Tecnoglass Inc. (TGLS) Q4 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Tecnoglass Inc.'s Fourth Quarter and Full Year 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Rodny Nacier, Investor Relations. Thank you. You may begin.

Thank you for joining us for Tecnoglass' fourth quarter 2016 conference call. A copy of the slide presentation to accompany this call may be obtained on the Investors section of the Tecnoglass website at www.tecnoglass.com. Our speakers for today's call are Jose 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 Jose 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 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 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 Jose Manuel, beginning on Slide #3.

Thank you, everyone, for participating on today's call. I will begin with a review of our operating highlights. Chris will then discuss our markets, followed by Santiago, who will take us through our financial results and outlook. Beginning with a summary of our 2016 accomplishments on Slide #4. 2016 was a very productive year for Tecnoglass on many different fronts. We have a lot of accomplishments within our core operations, while also taking conservative steps to enhance our alignment with shareholders. On the operational front, during 2016, we further cemented our position as the #1 architectural glass transformation company in Latin America and the second largest glass fabricator serving the United States. We grew our total revenues by 26% to a record $305 million, producing an increase in EBITDA to $72 million. Building on that momentum, we first [indiscernible] business, which allowed us to end the year with a backlog of 6% year-on-year and including GM&P on a pro forma basis up 28%. Since the beginning of 2016, we have continued to diversify our business and strengthened our vertical integration and improved our capital structure. During 2016, our U.S. revenue as percent of total grew 230 basis points to over 62%, helped by winning new customers, entering new markets and introducing new cutting-edge products. Our U.S. market opportunity remains extremely compelling and is further reinforced by our expectation for strong U.S.-Colombia free trade relations to persist, as Chris will discuss further. Since December, we have completed 2 strategic acquisitions in the U.S., which have both allowed us to strengthen our vertical integrated value chain. In December, we acquired our largest importer in the U.S. on very favorable terms to Tecnoglass. Earlier this week, in March, we purchased GM&P, a U.S.-based window and glass designer and installer in the U.S., which will allow us to fabricate locally in the U.S. Each of this deal is extremely attractive to our company and expected to be immediately accretive. During the year, we were also especially pleased to both expand our float and initiated a process to return a portion of excess capital to shareholders. We commenced a $0.50 annualized dividend, and we also expanded our public float by 98%, largely through and following the successful completion of our warrant exchange offer. We invested heavily to strengthen our financial reporting, which resulted in the elimination of 2 material weaknesses. And we are in the process of closing out our third and final one. We believe these collective actions, among others, have significantly improved our alignment with shareholders and reinforced our commitment to driving additional value through our local leadership positions to produce outpaced market growth on our highly efficient, low-cost operations. Moving to our 2016 results summary on the Slide #5. I am very pleased with our company performance during the year. We have grown our business significantly since 2014, with a majority of that growth coming from the U.S. We achieved adjusted EBITDA of $72 million for the full year, representing 26% growth over the prior year and also growing 26% revenue to $305 million. We deliver on our full year objectives as we continued to solidify Tecnoglass as a leader in U.S. and Latin American markets. Fourth quarter revenues up 20.6% year-over-year were stronger-than-expected driven by a surge in demand for our glass curtains and walls in the U.S. As a result of the robust demand, we were very pleased to grow adjusted EBITDA by an even more impressive 37.2% in the fourth quarter. This favorable outcome was made possible by our low-cost