarter of 2017, mainly due to delays in construction activity, which we expect to create pent-up activity ramping up revenues over the rest of the year. Overall, builder sentiment remains strong, and we expect economic activity in the future to rebound nicely as we move through the balance of the year. However, due to the first quarter impact, we believe a flattish market is a fair assumption in Colombia for 2017, which implies some acceleration of activity for the remainder of the year.

Moving to our financial highlights on Slide #15. During the first quarter 2017, we operated on a cost structure built out to support our 2017 growth objectives, with revenues expected to ramp up as we move through the year. Gross margins was primarily impacted by a higher mix of engineering and installation revenue from GM&P, along with a $1.6 million in higher D&A expense, resulting from the robust growth CapEx program finalized in 2016 as well as by higher direct labor cost. SG&A as a percentage of total revenue was 23.4% compared to 20.3% in the prior year quarter, mainly attributable to higher personnel costs as well as $1 million associated with nonrecurring costs related to the bond issuance and bad debt write-off. We consider this cost base to be adequate to address our expected growth and expect to gain operating leverage as we advance through the year.

During the quarter, we continued to focus on improving working capital metrics, which resulted in improved cash generation from operations. Excluding GM&P in order to normalize the effect of having 1 month of sales over a full receivable base, we saw meaningful improvement in days sales outstanding and inventory days year-over-year. In addition to our focus on working capital management through lean initiatives, our CapEx was significantly reduced with our capacity expansion phase virtually completed in 2016. As a result, we ended the quarter with a record cash balance, along with ample liquidity and a conservative leverage profile of 2.5x net debt to EBITDA on an LTM adjusted EBITDA basis.

Looking at the drivers of Q1 revenue and adjusted EBITDA on Slide #16. For the first quarter 2017, total revenue increased 3.1% to $65.8 million. As we discussed today, our U.S. revenue showed positive growth attributable to GM&P, whereas Colombian revenues was pressured by temporary market factors with a partial offset from favorable foreign currency benefit. The U.S. accounted for 70% of quarterly sales, with Colombia contributing 25%. Adjusted EBITDA in the first quarter 2017 decreased by 14.7% to $13.7 million. The main catalyst for the decrease was a higher cost structure put in place during our seasonally lowest revenue quarter and a partial quarter impact from a higher mix of revenue from engineering, design and installation services, which adds greater stability and enhanced control of our manufactured product through the value chain, albeit at a relatively lower margin versus products shipped to external customers.

Our price was essentially flat year-over-year. SG&A, as discussed, was higher to support an expected ramping project activity later in the year.

Interest expense during the quarter was skewed by the fact that after the bond issuance at the end of February was completed, we took approximately a month to fully repay the peso-denominated debt, as foreign exchange rates were not favorable for monetizing the funds. Going forward, we expect to see normalized fixed interest expenses based on current debt levels.

Turning to our cash flow metrics on Slide #17. I'd like to highlight a few items, which appropriately reflect our tighter management of capital. In the top 2 charts, you can see our LTM inventory days and LTM days sales outstanding are up compared to the fourth quarter 2016 and prior year first quarter on a reported basis, but this is mainly due to the addition of GM&P's working capital in March, with only 1 corresponding month of revenues on reported figures. On the dashed lines, we present this respective working capital metrics on a pro forma basis, assuming a full year of GM&P revenue; and separately, on a legacy basis, excluding GM&P altogether. The key takeaway is that our working capital metrics improved when adjusting for GM&P.

LTM days sales outstanding on our legacy business improved by 22 days to 87 versus the fourth quarter of 2016. On a pro forma basis, days sales outstanding improved on a sequential basis to 102 days. CapEx is down significantly versus prior years, given relatively low maintenance CapEx requirements on our modern state-of-the-art facility and the conclusion of our growth CapEx phase in 2016.

Moving to our 2017 outlook on Slide #18. For the full year 2017, we continue to expect to produce double-digit revenue growth based on improving commercial construction markets and market share gains. This expectation is supported by our higher backlog year-over-year. In 2017, we anticipate revenues to grow to a range of $360 million to $390 million, which will be largely weighted toward the back half of the year. As in prior years, we continue to expect our first quarter to be the seasonally lowest revenue quarter, and then to build up in each successive quarter. On this revenue growth, we expect adjusted EBITDA to increase to a range of $82 million to $90 million. Based on this outlook, we expect to generate positive cash flow from operations for the full year.

