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Edited Transcript of TGLS earnings conference call or presentation 11-Aug-17 1:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Tecnoglass Inc Earnings Call

Bogota Aug 16, 2017 (Thomson StreetEvents) -- Edited Transcript of Tecnoglass Inc earnings conference call or presentation Friday, August 11, 2017 at 1:00:00pm 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. - CFO

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Conference Call Participants

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* Anthony Snow

* Jeremy Scott Hamblin

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

* John Allen Baugh

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

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Presentation

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Operator [1]

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Greetings, and welcome to the Tecnoglass Second Quarter 2017 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rodny Nacier, Investor Relations. Please go ahead, sir.

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Rodny Nacier, ICR, LLC - SVP [2]

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Thank you for joining us for Tecnoglass' Second 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, Chief Financial Officer.

Moving to Slide 2. Before turning the call over to José Manuel, 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 that changes some circumstances. Actual results may vary in a material nature from those expressed or implied by the statements herein due to changes in economic, business, competitive and/or regulatory factors, and other risks and uncertainties affecting the operation of Tecnoglass' business. These risks, uncertainties and contingencies are indicated from time to time in Tecnoglass' filings with the Securities and Exchange Commission. The information discussed during the call is presented in light of such risks. Further, investors should keep in mind that Tecnoglass' financial results in any particular period may not be indicative of future results. Tecnoglass is under no obligation to and expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise.

I will now turn the call over to 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 thank you, everyone, for participating on today's call. I will begin with a review of our second quarter results. Chris will then discuss our backlog; followed by Santiago, who will take us through our market update, financial results and outlook.

Looking at our second quarter 2017 results, summary on Slide 4, we have grown our business significantly since 2014, with the majority of that growth coming from backlog expansion in the U.S. This trend has continued in 2017, with our quarter-end backlog up 22% year-over-year to a record $487 million.

(inaudible) U.S.-based revenue represented 75% of total sales compared to 60% in the second quarter 2016. This was driven by a 26.3% increase in U.S. revenue, primarily attributable to acquisitions of GM&P, which continues to significantly strengthen our vertically integrated U.S. presence. Overall, our total revenue grew by a more modest 1.5% compared to the prior year period.

This lower-than-expected total growth was attributable to 2 factors. First, while we continue to experience good visibility on our multiyear project pipeline, longer lead times in backlog due to delayed project starts in our legacy portfolio have pushed the timing of invoicing on a handful of sizable U.S. projects into the second half of 2017 and into 2018. Despite some of these invoicing already commencing in June, the size of the projects will cause part of the associated revenues to be realized next year.

Second, construction activity has tempered in a couple of key markets, including Florida and Colombia. In Colombia specifically, sales were down 45% in the second quarter, reflecting significant pent-up construction activity and delayed projects due to macro factors related to higher interest rates and the structural tax reform completed in January.

It is important to note that in all of our markets, projects in backlog are very secure, which makes project delays a matter of when they will be delivered versus if they will be delivered. As such, we continue to expect these revenues to be fully realized over time.

Second quarter adjusted EBITDA was $13.4 million compared to $17.7 million in the prior year quarter. This year-over-year decrease primarily reflects the adverse impact of our higher fixed cost structure, which we had put in place in anticipation of a faster ramp of revenues for the year and then returns to a very strong backlog expansion. Additionally, we have a higher mix of revenue from GM&P, which includes a higher portion of lower-margin engineering and installation service.

However, in response to a more muted revenue growth outlook for the full year 2017, due to the shift of activity to the next year, we are already taking steps to rationalize our cost structure. This includes ongoing company-wide cost cutting initiatives in SG&A, direct and indirect labor. There are material sourcing and other efficiencies through our plant network to enhance margins. We expect to see the benefit of these actions beginning in the second half of 2017.

Additionally, we expect to realize cost savings from the first phase of our solar energy conversion efforts by year end 2017 and the start of installation of the second phase of the project.

We remain confident in the market-leading capabilities of our platform, which include a highly efficient, low-cost operation and an extensive portfolio of in-demand products. This will allow us to fully capitalize on the abundant pent-up demand in our markets. Although the strengths of our business are not yet fully reflected in our share price, we are encouraged by the very strong foundation that we continue to build for Tecnoglass and by the visibility of our project pipeline afforded by our backlog.