vertically integrated operations, will continue to provide us with a sustainable platform to drive industry-leading margins. We increased sales in the U.S. by 31% during 2016 and nearly 50% in the fourth quarter. As we continue to expand and diversify operations within different regions in accordance with our long-term strategic plan. As a result, we saw some higher mix of total revenues from the U.S. and increasingly for markets beyond South Florida. Moving to our backlog on the Slide #6. Overall, commercial construction activity was strong throughout the quarter, resulting in a healthy backlog at year-end up 6% to $396 million. This was up helped by ongoing efforts to expand our geographic footprint, enter new niche markets and introduce new products. The bidding environment was strong throughout 2016, with the fourth quarter being no exception. We ended the year with good visibility on our multiyear project pipeline, and we continue to pursue new projects to grow our business in a strategic and disciplined manner. Including the backlog for our recently acquired GM&P assets, our backlog increased by 28% to $479 million on a pro forma basis compared to 2015. This pro forma backlog provides a better representation of our growth trajectory in 2017 and beyond. Looking to our geographic breakdown on the Slide #7. Our backlog by geography shows a significant portion of our growth in recent years reflects our targeted efforts to use our dominant stronghold in Florida to expand into other U.S. markets through our long-standing commitment to quality, innovation and service. This U.S. expansion continues to allow us to sustain high margins in our business, and we now operate in growing list of highly populated areas such as Baltimore, Washington, California, New York, New Jersey and Texas. To be clear, while we have received a healthy number of quotes in new markets, Florida continues to be a key component of our business strategy and one we see the strength in the short term. We continue to see a lot of quoting activity in our Florida base, which represent 43% of our backlog of the year when compared to 48% a year ago. Looking to our end market niche in backlog on the Slide #8. Our end markets are primarily commercial, which tends to lag residential by 1 or 2 years and provide some visibility on coming growth or contraction in those years. As you can see in our backlog trend, approximately 92% of our business come from commercial, which include multifamily projects. In this commercial market, we continue to experience a favorable operating activity throughout our footprint in mid- and high-rise rental buildings, office buildings and hotels. The remainder of our business is residential focused. However, a mix of residential project work is expected to gain a scale in coming quarters with the introduction of the Prestige and Elite product line, as we will disclose further in a moment. Turning to our most recent acquisition on Slide #9. GM&P was a highly complementary addition to our company, which we expect to be immediately accretive to investors beginning on day 1. GM&P designs, fabricates and installs building enclosure systems such as curtain and window walls. Prior to the acquisition, they were a significant value client in the U.S. and a very strong partner to Tecnoglass over the past 5 years. To put that relationship into context, GM&P's revenue of $137 million in 2016 are having represented consolidated revenues to Tecnoglass of approximately $50 million on a pro forma basis, excluding inter-company revenues. This deal was a quite logical next step in our ongoing efforts to strengthen our position in the United States. Specifically, GM&P allows us to be more vertically integrated in the U.S. and ensures maximum performance of our window systems by controlling the entire process from design to production to installation. Additionally, GM&P operates a midsize manufacturing warehouse in Florida where we can perform fabrication work, further diversifying our operations. We really held GM&P's impressive portfolio projects in the Florida market, which is rapidly expanding into Texas and the Southeast regions, strengthening Tecnoglass presence in both markets. We look forward to integrating these operations into our platform, which we expect to add additional value for our shareholders. I will now turn the call over to Chris to provide additional details on our markets.

