Tecnoglass Inc. (NYSE:TGLS) Q1 2023 Earnings Call Transcript May 7, 2023

Operator: Hello, and welcome to the Tecnoglass, Inc. First Quarter 2023 Earnings Conference Call. Please note, today’s event is being recorded. I’d now like to turn the conference over to Brad Cray, Investor Relations. Please go ahead, sir.

Brad Cray: Thank you for joining us for Tecnoglass’ first quarter 2023 conference call. A copy of the slide presentation to accompany this call may be obtained on the Investors Section of the Tecnoglass website. Our speakers for today’s call are Chief Executive Officer, José Manuel Daes; Chief Operating Officer, Chris Daes; and Chief Financial Officer, Santiago Giraldo. 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’s 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’s business. These risks, uncertainties and contingencies are indicated from time to time in Tecnoglass’s filings with the SEC. 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.

José Manuel Daes: Thank you, Brad and thank you everyone for participating on today’s call. We are very pleased to start 2023 on solid footing with very strong year-over-year growth and record first quarter results in all our key operating metrics. This includes record revenues, gross profit, adjusted EBITDA, free cash flow and backlog amongst several other metrics. Our outsized growth is driven by our structural and sustainable competitive advantages, which allow us to gain market share in different markets. Our multiyear effort to improve our operations through strategic investments in automation and capacity enhancements further boosted our bottom line. These structural improvements to our vertically integrated platform have enhanced our ability to support our ongoing growth while serving a broader market and broader product offering.

We are delivering high-quality service and products to our customers with lead times well below industry average. Our investments in our plans have bolstered our ability to meet the higher levels of demand for not only our legacy products but also for newer products designed for other geographies and segments such as Multimax and a recently designed Terrastore product. In both our commercial and single-family residential business, we are still experiencing a rapid growth in demand for our products, particularly in the Southeast U.S. where we enjoy the benefit of secular tailwinds. Furthermore, a strong momentum in our single-family residential business, which has a shorter cash cycle, along with our proven working capital management collectively helped drive our 13th consecutive quarter of exceptional cash flow generation.

Our ability to generate cash has strengthened our financial flexibility so that we can capture higher levels of demand and reinvest in the business through ongoing operational and capacity enhancements. We are on track to expand our installed production capacity to an output equivalent to roughly $950 million of annual sales by the end of the second quarter of this year. Our track record of delivering strong financial results validates our growth strategy. We are committed to consistent outperformance, operational excellence and driving value through product innovation by leveraging our vertically integrated platform. As a result, we continue to enjoy a healthy competitive advantage, which has contributed to market share gains. Based on our success so far this year and the opportunities we see ahead, we are pleased to increase our full year revenue and adjusted EBITDA growth outlook.

We were very pleased with our entire team’s dedication to driving exceptional results and now forced to deliver another year of record performance. We look forward to maintaining our position as a leader in architectural glass as we deliver exceptional above market growth, profitability and value to our shareholders. I will now turn the call over to Chris to provide additional details on the record backlog.

Chris Daes: Thank you, José Manuel. Moving to our backlog on Slide 5, we are thrilled to report a strong start to the year for Tecnoglass. We have a solid momentum in our business even into the second quarter, reflected by record invoicing month in March and April. Our strong performance in this challenging macroeconomic environment demonstrates the resilience of our business model. Our sales reflect the continued strong momentum in commercial demand and market share gains in single-family residential. We are delivering exceptional service, innovative product offerings and shorter lead times. Our track record of successfully delivering on high-profile projects and maintain consistent lead times has earned us an increasing number of opportunities across the U.S. These, along with our showroom expansions that are allowing us to further penetrate attractive geographies.

Strong demand for our multifamily residential and commercial product has resulted in accelerating backlog growth, which climbed to a record of $776 million at the end of the first quarter. Beyond our backlog, the pipeline of projects continues to be strong, providing visibility well into 2024 and starting to build into 2025. Supporting the positive momentum in commercial, we are pleased to see the ABI index return to expansionary readings in March. As a reminder, approximately two-third of our backlog is mainly composed of medium and high-rise residential buildings, which are currently outperforming most of other commercial sectors. The last one-third is related to a wide variety of commercial projects where demand remains firm. Our single-family residential growth trajectory is not fully captured in our backlog given the shorter-term spot duration of projects.

Several other important factors driving our consistent ability to produce exceptional results are strong customer relationships, strategic partnerships and new product innovations. We were thrilled to announce our partnership with Storm Shield Windows & Door during the first quarter to develop a new product called StormArmour that targets key geographies we operate in where severe weather conditions such as hurricanes, torrential rains and high winds are prominent. Product launches such as StormArmour and our existing Multimax product line should help us generate additional organic growth as we expand our addressable market through new and unique solutions. We were also excited to recently announce our strategic partnership with Wells Fargo, who will offer a variety of very competitive and affordable financing options to our customers.

Partnerships such as these highlight our dedication providing value-added solutions for our customers in addition to participating in ongoing industry innovation. I will now turn the call over to Santiago to discuss our operations, financial results and improved outlook for 2023.