We remain sharply focused on generating additional value for shareholders. To that end, we are excited to increase our dividend by 12% on an annualized rate of $0.56 per share, beginning with our third quarter 2017 distribution. This augmented payout is made possible by our strong balance sheet and financial flexibility. (inaudible) represent (inaudible) of nearly 7%. This is the highest among all U.S. building product companies and one of the highest across the broader U.S. industrial sector. We are extremely confident that there's significant upside in our company, and we are committed to exploring ways to unlock additional value in our shares over time.

I will now turn the call over to Chris to provide additional details of our backlog.

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

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

Moving to our backlog on Slide #5. We continue to feel confident in our market based on a stable coring and billing activity, particularly in the U.S., where we competed to diversifying into many different regions. Our ongoing efforts to expand our geographic footprint, broaden our customer relationships and introduce new cutting-edge products allow us to expand backlog by 22% year-over-year to a record $487 million. This includes a combination of attractive project wins from GM&P, additional success in our legacy business and penetration into residential end markets.

Compared to the first quarter 2017, backlog increased by 3% sequentially, representing good traction for our products and services, including our Prestige and Elite residential product lines, which we recently introduced in the second quarter.

In residential, we remain on track to surpass our roughly $10 million sales target in 2017, which we continue to expect to ramp to a range of $20 million to $25 million of sales in 2018 given the strong interest in these new products.

On our last call, we announced our entry into the Middle East with the signing of a $13 million letter of intent in Qatar. While we remain committed to servicing the rapidly developing and attractive Middle East market, we made a decision to move away from that specific project due to recent political turmoil in Qatar, which elevated the risk profile of the project. That said, excluding the removal of the project, our remaining backlog improved by an even more impressive $27 million or by 6% compared to the first quarter 2017.

Looking at our geographic breakdown on Slide #6. While we continue to ramp our GM&P, we continue to significantly enhance our vertically integrated operations by providing the future opportunity to reach new markets in the U.S. We continue to invest and expand our presence into many additional U.S. markets, with Q2 backlog representing substantial project wins across more than 10 states. These strategic expansion efforts have successfully elevated our profile in the Northeast and West Coast and we are building relationships in Europe and other markets as well. We are bidding on a range of projects in these diversified markets to help populate our backlog in time with a range of attractive projects. In Colombia, we expect backlog to remain at a strong level given pent-up activity in that market.

Overall, we ended the quarter with good visibility on our multiyear project pipeline and we are actively diversifying our geographic and end market exposure in a disciplined manner.

I will now turn the call over to Santiago to discuss our markets and financial results.

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Santiago Giraldo, Tecnoglass Inc. - 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 #8. Our growing presence in the U.S. is underpinned by favorable construction activity in many markets across the nation. Amidst this backdrop, we are broadening customer relationships and successfully entering new markets. Additionally, we continue to diversify our mix of projects, which include multifamily, office buildings, high-rise hotels and, more recently, single-family homes.

Looking at commercial, which still represents the majority of our business, underlying U.S. demand is strong and reinforced by a positive outlook suggested by the ABI Index for the fifth consecutive month as of June, especially in the South and West, which are 2 of our key regions. Additionally, FMI data continues to support our mid-single-digit growth outlook in nonresidential spending across all of our key project types over the long term.

Looking at the U.S. construction demand in our sector on Slide #9. The Glazing Industry which represents good market proxy for our business, grew at a fairly outsized -- outside pace during the past 5 years leading up to 2017. Looking forward, the market is expected to continue expanding at mid-single-digit pace over the next 5 years according to other party sources.

Roughly 2/3 of industry revenue is comprised of light nonresidential, including office, commercial and institutional buildings, with the remainder derived from residential. With single-family residential still approximating 3% of backlog, this remains a growing and exciting source of upside for us.

Looking at the commercial building construction outlook in the bottom chart. Projected economic expansion, robust demand and rising investment also provide a favorable backdrop for architectural glass industry revenue for years to come.