We thank you for your continuous support. We'll be happy to answer your questions. Operator, please open the line to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jeremy Hamblin with Dougherty & Company.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [2]

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I wanted to first explore some of the revenue trends, and you saw a pretty massive acceleration, 25% growth in the United States. In terms of thinking about that and looking at your backlog, moving forward, is that probably a good benchmark to use for what you're thinking on U.S. growth for most of this year? Are we looking at kind of 25%, just in your U.S. business? In conjunction with that, should we be thinking that going forward, roughly 2/3 or more of your business is going to happen in the U.S.?

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [3]

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(inaudible)

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Rodny Nacier, ICR, LLC - SVP [4]

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Jeremy?

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [5]

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Yes?

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Rodny Nacier, ICR, LLC - SVP [6]

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Can you hear José?

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [7]

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I cannot.

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Rodny Nacier, ICR, LLC - SVP [8]

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Give me just one second.

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [9]

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It seems like we have a telephone problem, sorry.

Listen, Jeremy, we expect the business in the U.S. to keep growing as we are penetrating new markets, as I've been telling you. Now we have work in New York, in Boston. We have work in the West Coast, in California and also in Washington State. So we expect business in the U.S. to keep growing. That's a fair assumption.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [10]

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So in terms of the total portion of business though, are we looking at maybe 65% to 70% going forward?

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [11]

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Yes, 65% -- 65% to 70% on every quarter. And even though we are closing a lot of businesses also in Colombia, but when you take the whole picture, it will keep the same proportion.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [12]

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Okay. And then in terms of thinking about just the next quarter, obviously, your guidance implies some pretty significant revenue acceleration. How does the flow of revenues, Santiago, look for the year? I mean, are we looking at kind of $95 million to $100 million in Q2, and then accelerating further from there? Or can you give me any more color on how Q2 trends are tracking?

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Santiago Giraldo, Tecnoglass Inc. - Head of IR and Deputy CFO [13]

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Yes, actually, Jeremy, it's going to be backloaded into the second half. So what we're expecting for the second quarter is closer to the $85 million figure, and then ramping up over the last 2 quarters. And that's partially related to the backlog shift that we discussed earlier. So we think that sequentially, Q2 is going to be stronger, and then Q3 and Q4 are going to be the strongest to get to the guidance that we provided.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [14]

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Okay. So we're looking at -- is the breakdown for Q3 and Q4 relatively equal?

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Santiago Giraldo, Tecnoglass Inc. - Head of IR and Deputy CFO [15]

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Yes.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [16]

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Or is it slanted a little more towards -- okay.

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [17]

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So it's going to be -- Q3 and Q4 are going to be very strong, because as I've been telling you, 3 to 5 large jobs in the U.S. got delayed, and instead of starting in December, January, they are starting in June, July. And they will end up in June, July next year. So the second -- the third and fourth quarter are going to be our strongest this year. They are usually the strongest, but the fourth a little less than the third. But this year, I believe they're going to be around the same or maybe even more, the fourth quarter.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [18]

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Okay. And so can I assume that you're going to do at least $105 million then in Q3 and Q4?

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [19]

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Of course. We hope so. I mean, we need to do it.

We need to be on time on the job, so if we don't deliver those amounts, then we're going to be late. And we're never late.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [20]

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Okay. And in the delays -- now I also saw though that your international businesses, or your business in Colombia and Panama, was down in the first quarter. You mentioned some delays in the U.S. projects. What are you seeing in those local markets in Colombia and Panama as well?

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [21]

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Somehow, everything turned out to be the same way. In Panama, we got a slump, like for 3, 4 months, we didn't close any business. And now, we're closing a lot of business. But when you close a business, you have to do the shop drawings, you have to talk to the architect about many, many, many things that are open items. And then you deliver, in 3 to 6 months, you start delivering the job. So what happened in the U.S. happened also in Panama and in Colombia. But by the same token, I mean, we see a lot of quoting going around. We're closing a lot of business. Our backlog is coming up. And at the end of the day, that means that we're going to deliver one day or another. So the third and fourth quarter are going to be strong, and we look for 2018 to ramp up a lot, too.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [22]

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Okay, great. And then the last call, I think you mentioned that there was a little softness in the high-end luxury market in Florida. I wanted to just see if you could make a comment on whether or not you've seen some improvement in that end market. We're hearing that there has been some improvements in that market overall, which I think is encouraging for your business. But can you comment on that?