Turning to our U.S. market update on Slide 11. Thank you, Jose Manuel, and good morning to everyone on the line. During the fourth quarter, we continue to broaden our customer relationships and strengthen our presence in new markets across and increasingly diversified footprint. We are further diversifying our business and asset types from multifamily into office buildings, high rises and hotels. A portion of our expansion is also riding the positive tailwinds of improved demand. The ABI index continues to support our expansionary environment, including a lot of what of that growth in the Southeast, where we enjoy our strongest leadership positions. The ABI readings is further supported by FMI data, which shows U.S. construction activity was up single digits in 2016 and poised for mid-single-digit growth in 2017, including office and retail, which represent 2 of our largest end markets. Turning to Slide 12. We had a lot of success in Colombia during 2016 with our sales up 21% for the year. Overall, consumer sentiment is strong for the construction segment and the Colombian economy is expected to continue expanding, mainly driven by construction and infrastructure spending. Leading investment banks indicate that Colombia is attracting more investors' inflows compared to other emerging markets, especially Mexico. This is consistent with increased spending on infrastructure, construction and industrial activity, which drove local GDP up 2% in 2016, including nonresidential construction up 10%. In 2017, the Colombian GDP is expected to grow another 2.5%. This GDP outlook is consistent with expected construction growth in 2017 based on higher permitting activity, which is anticipated to grow at 4% and ahead of overall GDP. As the #1 glass and windows company in Colombia, we have an advantage position to capitalize on these favorable trends, given our local manufacturing footprint, deep customer relationship and a low-cost structure. We ended the year with good visibility on our multiyear project pipeline in Colombia. And we are actively pursuing new projects throughout the entire Latin American region to grow our business. Turning to Slide #13. We believe it is very important to help investors understand how we continue to maintain a very strong outlook for our growth prospects. There has been a lot of uncertainty regarding the trade relations and tariff following U.S. President Trump's election, and we want to take this opportunity to clarify what it means for Colombia and highlight the country's unique trading relationship with the United States. I will walk through some key points. First, Colombia has had a free trade agreement in place with U.S. since May 2012 on over 500 products, including Colombian glass and aluminum products. This covers essentially all of our sales to the U.S., and we see this positive relationship continuing. Second, the U.S. is Colombia's largest trading partner and a net import recipient. As a result, during the past 5 years, Colombia on whole has run average annual trade deficit with the U.S. of several million dollars per years. Additionally, there has been relatively few value-added exports from Colombia to the U.S., which means Colombia has not taking job creation away from the U.S. By comparison, Mexico had a trade surplus with the U.S. of $63 billion in 2016 alone. Third, taking Tecnoglass as an example of net import-exporting company. While we expect to enjoy favorable shipping rates to the U.S. indefinitely due to the number of U.S. container ships returning home empty. The fact is a large part of our raw materials are actually imported from the U.S. companies on a mutually beneficial tariff-free basis. As previously mentioned, GM&P also provides operational diversification, which could further mitigate this effect. To continue a discussion on the Slide #14. We would like to further point out that much of the Trump administration attention and concern regarding U.S. trade relationship has focused on countries with large trade imbalances with the U.S. such as China and Mexico, which have potentially driven jobs away from the U.S. We want to stress that this is not the case with Colombia. Colombia exports into the U.S. are mostly commodity-driven, low-value-added products that do not pose the same economic threat that the Trump administration has opposed. Furthermore, President Trump has emphasized that United States continue support for Colombia as a key ally in Latin America and has made a point to praise the Colombian manufacturing industry, especially mentioning the building product sector. As such, we view Tecnoglass as a standing and growth opportunity in the U.S. as very sound. That said, we have a diversified business and a strategic vision with a range of operational capabilities and target markets. These mitigate any risks to the tremendous global upside in our business in coming years. Moving to our product highlight on the Slide 16. Our focus on new products is a key driver of our new client wins and addressable projects opportunity. We remain focused on introducing novelty products and application into our markets. Two such examples, especially given to our housing markets, are our Prestige and Elite lines, serving our luxury and upscale residential segments. The Prestige line has a modern feel and targets high-end residential properties with premium features such as hurricane and corrosion-resistant hardware for coastal applications. The Elite line also target residential applications, seeking high performance and superior designs with features such as superior thermal performance and hurricanes resistant with no visible installation anchors. Moving to Slide #17. On the commercial side, we recently reviewed several high-end interior partition walls, including our ELI and ALEXIS product lines. The ELI lines is for applications where no visual barrier is required and where transparency needs to be accentuated. It is easy to install on site quickly and target to all commercial customers in the U.S. and Latin America. The ALEXIS line is a high tech oriented system target to U.S. customers with an elegant look that is built to provide acoustic comfort with a transformation feature to become a customizable wall. We are excited by all these new products and a deep pipeline of new products in our portfolio. I will now turn the call to Santiago to discuss our 2016 financial results.