Turning to our Colombian market update on Slide #10. The Colombian construction market has been relatively muted during the first half 2017, with limited GDP growth and a modest decline in building construction licenses. In Colombia our sales were down during the second quarter 2017 mainly due to project delays and an overall more tempered pace of construction activity, which we now expect to rebound closer to year-end.

A significant factor impacting Colombian construction activity is structural tax reform introduced at the beginning of 2017 which pushed out a large number of project starts as contractors awaited this new legislation.

While these conditions resulted in a softer construction activity than initially expected, improving macro factors should lead to a steady recovery as mortgage and interest rates are dropping sharply, with inflation now within Colombia central bank's target rate of 2% to 4%, consistent with 2014 to early 2016 levels.

Additionally, overall builder sentiment remains strong. Our conversations with contractors and customers have been encouraging, which continue to reinforce our confidence in the significant pent-up demand in this market.

Moving to our financial highlights on Slide #12. I'll begin with some additional context on the moving pieces in our P&L. During the second quarter 2017, we produced modest growth in revenues but experienced margin pressure in gross profit and adjusted EBITDA.

Gross margin was primarily impacted by a higher mix of engineering and installation revenues from GM&P projects, along with additional D&A expenses resulting from the robust growth CapEx program finalized in 2016 and by higher direct and indirect labor costs to support our higher revenue expectations to start the year.

SG&A as a percentage of total revenue was 21.2% compared to 19.1% in the prior year quarter, but essentially flat, excluding $1.6 million associated with nonrecurring cost.

To address the margin impacts on our business, we have taken steps to improve efficiencies and reduce our cost base. At the beginning of the third quarter, we trimmed about 5% of administrative headcount and approximately 7% of our direct labor force. These decisions are always tough, but with the enhanced visibility on the cadence of our project pipeline, this was a required step to rationalize our cost base through our revised expectations for the year. We have done substantial analysis and feel very confident that the current cost structure will support our expected second half growth.

As a reminder, adjusted EBITDA excludes the impact of noncash FX gains and losses on certain balance sheet items. Beginning with the second quarter of 2017, we have made the same modification to adjusted net income to better reflect our core performance. Adjusted net income in Q2 2017 excludes a noncash FX loss of $8.7 million, and adjusted net income in the prior year quarter excludes a noncash FX loss of $1 million.

Looking at the drivers of Q2 revenue on adjusted EBITDA on Slide #13. For the second quarter 2017, total revenue increased 1.5% to $81 million. This growth was mainly attributable to the addition of GM&P in the U.S., which was partially offset by delayed invoicing within projects in our legacy business in the U.S. And the impact of temporary market pressures on Colombian revenues. The U.S. accounted for 75% of quarterly sales, with Colombia contributing 19%.

Adjusted EBITDA in the second quarter of 2017 decreased by 25% to $13.4 million. Volume was up slightly and the price was essentially flat year-over-year. That said, we had 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, although at a relatively lower-margin (inaudible) products shipped to external customers.

Another factor was our higher SG&A cost structure left in place to support an expected ramp-up in project activity to support our growing backlog. As mentioned, a number of projects have been pushed out of 2017 and into 2018, so we are cutting costs and intensifying productivity initiatives to improve our margin performance into the back half of 2017, while still being able to support the expected growth.

Turning to our balance sheet and capital resources on Slide #14. Our CapEx was significantly reduced by 75% as a result of our capacity expansion phase virtually completed in 2016. We ended the quarter with a very strong balance sheet, including cash on hand of $43.7 million.

The seasonal dip in cash from the first to the second quarter is mainly attributable to the timing of cash tax payments in Colombia, which typically occur in the second quarter.

During the quarter, 2017, we paid cash taxes of $11.7 million on taxable income generated during full year 2016.

At quarter end, we had ample liquidity and a conservative leverage profile of 2.8x net debt to LTM adjusted EBITDA.

This balance sheet strength supports our future growth initiatives and other productivity investments such as our multiyear solar energy conversion program, which is progressing according to plan.