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [23]

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Yes, that is true. And that is the reason why a few of the jobs got delayed. For example, Flatiron, which is around a $20 million business, got delayed. Now it's in the third or fourth floor. We're going to be delivering, around a month or 2, we'll start delivering. The first window is a go. 8701, which is a landmark, because it's a job designed by a famous architect on the beach, already got approvals, already got the financing, and by the end of the year, we're going to start delivering. And like that, I can mention, like 5 or 6 buildings in Miami, but let me tell you this, to my surprise, there are like 20 new buildings going up, but for -- yes, residential, but rentals. And these rental buildings, for example, Panorama, is an 87-floor building and is the highest, the tallest building south of New York, and is already up all the way and it's all for rental. And the same person, the same owner, is going to do 2 more buildings, and we're already talking to them, and both are around 80 to 100 floors.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [24]

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Well, that's great to hear. I wanted to then shift gears to the new markets that you mentioned, which sounds very exciting. In thinking about Europe and the Middle East, and obviously, lots of construction activity and pickup in those markets, you mentioned that you've staffed a sales branch out of Italy. How should I be thinking about the margins for that business, given that it's a little bit further away for you to deliver? I'm assuming that the product that's provided to those regions is also coming out of Barranquilla. Are the margins going to be the same? Are they going to be a little bit lower? A little bit better? Can you speak to the margin profile of that business that you're winning in Europe and the Middle East?

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [25]

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Well, let's talk about the Middle East, the one that we already closed. That business has the same margin as every other business. Believe it or not, from Barranquilla to Doha, which is the port in Qatar, we are paying only $1,000 more per container than to Miami. And so it's a minimal amount compared to the cost of the goods in the container. So the margins are good, the margins are the same. At the beginning, for example, in Europe, the first -- or the second building are going to be a little lower margin in order to get in, because a newcomer, it's not easy to get a business unless you show them a reason why. But after that, the margins in Europe are much better because they have triple panes, double insulated, and then they have these really well-designed coated walls, and that cost a lot of money. And since our labor is very cheap, that makes our margins improve.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [26]

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Okay, great. And then in terms of the -- you mentioned the residential business. I recognize that's still a relatively small piece of your sales, but it sounds like that is seeing some traction. Can you just speak to the end markets on your residential side in Florida? How attractive they look, the type of growth that you're expecting this year and next?

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [27]

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Yes. Well, the products have been so well received that we are seeing every month an increase in orders of around 20% to 25%. Even though it's very little, we were expected to sell around $10 million this year. I believe it's going to be at least 40% to 50% more than that. And for next year, if things keep coming like this, we expect to do around $24 million to $25 million in that line. Our product, we -- I mean, we believe, is much better than the competition. The only thing is that we don't have a track record. And people tend to prefer the track record business because they know they deliver and delivery is important in this business. But we are penetrating. And we believe that line, in 2, 3 years, is going to be at least 20% to 25% of our business.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [28]

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Great. Shifting gears a bit, Santiago and Christian, if you could talk a little bit more detail about the solar project, this $15 million investment. You mentioned that the natural gas savings could be 20% or more. What does that amount to on a cash savings basis? And then what would the cash tax savings be over time on an annualized basis?

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Santiago Giraldo, Tecnoglass Inc. - Head of IR and Deputy CFO [29]

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Yes, Jeremy. So this is basically -- the 20% that you're mentioning of the overall annual cost ends up being about $0.5 million for the first year. So that's basically based on the first phase, which we have now completed. The idea would be to complete subsequent phases. So for 2017, what we're estimating is between $400,000 and $500,000. But after a couple of years, that amount could be substantially higher. And the first phase has performed well, so the intention is to move forward with the second phase, which we're expecting to start next month and complete within the next 3 months. So it's a substantial savings amount on our SG&A.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [30]

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So it could be over $2 million long-term on annualized savings, it sounds like?

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Santiago Giraldo, Tecnoglass Inc. - Head of IR and Deputy CFO [31]

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Over time? Over time, right now, we just completed 3 megawatts out of our project that is 15 megawatts. So right now, it's just a portion of what the overall project could end up being.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [32]

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And then the savings on the tax side?

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Santiago Giraldo, Tecnoglass Inc. - Head of IR and Deputy CFO [33]

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Yes. Basically, you get to write off 50% of your investment price in that tax savings we're going to realize in 2018. So for your model, you wouldn't assume any tax savings for 2017, but that will be done for next year.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [34]

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Great. And then the GM&P acquisition, I wanted to see, after a couple of months here of absorbing the deal, what types of synergies on the revenue front? And what types of savings are you seeing from that deal?

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Santiago Giraldo, Tecnoglass Inc. - Head of IR and Deputy CFO [35]

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So far, we're still integrating the operation, Jeremy. We think we can save some SG&A, basically by integrating both operations. But the business are different in the sense that what they do provide is installation, engineering and designing, which is not something that we have on our end as far as Tecnoglass goes. So the main synergies are going to come just from the administrative side and the selling side, more than the operation itself. Right now, for the first month, we didn't incorporate any savings into the results that you saw. Hopefully, as we move through the year, that's going to be kind of ramping up.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [36]

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Okay. And then just one more, and I'll hop out of the queue and let others ask questions. In terms of CapEx, your CapEx is down meaningfully. What is the CapEx guidance for the year? And what's your depreciation and amortization guidance for the year?