Thank you, Christian. Turning to Slide #19. 2016 was up pivotal year for our company. And the activity that Jose Manuel and Chris discussed today represents the combination of the many positive attributes of our business. In September, we completed the warrant exchange offer and subsequently concluded the exchange of other non-tendering holders with the expiration on December 20. Shortly after, we initiated our quarterly dividend program at an annualized rate of $0.50 per share. During 2016, we reduced our CapEx spend by half compared to the prior year, as we completed an intensive multiyear CapEx phase, which has allowed us to stay ahead of sustained growth in customer orders. We accomplished this while improving our working capital metrics and cash flow profile, generating a healthy amount of cash from operations during the last quarter of the year. In addition to our focus on working capital management, we were also able to gain added financial flexibility by reprofiling our debt into a nonamortizing long-term structure, which provides us with an overall lower cost of funding. We ended the year with prudent debt levels, a stronger cash position and conservative leverage metrics with a net debt to adjusted EBITDA of 2.6x as of year-end on a pro forma basis. Looking at drivers of revenue in 2016 on Slide #20. For the full year 2016, we drove revenue expansion of 25.9% to $305 million, reflecting a strong pace of activity in our different regions. The U.S. accounted for 71% of full year growth with Colombia contributing 28%. On a constant currency basis, revenues increased 30.5% for the full year. In the fourth quarter, total revenues increased 21.1% to $80.3 million. On a constant currency basis, revenue increased 20.6% year-over-year with less significant impacts of foreign currency translations to Colombian sales. This sales improvement reflected meaningful progress led by considerable strength in the U.S. and continued growth in our Latin American operations. In the U.S., fourth quarter revenue improved 49.4% to $51.2 million, reflecting increased project activity in Florida and diversification to a range of projects in other states, including New York, New Jersey, Baltimore and Texas. Overall, the U.S. represented about 64% of our fourth quarter revenues compared sequentially to 62% in the third quarter of 2016. Colombia revenues in local currency or on a constant currency basis increased 2.4% for the fourth quarter, helped by healthy construction activity. A favorable foreign currency impact resulted in reported Colombia revenues up 4% compared to the prior year quarter. Turning to Slide #21 to discuss adjusted EBITDA. For the year, adjusted EBITDA in 2016 increased by 26.1% to $72 million, mainly attributable to stronger sales throughout all of the markets within our footprint and an improved gross margin despite having a negative FX impact on Colombian sales. In the fourth quarter, adjusted EBITDA grew 36.7% to $19.3 million. Looking at the adjusted EBITDA bridge, improvement was mainly related to a $5 million increase in gross profit, driven by higher volume with stable price and product mix. This improvement more than offset $1.5 million of additional SG&A spend, excluding nonrecurring items to support growth initiatives. Overall, this was a very strong performance for the fourth quarter, which concluded another year of industry leading adjusted EBITDA margins in our business. Moving to Slide #22. We provide a more complete picture of our financial results starting out by focusing on the fourth quarter performance. Gross profit increased 21.2% to $28.7 million compared to the prior year quarter. Gross margin was 35.7%, which was stable compared to prior year quarter. SG&A was $19.6 million compared to $13.2 million in the prior year quarter. As a percentage of total revenue, SG&A was 24.4% compared to 19.9% in the prior year quarter. The increase in SG&A was mainly the result of a couple nonrecurring items totaling $4.5 million in the fourth quarter of 2016. These nonrecurring items included the provision of a $3.2 million unbilled receivable associated with a partial change in scope of an ongoing project in Colombia. Essentially, a change in the time line and scope of this multi-phase project required us to adjust our unbilled receivable, while gaining back inventory that could be used in subsequent phases. Additionally, we had a onetime write-off in accounts receivable along with consulting fees associated with the planned bond offering and the E.S. Windows acquisition totaling $1.3 million. Excluding these onetime items, SG&A would have been $15.1 million or 18.8% as a percentage of total revenues. Fourth quarter GAAP EPS was $0.09 per share, and adjusted EPS was $0.15 per share. We continue to expect our long-term normalized tax rate to approximate 40% for 2017 with quarter-to-quarter variability impacted by the timing of nondeductible expenses under Colombian tax rules. However, as a positive development, the Colombian government recently passed a new tax regulation, whereas corporate taxes will decrease to 33% over the next couple of years, stepping down to 38% in 2017. Turning to our strategic CapEx enhancements on Slide #23. We are continuously investing in our state-of-the-art facilities to enhance our production efficiencies and produce high performance products to broaden our project base. This is further supported by our commitment to quality and innovation, which we are able to achieve at multiple points of our vertically integrated value chain. As I mentioned, leading up to 2016, we had undergone a robust capital expansion phase in recent years to stay ahead of sustained growth in customer orders. We had an intense CapEx investment phase in 2015 with a completion of our soft coat facility and other operational enhancements. Collectively, these investments in capacity have helped us more efficiently expand our production capabilities to better serve our customers. In 2016, we completed our expansion phase, which drove down CapEx as a percentage of sales to 14% compared to 33% in 2015, resulting in a strong installed capacity base, which will allow us to further grow our revenues in coming years. Moving to 2017 outlook. Our strategic investments in capacity, products and people, combined with our business development activities and growing product portfolio, provide us with a firm foundation to achieve another year of record results. For the full year 2017, we expect to produce double-digit revenue growth based on improving commercial construction markets and additional market share gains in the U.S., Colombia and Latin America. 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 towards the second quarter and the back half of the year. As in prior years, we expect our first quarter to be the seasonally lowest revenue quarter and to then 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. The full year 2017 outlook include the effect of fully consolidating E.S. Windows along with the contribution of GM&P as of March 1, 2017, acquisition date. We believe we are well suited to deliver another year of double-digit growth in sales and adjusted EBITDA, which is well ahead of industry growth rates. We are confident in the trajectory of our business and look forward to executing on our multiyear project pipeline, while actively pursuing additional opportunities to invest our capital prudently to generate attractive returns. We thank you for your continued support. We'll be happy to answer your questions. Operator, please open the line to questions.