Moving to our 2017 outlook on Slide #16. Based on our results year-to-date, lower activity in Colombia and the timing of a number of large projects pushed out to 2018, we are lowering our full year 2017 outlook for sales and adjusted EBITDA. Looking at the table, we identified this timing impact on several large projects which have shifted from 2017 into 2018 for a variety of reasons, including financing delays and project redesigns.

These projects collectively represent $36 million of deferred revenue invoicing. Our decision to move away from our previously planned Qatar project represents an additional $13 million of revenue, which, as opposed to the other mentioned projects, is no longer included in our backlog.

We expect these factors to be partially offset by additional success with our residential product lines and other projects. As a result, we now anticipate growing revenues to a range of $320 million to $330 million compared to prior range of $360 million to $390 million. On this revenue growth, we expect adjusted EBITDA to increase to a range of $57 million to $65 million. We continue to expect to generate positive cash flow from operations for the full year, in part achieved through better working capital management.

Looking at a cycle comparison in our business on Slide 17. Given our extensive discussion around the deferred backlog today, we wanted to provide some additional perspective on how our business have responded to this dynamic in the past. As you can see in the chart on the left, a similar dynamic was evidenced as recently as 2014, which drove pent-up activity during the year, followed by substantial growth in the following year as backlog shifted into 2015.

Similar to our experience this year, in 2014, adjusted EBITDA was limited by the more robust cost structure to address increase in backlog and higher expected revenues.

In 2017, our adjusted EBITDA margins has also been further impacted by a higher mix of newly acquired GM&P business. That said, early Q3 activities are already showing signs of an improving revenue cadence. This, coupled with ongoing cost-saving initiatives, should help enhance our margin performance in the second half of 2017. As such, we are excited by our prospects for sequential improvement in the back half of this year and into 2018.

We thank you for your continued 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 today is coming from Jeremy Hamblin from Dougherty & Company.

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

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I wanted to start with coming back to the SG&A, and get a sense for where your run rates are looking on a quarterly basis. Given -- if I look back to the second half of last year, you ran at an average of about $18 million a quarter on SG&A cost. It sounds like with the cost cutting, that you're going to be seeing something considerably less than that. But where do you -- with the 5% change -- reduction in administrative, where do you expect your SG&A run rates to be given the lower level of sales expectation

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Santiago Giraldo, Tecnoglass Inc. - CFO [3]

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Jeremy, this is Santiago. Obviously in here, there is a component of variable cost as well. But we're thinking for the second half of the year is that we can get admin cost at about $15 million to $16 million per quarter. And that would get you basically to a second half total of about $65 million, including D&A. And that would include admin and selling cost.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [4]

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Okay. And so then, as a run rate, that looks like you're looking at about 17%, 17% to 18% per quarter on a...

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Santiago Giraldo, Tecnoglass Inc. - CFO [5]

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On project sales, yes.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [6]

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Yes, okay. And I think I missed it, but what are you looking at for your total depreciation and amortization for the year at this point?

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Santiago Giraldo, Tecnoglass Inc. - CFO [7]

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D&A should be close to about $20 million or so, and that's basically depreciation of about $17.5 million, $18 million and then we will have some amortization related to the GM&P acquisition.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [8]

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Okay. And then I have to say, I think probably the most surprising thing in here is where your Q2 gross margins came in: down 700 basis points year-over-year and under 28%. Your sales mix was actually not that much versus expectation, about $3.5 million in the quarter. So I'm a little surprised by the size of degradation in your gross margins. Can you just share a little bit more on that? How much of this is sales deleverage? And maybe getting ahead of yourselves on production capability versus how much of that is the shift in mix?

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Santiago Giraldo, Tecnoglass Inc. - CFO [9]

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Sure. So the first effect and the main effect is the higher revenue mix from GM&P. So you actually have a higher amount of revenues coming from the GM&P business, which carries lower gross margin.

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

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What is the discrepancy between your legacy business and GM&P on average gross margin?