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Santiago Giraldo, Tecnoglass Inc. - Head of IR and Deputy CFO [37]

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So basically, we had estimated a maximum of $10 million for the year. So if you see our results for the first quarter, we're definitely in line with those projections. We ended up with about $2 million, which is mainly associated with the solar panel project completion and very little maintenance CapEx. As you know, our equipment is less than 5 years old, so our maintenance CapEx is very limited. Given the fact that we're going to move forward with the second phase of the solar plant -- panel project, I think it's still a fair assumption to assume a maximum CapEx of $10 million for the year.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [38]

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And depreciation and amortization?

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Santiago Giraldo, Tecnoglass Inc. - Head of IR and Deputy CFO [39]

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About $4.5 million a quarter for -- so I will tell you about $17.5 million for the year.

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Operator [40]

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Our next question comes from Alex Rygiel with FBR Capital Markets.

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Alexander John Rygiel, FBR Capital Markets & Co., Research Division - Co-Head of Diversified Industrials in Equity Research [41]

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José Manuel, could you expand a little bit upon sort of how we should think about the timing of revenue from your new office in Italy as it relates to demand coming out of Europe and the Middle East? What should we be looking for in 2017? Is there a target that maybe we can look for in 2018? And then I have a follow-up.

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [42]

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Well, let me tell you, 2017 in Europe is going to be nonexistent because when you -- within the time that you quote, you do all the engineering and the final design assist, you're going to be delivering at least in March to June of 2018. So we don't expect any business for this year. We expect around $10 million to $20 million for next year in Europe. And then on, it's going to go higher and higher. As we show that we can perform and that we can do the buildings, I mean, people will get more confident and we'll get a lot more business. Now in the Middle East, we already have a business. And we expect this year to deliver the [$30 million]. And next year, we hope to get at least another $20 million or $30 million from the Middle East, but that is uncertain. I mean, until you have the business, you cannot, but we expect around $20 million to $30 million a year from the Middle East in the next 2 to 3 years every year.

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Alexander John Rygiel, FBR Capital Markets & Co., Research Division - Co-Head of Diversified Industrials in Equity Research [43]

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That's great. Could you also address raw material cost inflation, if you're seeing any? And any thoughts or -- of that developing over the next 12 months?

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Christian T. Daes, Tecnoglass Inc. - COO and Director [44]

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This is Christian. We actually don't see any -- I mean, the only price going up is aluminum. And we have already signed a deal for aluminum for all of 2017. We bought ahead of time around 700 tons of aluminum, which is what we consume every -- 700 tons per month. That is what we take every month. So the price is fixed, and we don't -- we're not taking an increase in the price. Obviously, we're quoting now having into account the new price of aluminum, which is around $1,900. And with regards to glass and other materials, we have stability for at least the next 12 months. So there is no problem. We're right on track, and we expect to -- with the ramp-up sales invoicing now in second quarter, third quarter and fourth quarter, to start seeing all the benefits of this.

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Alexander John Rygiel, FBR Capital Markets & Co., Research Division - Co-Head of Diversified Industrials in Equity Research [45]

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And then lastly, as it relates to the 3 to 5 projects that experienced some delays, was there anything common with regards to those delays? Was it weather-related, permit-related or financing-related?

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [46]

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Well, there were -- there are a few reasons why they were delayed, and each one is different. For example, the one in Brickell, which is Flatiron, they had some design changes because of the market change, so they delayed a little bit that job. It's already going up. Then the one in Paramount, which is a huge tower in downtown Miami, they were having problems with the financing -- or not problems, delayed financing. And finally, they got it, and they are going up also. We are released to deliver the windows. You can see the building going up. And in 8701, which is the one designed by Renzo Piano, an Italian architect, until they reach 70% of sales, the bank wouldn't give them the financing because of the tight conditions now implied by the banks in Miami. And now, they reached the target, so the bank gave the financing. There are many things. But the buildings are going up and we got the jobs. And we are already working on the windows to be delivered between June and July and on.

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Operator [47]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back to José Manuel for closing comments.

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [48]

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Well, thank you, everyone, for being on the call. We are very enthusiastic to reach this year's targets. As we said before in the last call, this quarter was going to be the slowest one. The second quarter is going to be better. And the third and fourth are going to be record quarters for the company. And we believe that 2018 is going to be a record year, too. We have many things going that we cannot share right now, but sooner than later, we will. Keep it up. Thank you for being on the call, and thank you for investing with us.

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Operator [49]

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This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.