[Operator Instructions] Our first question comes from the line of Jeremy Hamblin with Dougherty & Company.

Congratulations on the strong results in the fourth quarter and a great year and the GM&P deal. I wanted to first ask a question about just kind of the implied organic growth within your guidance range for this year. What is the expected organic growth for the Tecnoglass business to legacy business versus the GM&P business?

Jeremy, what we're assuming an organic growth is at least 10% at the midpoint of the range. Basically, when the guidance that we gave and on the range that is upside, but on the midpoint of that, we are implying a 10% growth year-over-year.

And Jeremy, is that we prefer? This is Christian Daes. We prefer to under promise and over deliver that toward the other way around. And we don't want everyone [ph] to adjust our EBITDA, our sales volumes in our projected forecast.

Understood. So in terms of the organic growth, you are expecting about 10% both on the Tecnoglass side of the business as well as GM&P?

No, on the GM&P, we are assuming a flat revenue year and that is again being conservative. So on the consolidated results and guidance that you see in there, you have a flat GM&P for 10 months, as we acquired this company starting March, and then 10% growth on the legacy business.

Okay. Great. That's helpful. And then in terms of thinking about the gross margin outlook for this year, I noticed that in the fourth quarter, you saw raw material costs were up fairly significantly year-over-year, about 180 basis points. Was that primarily due to aluminum scrap or that increase in raw material cost, it was 38% of sales in Q4 this year -- in Q4 '16 versus 36.2% in Q4 '15? Can you just speak to what caused that difference? Was it more breakage within the production facility? Or was it input costs that were higher?

No. Actually, Jeremy, this is Jose Daes. We -- at the end of the year, we took a lot of material that was either defective or out of use, and we took it out because of a consideration from the auditors. So that's why it went a little up. But is now -- that we don't foresee that happening anymore.

Okay. And then so just thinking about 2017, I know aluminum costs have moved higher on a year-over-year basis, and I would expect that could be couple of million dollars of drag on EBITDA year-over-year. Wondering if you could provide a little bit more clarity on whether you expect gross margins overall up or down on a year-over-year basis, given your implied EBITDA margin range of about 23% for the year?

No. On that, Jeremy, we actually have passthrough on to clients. So increased aluminum prices will not affect us. What we're expecting for gross margin is roughly to be at 35% this year and that is basically wading out the GM&P acquisition, which is a business in which we expect EBITDA margins of about 20%. That counter effects with the E.S. Windows acquisition, which has an EBITDA margin closer to 40%. So all in all, we expect margins to be about the same. But from a gross margin perspective, we're expecting this to be 35%, 36%. But we're certainly going to look to implement -- identify synergies from the GM&P acquisition going forward. So this could be conservative. But again, we want to be prudent as we report results. So to answer your question, 35% would be a fair number to model.

Okay. And actually just on the -- a follow-up on that last point. In terms of the acquisitions themselves, are there any synergies that are actually built into your guidance at this point in time?

Not as of now, not as of now. Just like I said, we want to be able to be conservative on this. We have identified the synergies that will result from the acquisition. So there is upside there.

Understood. One other question, and then I'll hop out of the queue. You mentioned the introduction of some new residential window products. It sounds like fairly positive initial reception. In terms of contribution for 2017 and 2018, what kind of incremental sales growth can come from those new residential window products?

We do not...

Excuse me, go ahead, Jose.

No. We expect around $10 million from the residential lines for this year. We are very positive for around $20 million to $25 million for next year because everybody is so happy with the new line. We're getting great results from the clients. And the orders -- the problem is that the orders will start coming perhaps in April, May, and they will go on into next year. So around probably $10 million this year, which is optimistic and then $25 million for next year, which is conservative.

Our next question comes from the line of Michael Morosi with Avondale Partners.

I guess, yes, first off, the continued diversification within the United States is a key factor here. So I wonder if you could just talk a little bit more about some of the go-to-market changes you're making both in the Northeast, but also in California and how those business development, market development activities have progressed?