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Santiago Giraldo, Tecnoglass Inc. - CFO [11]

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Well, Jeremy, (inaudible) because if you think about it, GM&P was our main client the year past, so those revenues are very closely intertwined. But if you were to look at U.S. sales year-over-year, our legacy business year-over-year would have been up mid-single digits. And then what caused the down effect was mainly related to Colombia. So, if you think this through, it's a vertically integrated scheme that we have. Sales that were directly from Tecnoglass out to GM&P last year are still there this year. It's just that they were consolidated. They're now reflected as full GM&P sales. So it's kind of hard to separate one or the other, but on a stand-alone basis, our U.S. business would have been up mid-single digits on the legacy business alone. But this -- the effect is about 400 to 500 basis points of GM&P mix. You have an effect (inaudible) of 1.3% and then higher direct (inaudible) on lower revenues, so the deleveraging that you're talking about cost about a 1% effect on the gross margins year-over-year.

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

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Okay. So then should I interpret that to mean that your longer-term gross margins are always going to be lower because of the GM&P acquisition?

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Santiago Giraldo, Tecnoglass Inc. - CFO [13]

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Yes. It's definitely not going to be the same cost structure as you have when you didn't have GM&P because obviously, their business is a lower-margin business.

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

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Okay. So I have to ask a question. On the last call -- I mean, I don't think that was highlighted on the last call, when the transaction had been announced and completed at that point. So I'm a little confused as to -- I mean, it's such a step down because it sounds like what you're really looking at is longer-term gross margins in like the low '30s versus kind of mid-30s. Is that a fair way to be thinking about it?

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Santiago Giraldo, Tecnoglass Inc. - CFO [15]

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Yes. That's accurate. Obviously, as we grow, we expect you will get some benefit from operating leverage. But for the remaining of the year, that is a fair expectation.

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

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But I mean, what about moving forward? More like in 2018, '19, '20, I mean, where are kind of target gross margins just on a, let's say, on a mid-single-digit growth rate?

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Santiago Giraldo, Tecnoglass Inc. - CFO [17]

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As you lower cost, which we're doing right now, and you get some operating leverage, we expect to pick up a couple hundred basis points. But without having given any specific guidance on that, we will rather not get into details, but that would be the expectation.

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

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Okay. And then, I want to come back to the downturn in the business in Colombia, I think was also -- because you actually had a fairly significant beat versus my expectation in the U.S., and that's impressive. But let me just turn to Colombia for a second, and you're seeing quite a downturn in Colombia. Is some of that related to kind of the political turmoil in your neighboring country that's really struggling? Or it's just -- it's hard for me to understand because it looks like the Colombian economy is doing pretty well and yet normally, that would lead to fairly significant uptick in construction activity. But that does not seem to be what's taking place. Can you just provide a little more color on that?

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

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Jeremy, this is José. In Colombia, the year before this one was the year when the peace process was being negotiated and a lot of the project got delayed due to that. So we expect the downturn that we are seeing this year, we expect that pick up again next year. And we have a significant backlog for next year, and I believe we're going to do 30% to 35% more next year than this year for sure.

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

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In Colombia?

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

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Yes, in Colombia. Yes.

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

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And how many of those -- of that growth, how much of that is derived from a few larger projects versus just a whole handful of medium-size projects?

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

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No, for next year, we don't have any large projects in Colombia. All of them are around, let's say, from $500,000 to $3 million.

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

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Okay. And then turning to the U.S. and what you're seeing. We' had been hearing a little bit about softness in the high-rise condo market in Florida. It didn't seem to be impacted too much in the second quarter. But looking forward, it sounds like you're tempering your expectations around Florida. One of the things I wanted to ask about was you've had this nice pipeline of jobs in Florida. You're expanding your geographic presence across the U.S. What is -- can you talk a little bit about the process in doing that, the learning process of navigating different regulations of other states, where you might be a little less familiar with kind of the players and the regulations? Is that creating elongated cycles in completing jobs?

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

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Well, the answer is, the elongated cycles are true, but not because of the reasons that you stated. It's for different reasons. In the Northeast, specifically, when they give you a job today because they like the price, normally 90% of the jobs are not a standard project, like in Florida. In Florida, 90% of the projects are standard. You already have a permit, you already have a test, you already have an MOA. And then when they give you a job, you're supposed to deliver in 2 to 4 months -- start delivering. In the Northeast specifically, they give you a job today, then you start designing as if (inaudible) quoted to your product or the prototype product that you were quoting all the requisites that the job needs. And then that takes from 12 months to 18 months until you start delivering. And that is the gap that we are seeing these past 6 months. The second 6 months are looking much better than the first 6. And next year, our pipeline is full. So that was what happened for these first 6 months. A lot of jobs ending and not a lot of jobs starting.

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

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Okay. And what do you think in terms of -- I think as your slides show, the activity in the U.S. is pretty solid. Architectural Billings Index is in a solid position. Your core markets actually are all doing pretty well overall. In terms of the risk moving forward of the backlog taking longer than expected, much like what happened this year, why is the risk lower moving forward than what you ended up seeing this year?

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

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Because this is a matter of going into the pace. Once you start a job, so you're getting the new job and you start what you've got 18 months ago, you start delivering and then everybody can do jobs that require the same timing, everything is like a train. Once you have a (inaudible) then the second, the third, everything goes at the same pace. And let me tell you something else, Jeremy. We are moving into the Curtain Walls that we didn't quote before. And we hired a few people that are experts in Curtain Walls. And we are quoting 2 or 3 very, very large jobs that if we get at least one of them, each one is like from $70 million to $100 million. So we're expecting for '18 and '19 -- the second half of '18 and '19, to ramp up like crazy. But that's all a new game with longer lead times. But once the (inaudible) starts moving, everything goes along.

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

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Well, let me just follow up on that and ask. That's a different type of product to produce. What kind of capital investment would you need to really move into Curtain Wall?

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [29]

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No, no capital investment because we have everything. We have all the machines. We're saving up a line, which means moving the machines from one side to the other to coordinate what is needed for the new quality control in Curtain Wall. And that will take, at the most, $500,000. I mean, it's nothing. And let me tell you something else, Jeremy. As you can see, we are at 50% capacity right now. We're going to be at 60% to 65% in the second half. And next year, we're going to be like at 75% capacity. So we don't need -- listen, the capital investment this year is low. Next year it's going to be -- we expect that $10 million is going to be spent or much less. And for the year after, the same thing. We don't need any more capital. We have a lot of capacity.

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Operator [30]

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Our next question today is coming from John Baugh from Stifel.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [31]

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I was just wondering if you could walk back through the U.S. backlog and you can give it to me year-over-year or sequential and if we can break out GM&P from that. I'm trying to get a sense for the core business and then maybe extract how much was added vis-à-vis the residential product versus the traditional non-res.

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Santiago Giraldo, Tecnoglass Inc. - CFO [32]

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This is Santiago. If you look at one of the slides in the presentation, it gives you the evolution from each one of the quarters for the LTM. So basically, the ramp up of 22% year-over-year incorporates a portion that is related to GM&P. GM&P as of the last quarter should be about $35 million, $40 million out of that backlog. So despite the fact that the Qatar project that we took out of the backlog for this quarter should have reduced legacy backlog, you still have a pretty healthy ramp-up on the legacy business, and then you get to add GM&P on top of that. I believe it's probably the fourth or fifth slide that outlines the evolution year-over-year.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [33]

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Okay. And is there -- are there any delays in the U.S. deliveries versus backlog or is this really a Colombia-only situation?

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Santiago Giraldo, Tecnoglass Inc. - CFO [34]

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So basically, the main delays from this year are associated with projects in the U.S., and we bridged that out toward the end of the presentation for you to get a better view as to how that's moving into the second half of '17 and '18. But also in Colombia, there's some pent-up activity from the first quarter, like José Manuel was saying, that we expect to ramp up on the second quarter. But the main effect on this year is associated with the U.S. projects.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [35]

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And is the U.S. project delays, are they because of what -- I believe it was José, I can't remember who has said, there's a different process with the Northeast and an order there gets delivered so much later than an order, say, in Florida. Or are there construction delays or customers saying, for whatever reason, "We're not going to do the project now. We're going to do it 6 months from now." I'm just trying to get a feel for the reasons for the U.S. delays.