Well, we have introduced our products in Washington, Philadelphia, New York, Boston, Texas. And now, we're doing some small things in California with great reception. And we are getting a lot of forward calls. We have a lot of backlog now for next year of around $50 million for the Northeast. We plan to double that for 2018.

That's great. So when we look at your usage of cash going forward, obviously, CapEx as a percentage of sales has declined significantly. Is this a new sustainable level? Or how should we think about either maintenance CapEx or future growth CapEx?

Let me -- this is Christian. Let me answer that. We have built enough capacity to roll up 25% this year or 30% this year and 30% next year without having to do too much CapEx. And when I mean too much CapEx is less than $2 million, probably $2 million or $3 million for this year. We have a good capacity and a good setup ready for all the orders that we have in our backlog.

That's great. And then as we look at the write-off for the change in scope, yes, it's my understanding that, that was a Colombian project. Do you feel that, that was just kind of a one-off scenario? Or are there any kind of other read-throughs that we should make?

The next phase of this Colombian project will come up in April or May. But since it's delayed and it's been delayed 8 or 9 months, it's a must do, because it's a very important project in Colombia and it's going. And we have the money and everything underneath. But we have to take it now from our accounting so the auditors will feel comfortable. And when they come back, we'll use everything that we have for that job.

All right. And then, yes, just one last one from me on the refinancing and maybe this one is for Santiago. But you obviously -- the paper has performed well in the aftermarket. And, I guess, so I was just wondering if you could give us, yes, just a little more color on how that transaction came together, how that process went, kind of the types of and nature of demand and anything you can add there, understanding there?

Sure. So basically this was a 2-phase approach. We went out to the market in November, right before the elections. And unfortunately, due to all the volatility that came about at that point in time, we went back to the market in January and were available to execute the deal. But it was a very well-executed transaction. It was oversubscribed. The accounts that participated in there are some of the largest funds out there that participate in emerging markets. So all in all, it was a great result. We were basically able to refinance virtually all of our debt into, obviously, a longer tenure with no amortizing structure. So it gives us a lot of financial flexibility. I think at that time, we were charged a premium basically on the volatility that the markets were having in regards mainly to the Trump effect. But all in all, a very successful result, and we're certainly very happy with the outcome.

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

Jose Manuel and Christian, could you talk a little bit about your expectation for price in 2017 versus 2016? And also talk a little bit about sort of product mix and how you expect that to impact your results?

Well, price, we expect to be around the same as 2016. But we are in a cost-cutting venture. We are cutting every extra spend that we can cut. So we can have even better numbers with good results. And we do expect the -- our backlog to continue to increase for the next 2 years, because we have our hands full quoting everything that they are sending to us. And we have a very good chance of growing our backlog through the future.

And with your move into the residential market, have you seen any reactions by competitors? And even not just residential, but moving your nonresidential product into new markets like California, have you seen any abnormal reaction by your competitors?

Well, you have to remember that we have -- margins in the industry. So we can always go down. We are affecting too much our profit. And we have -- we do -- we have seen a reaction. We have heard that competition are saying that we will match any price. But this is not only our price. We don't want to be a cheap competitor. We want to be a good-quality competitor that we can deliver on time, be responsible and at the same time, give a good price to our customers.

Not only that, but we have the best product in the market. Our product is outperforming every other product. So we are very happy with what we have. We developed a product watching every other competitor, and we reached a better window for lower residential, mid-residential and high-end residential.

Our next question comes from the line of Tony Snow with Red Oak Partners.

Just want to drill a little deeper on your guidance, which sounds from you guys is a bit conservative and on the face of it, to me, seems very conservative. Santiago, just wanted to walk through kind of the following math and make sure I'm thinking about this the right way. The company reported $72 million of EBITDA for '16. After the third quarter -- on the third quarter call, you guys called out that '16 would have $5 million of onetime charges from energy, consulting, auditing and the lean manufacturing initiatives. I think you also said after the third quarter that the soft coat line savings of $6 million to $8 million would be pushed out as well into '17. So let's say that adds $3 million to savings, you get half that, half the $6 million to $8 million. And then on the acquisitions, if I layer that on top of the $72 million, for E.S. Windows and GM&P paid $48 million, and I'm going to assume that you guys pay, let's call it, a 6x multiple. You probably did better than that, knowing how you guys think and that you buy things cheap. So layer that on and up another $8 million. So kind of before I even get to 2017 base business organic growth, I'm at kind of $88 million of adjusted EBITDA. If I take kind of the midpoint of your organic growth rate, which is at 10%, that's going to add $30 million of revenue and using kind of the incremental margins you guys have been getting, which is kind of mid-$30 million that should drop about $10 million to the EBITDA line. So if you take kind of the $88 million from the onetime adjustments and the additions of the acquisitions plus another $10 million from organic, I get to kind of $98 million to $100 million of kind of adjusted EBITDA for '17. And that's again, I think, what I think is conservative assumption. Is that the right math, Santiago?