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [36]

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No actually, they are not delays. They are the normal course -- the different course that it takes jobs in the Northeast and the West Coast than what it takes in Florida. Florida has a different code, and the sector that we are in, which is condo high-rise market, it was most of our jobs, they are all standard products. So they already have a test, they already have an MOA, and there is nothing new to do, only to decide the color of the aluminum and the color of the glass. Now in the Northeast, they require different things: a louvre, a this, a that, they require a different profile. They want the [nodes] in the front. They want -- so then, after you design with the architect all that they need, then you have to make a prototype. And then after the prototype, you have to make a test and pass the test. So it takes a lot longer.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [37]

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Okay. So what you're really saying is there aren't delays per se in the U.S. It's just these orders have a different cycle from order to delivery?

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [38]

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Yes, that's in the Northeast. Now in Florida, we have some delays because the banks are really getting strict on the amount of apartments that need to be sold in order for them to keep the financing. So we got delayed like for $75 million, $77 million. That's why we are going to be up in the second half in sales, and next year, we are going to ramp up a lot again.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [39]

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So that delay relates to banks waiting to see more occupation purchases of condos before they allow the next phase of construction for additional condos?

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [40]

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Yes. Well, they're financing now until they are at 70%. In the beginning, it was 30% to 40%. Then after the crisis of 2008, they went up to 50%. But now today, it's 70%. But we have like 3 large condo projects that already reached that level, and we're doing. And they were delayed because of that and now they're coming up.

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Operator [41]

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Our next question today is coming from [Johannes Vanderburg] from (inaudible).

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Unidentified Analyst, [42]

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I've got a quick one, the GM&P acquisition. I believe there's still $29 million to be paid. And soon you want to make a decision whether that will be with cash or shares. And given where shares are trading, I was wondering if you have any updated thoughts on whether you will choose cash or shares to pay that $29 million?

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Santiago Giraldo, Tecnoglass Inc. - CFO [43]

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Yes, so we actually have several options on our hand. You see, our cash balance is close to $50 million at the quarter end, and we also have availability on our lines of credit. So we are in discussions with the seller. We have until September 1st but obviously doing something. We'll have to keep in mind that the share price at this point is obviously not optimal to do a transaction that way. We don't typically discuss capital raising transactions publicly, but what we can tell for now is that we do have other options aside from equity to carry out the transaction. And we'll be obviously announcing what that is prior to our deadline on September 1st.

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Operator [44]

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Our next question today is coming from Anthony Snow from Red Oak Partners.

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Anthony Snow, [45]

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Just a few questions for you. In terms of backlog, can you help kind of define the criteria for what goes in backlog? For example, if you have a project signed up that maybe isn't fully financed, does that go in backlog? And for things that come out, what's kind of the criteria for removing something from backlog?

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

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When we remove something -- for example, what happened in Qatar, we didn't get -- I didn't get -- the total guarantee of payment, and the letter of credit that they wanted to give us was not enough guarantee for me to accept. So after discussing and discussing with the client, I finally said, "Listen, if you don't give me the proper guarantee, I'll walk out." So I walked out and that's taken off of the backlog. The backlog that we talked about that we have is all signed projects. The ones in Colombia, we have down payment in all of them. And the ones in the U.S. are signed. They are already -- we have a signed contract on them. And there are a little bit of the backlog, which is not that much, maybe $15 million to $16 million, that we have a commitment -- I mean, a purchase order that is a monthly order that we deliver, for example, for the refrigeration people. And it's not a contract, but it's a purchase -- an open purchase order of certain units every month, and it goes from year to year.

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Anthony Snow, [47]

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And in terms of what's in there even with an order, do you guys factor in kind of the status of the project financing? Meaning, do you haircut some of that backlog based on that? Or as long as you have something signed, it goes in the backlog?

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

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No, no, no. If it doesn't have financing, we take it off. I mean, we took off in the last quarter, there was a job in Miami Beach that didn't have financing. We took it off. Now they have the financing again. We're going to put it on for next quarter.

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Anthony Snow, [49]

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Okay, that's helpful. On cash flow or free cash flow, what is -- based on the midpoint of your adjusted EBITDA guidance, call it $61 million, and given that you probably should have kind of working capital relief that's a source of cash this year, how does that $61 million kind of translate to free cash flow?

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Santiago Giraldo, Tecnoglass Inc. - CFO [50]

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Tony, this is Santiago. So if you look at the first 6 months of the year, we had cash flow from operations of about $12 million despite the fact that we ended up paying $11 million in cash taxes in the second quarter. So we are -- we're forecasting free cash flow of at least $10 million for the second half of the year, given the fact that we don't have any CapEx needs and significant CapEx. But we do see ramping up on revenues on a sequential basis for Q3 and Q4. So there's going to be some working capital demands there.

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Anthony Snow, [51]

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So, sorry, Santiago. I guess maybe we can -- if we can take that in parts. What's -- is CapEx spend going to be about $10 million this year?

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Santiago Giraldo, Tecnoglass Inc. - CFO [52]

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Yes, yes. And that's what we had guided from the beginning. And if you look halfway through the year, we're basically very much in line. It's about $4.2 million. And I would tell you that the second half is probably going to be lower than that.

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Anthony Snow, [53]

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Okay. And so first half of the year, you did $12 million of cash flow from operations, and I think if I heard you correctly, you said $10 million in the second half. So call it $22 million, somewhere around $22 million of cash flow from operations and $10 million of CapEx gets you to kind of $10 million or $12 million of free cash flow for the year, is that?

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Santiago Giraldo, Tecnoglass Inc. - CFO [54]

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No. On the second half of the year, we're going to do another $10 million. We did about $12 million for the first part. The CapEx is probably going to be, like I said, $4.2 million in the first half, and I don't think we'll even get to the $10 million than we had originally guided. So at the end of the year, we should have at least $15 million based on that.

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Anthony Snow, [55]

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Okay, $15 million of free cash flow. On the guidance, and I know it's a little dated now, but we'd like to just kind of keep track based on what you guys talked about originally. Does the guidance reflect cost-savings from the soft coat line? And if so, what's kind of that annual number versus the original projection?

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Santiago Giraldo, Tecnoglass Inc. - CFO [56]

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No, it doesn't incorporate those savings. Basically, the new -- to bridge you from the old guidance to the new guidance is mainly related to the jobs that are being pushed out into 2018, I'm sorry, which if you look at the slide, you're looking at about $50 million of revenues that are getting pushed out. And then, on the mix of revenues that are mainly growing from GM&P, which has lower margins, as well as the jobs being done in Colombia, which as José was saying, are more kind of on the lower end rather than huge jobs that have higher margins. So we're not baking in savings on the soft coating. It's more related to the mix of business as well as the business that are getting pushed into 2018.

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Anthony Snow, [57]

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Okay. So nothing on the cost side from that, irrespective of revenue?

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Santiago Giraldo, Tecnoglass Inc. - CFO [58]

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On the cost side, we're incorporating what we said we're doing on the cost cutting initiatives to reduce headcount and others basically.

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Anthony Snow, [59]

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Okay, okay. And then the last question for me here. Are you guys considering at all using the cost advantage that you have versus kind of competitors to maybe aggressively win more business to offset some of the headwinds you're seeing?

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [60]

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We do not like to fall into the trap of getting more business with a lower margin because we believe we can grow with the same margin or a higher margin. Specifically, we're seeing that on the West Coast, the higher margins and better business result. In Florida today, because of the lack of demand, everybody is lowering their prices. And we find out that going into crushing the prices to gain sales, I mean, doesn't mean anything. We are pulling at a minimum percentage that we do our jobs. If we go lower than that, well, okay, see you later, alligator. We are working with better profit somewhere else. And we're doing really good with our clients. The regular clients prefer to pay a little more to us and have reliability and go with a supplier that they know will perform and will be there in the long run because we see a lot of people in the window business that go in and out. I mean, a normal window company stays open 10 to 15 years. And we've been in business for more than 30, and we're here to stay.

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Operator [61]

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We've reached the end of our question-and-answer session. I'd like to turn the floor back over to José Manuel for any further or closing comments.

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José Manuel Daes, Tecnoglass Inc. - CEO and Director [62]

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Okay, well, thank you for all the support. We're going to give you much better news next quarter. And next year we hope to be a record year again. Thank you.

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Operator [63]

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Thank you. And that does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.