I think, Tony, on your calculation from the organic business, our EBITDA margin is not on the $30 million like you just mentioned. If you look at the year-end, we're going to end up with 23.5% EBITDA margin. So if you do that math, on $30 million of added sales, you basically get to $7 million. So that takes you from $72 million to about $79 million. And then what we're assuming is that we are going to derive about $7 million or $8 million additional million dollars from both acquisitions given the fact that GM&P will only get to consolidate for 10 years -- for 10 months, I'm sorry. So that gets you to $86 million or so and that's our midpoint, that's our base case.

Tony, on the market for us last year -- last year, the market for us to be conservative and not to expect too much, and we don't want to overpromise and only deliver [indiscernible] to be cautious to go slowly. Like we said, the first quarter is going to be a flat quarter, because all the work is pushed back to second quarter, third quarter, fourth quarter. So we prefer not to overpromise and under deliver because then we're going to get punished for that.

Christian, I understand that. But Santiago, if I could, the 23% incremental margin that you called out for full year '16. Doesn't that include kind of the $5 million of onetime that you called out after the third quarter? So if you add that back, you're really at kind of 32% to 33%? Or were those -- do you expect some of that $5 million or all of that $5 million to kind of reoccur this year?

No, we're not modeling that the add back of that 5-year, Tony. So that could be certainly an upside on energy cost, which was one of the drivers that we stated in Q3. We're actually seeing sustained higher energy cost. So for once, we're not modeling lower energy costs for next year. And for 2, we are not modeling significantly efficiencies from the soft coating facility. Like Chris said, there is definitely upside in there, but we'll be in conservative and prudent on that front. So you're right. I mean, it could be higher. We are being prudent and kind of modeling a double-digit EBITDA growth on the organic business and about $7 million to $8 million derived from the acquisitions that we made in the last couple of months.

Not only that, Tony, but you can be sure that we go out there and try to make it what you think it should be. So that's what we are working on. Believe me, we don't sleep. We work 24 hours. We work Saturdays and Sundays, because we want to make the -- best company in the industry, and we are working on it. If you see 2016 compared to 2015, we are a much better company. Now, our 10-K is ready. The accounting is ready. We have the material weaknesses already out. We don't have related companies. So we are completing the work that we have to do to make sure that it is a best company in the industry, because remember, we have our money at stake in this company.

Our next question is from the line of Josh Goldberg with G2 Investment Partners.

I just want to better understand the acquisition and the possible benefits on your cost side. I mean, I would assume that, as you've worked with this company in a pretty big way, you would probably kind of removing them as they probably bought your product and then added on additional amount for their own profits. You don't pay that additional amount anymore and that would probably help you both on the, I guess, on the gross margin side. So I just wanted to hear from you about what opportunities there are to improve your gross margin because of the vertical integration that you're doing? And then I have a follow-up.

Well, here, what you have is some part of the revenues are inter-company revenues. So in other words, Tecnoglass sells into GM&P and that GM&P sells into the end customers. So you have to eliminate those sales when you consolidate. On the remaining sales that they have, their business basically, the incremental revenue that we get, like I say, is going to have a lower margin. This business is typically closer to 18% to 20% EBITDA margin. And that's why I was stating that on a consolidated basis, we expect EBITDA margin to be around 24%-or-so and that is netted against the E.S. Windows' revenues. So that's basically already baked in into the projection that we made for 2017, having this business incorporated for 10 months out of the year.

Right. Okay. And when you look at their backlog, which increases your backlog by about $85 million. How much of their backlog is, let's say, the next 12 months? And how much is further out? And based on what you are seeing on their backlog of orders, is it fair to say that those are all similar margin to what you are expecting on the revenue side? I mean, there is no low-margin business that they took.

Jose Manuel, would you like to take that?

Yes. Well, out of the around $1,200 million, we have around $260 million for this year plus the day-to-day business, which we cannot include in our backlog, which will be the balance. And I'm talking only about Tecnoglass without GM&P included. For the year after, we have the balance, which would be $140 million, and we see that trend growing up again because we're getting lot of jobs and the margin [indiscernible] if we don't see the margin going down, as a matter of fact, we're getting better jobs with better margins [indiscernible] more difficult, so less people can get into those jobs. And we want them to stay flat.

Okay. And in terms of your level of confidence, you said that the first quarter is going to be flat. Did you mean that was going to be flat year-over-year or just versus the fourth quarter?

Flat versus the fourth quarter last year.

No, year-over-over.

Yes. This is always the lowest revenue quarter of the year for us.

Well, we have -- let me explain. We only work 15 days in January and we work only around 20 days in February because of local festivities, which are called carnivals. And in carnivals, [indiscernible] people won't work, they want to dance and they want to drink.

I'm saying with the acquisition, you're going to be flat in March versus March? Or is it going to be higher?

No, no.

No, no. [indiscernible] no, no. We're talking about business-to-business, Tecnoglass-to-Tecnoglass.

Yes, on the comparative business...

I'm hearing a couple of things. Just help me understand. You're saying it's going to be flat on the March '17 versus '16 number, then you add the acquisitions?

Yes. You will...

No, no.

Retroactively you add the acquisition as if it will have taken place in 2016, so you compare apples-to-apples. So we're expecting a flat year-over-year, quarter-over-quarter, including both acquisitions already incorporated into it.

Okay. And what was that number in March of '16, incorporating those acquisitions?

What was -- what number? The sales?

Yes.

It was closer to $67 million, I believe. So we ended up with $80 million in fourth quarter of the year and the second and third were closer to $75 million, $77 million apiece.

Right. So what you're saying is, if you do, call it, $68 million to $70 million in the first quarter, you are expecting very strong ramp into second half of the year. It's going to be north of $100 million to get to your numbers for '17.

I'm giving you the number on the legacy business. I'm not giving you the number with GM&P. So the $67 million was a legacy number for this year. But once you include GM&P on top of that, to answer your question, yes, the second, third and fourth quarter will be substantially stronger than the first.

Our last question is a follow-up question from Jeremy Hamblin.

I want to just make sure to clarify on the taxes. What is the effective tax rate that you're expecting for 2017? And then, Santiago, you mentioned the change in tax relief for corporate taxes moving forward. How should we be thinking about those in 2018?

Sure. It goes down to 38% this year, Jeremy. Falls down to 37% next year and then every year thereafter, it goes down to 33%.

Okay. Great. And then one last on the pro forma. If you're looking at where balance sheet stands post the deal, how -- where is your pro forma debt? Where is your cash balance? And then what is your approximate diluted share count post-GM&P deal?

So on the debt, we don't expect to be anywhere -- on neither acquisition, we acquired any debt. So basically the consolidated debt that we have in hand right now is just related to the bonds for $210 million and a small ECA facility that we have for $18 million. So that's all the debt that we have right now and what we expect to have for the remaining of the year. On the cash, we are currently running at about $45 million. So you can model your leverage that way and expect to be free cash flow positive during the year. And then thirdly, I'm sorry, Jeremy, what's your third question?

Diluted share count post-GM&P deal.

Okay. So right now you're running at 33.1 million. On the acquisition like we released this morning, we are still determining the most appropriate structure to do this. We already paid roughly 20% of the acquisition with cash upfront. So on the earnings structure, this is going to be accretive to shareholders. On the remaining payment, we are basically analyzing the best way of handling. It could be partially through cash. All of our credit line facilities are open since we repaid all of our banks. So we have financial flexibility in there. But if it make sense, we could also consider doing some part of share. So to answer your question, I couldn't give you a precise fully diluted amount right now. We'll certainly be sure to kind of tell you guys once a final decision has been made as to how the remaining of the acquisition is going to be funded.

But maximum diluted share count would be in the kind of 35.5 million range, something like that?

Yes, that's right depending on share prices. Yes.

Ladies and gentlemen, that does conclude our question-and-answer session. With that, this also concludes today's conference. We thank you for your participation. You may disconnect your lines at this time.