Santiago Giraldo: Thank you, Christian. Turning to Slide #6, our exceptional performance in the first quarter reflects the ongoing strength and resilience of our business model. We had a very strong year-over-year organic growth in both our commercial and single-family residential businesses. We’re executing on our growth strategy to capture demand for our innovative products and remain better positioned than ever to take advantage of the tailwinds José Manuel and Christian highlight, given the unique benefits provided by our vertically-integrated platform and deepening customer relationships across our increasingly diversified footprint. Single-family residential revenues grew organically 40% year-over-year in the first quarter, now representing 43% of our U.S. revenue.

Our continued growth in single family is a direct result of our ability to deliver superior quality architectural glass products with much shorter lead times at an attractive value. It is also important to reiterate that approximately two-third of our single family residential revenues are tied to repair and remodeling demand, which has remained relatively resilient in our markets and for our products and have historically local relation with interest and mortgage rate fluctuations. As we look ahead, we see additional market share upside to single-family revenues through our expanding dealer base, geographic expansion within the Southeast and South Central U.S., the introduction of innovative new products, such as those Christian just discussed, and the opening of new showrooms in key geographies.

Additionally, we continue to see favorable demographic trends of population migration into the Southern U.S. where we have significant exposure. Now on Slide #7, I would like to reiterate the important differentiating aspects driving our industry leadership and outperformance. Our vertically-integrated business model and strategically located operations are supporting our success in the ongoing tight supply and dynamic cost environment. More specifically, the differentiating factors benefiting our businesses are: number one, previously implemented an ongoing high-return investments in plant automation and capacity upgrades; number two, stabilizing our cost through hedging on aluminum inputs and dependable supply of raw glass through our joint venture with Saint-Gobain; number three, our people-focused culture to retain quality talent and achieve low turnover as an employer of choice that pays well above minimum wage; number four, keeping transportation costs under 5% of revenues; and number five, a sustainable energy model including solar power and co-generation of power through on-site natural gas.

Turning to the drivers of revenue on Slide 9, total revenues increased 50.6% year-over-year to $202.6 million for the first quarter. This increase was driven by a significant growth in our multifamily and commercial activity as well as a strong increase in single-family residential activity in addition to market share gains. Of note, both single-family residential and multifamily and commercial revenues are benefiting from the positive demographic trends in our main markets that I touched on earlier. Looking at the drivers of adjusted EBITDA on Slide #10. Adjusted EBITDA for the first quarter of 2023 nearly doubled to a first quarter record of $85.8 million compared to $45.4 million in the prior year quarter. Adjusted EBITDA margin of 42.4% increased 860 basis points compared to the first quarter of 2022.

First quarter gross profit increased 78.6% to $107.8 million, representing a record 53.2% gross margin. This compares to gross profit of $60.3 million, representing a 44.8% gross margin in the prior year quarter. Our significant improvement in margin mainly reflected operating leverage on higher sales, favorable pricing dynamics and greater operating efficiencies, partly due to prior automation initiatives. SG&A was $34.1 million compared to $26.4 million in the prior year quarter, with the majority of the increase attributable to higher shipping and commission expenses as a result of higher sales volume. As well as a higher provision for bad debt expenses and incremental marketing and administrative costs associated with the expansion of our new showrooms.

As a percentage of total revenue, SG&A for the first quarter improved 280 basis points to 16.8%. Now looking at our improved balance sheet and leverage on Slide 11. In the first quarter, we built on our solid track record of cash flow generation, with operating cash flow of $43.1 million. This has left us with significant financial flexibility to drive additional value in our business, giving us the ability to reinvest in growth CapEx into our operations in anticipation of higher levels of demand in the future. At quarter end, our leverage ratio once again improved to a new record low of 0.1x net debt to LTM adjusted EBITDA, down from 0.6x in the prior year quarter. As of March 31, we had a cash balance of $128.5 million and availability under our committed revolving credit facilities of $170 million, resulting in total liquidity of approximately $300 million.

Turning to our structurally improved margins and cash generation on Slide #12, the significant improvements in our gross margin are mainly attributable to the themes that we’ve highlighted in recent calls. Namely, the structural and sustainable operational improvements related to automation initiatives in our shift in business strategy to further penetrate into the more profitable single-family residential end market, where we do not carry out lower margin installation work. Additionally, our operating leverage on higher revenues has more than offset depreciation, labor and other indirect manufacturing costs, further bolstering our profitability. Taking these factors into account, we now expect our gross margin to normalize in the 50% range for the full year 2023 based on our current expected mix of commercial versus residential revenue.

Our impressive cash generation has benefited from our careful working capital management, reduced interest expense and a more favorable mix of revenues, providing us with financial flexibility to drive additional shareholder value through the 20% increase to our dividend in March as well as the funding of our investments to increase production capacity by over 35% by the end of the second quarter of 2023, which are being financed entirely by our operating cash flow generation. While we continue to anticipate strong cash flow for the full year 2023, cash flow from operations is expected to trend down in the second and third quarters of 2023, given the timing of 2022 income tax payments in the U.S. and Colombia. Now on Slide 13, I would like to highlight our strong returns.

Since becoming a public company, Tecnoglass has been focused on making accretive investments with our returns-oriented mindset. This is evident in the value we have created for our shareholders through our return on equity and return on invested capital. As evidenced by the charts on this slide, the stronger profitability and meaningful step-up in cash flow has driven significant average returns over the past 3 years. And when comparing our ROE and ROIC metrics to those U.S. building product peers, the returns of our investments into our business have driven substantially higher value to our shareholders, further validating our strategic approach to drive their returns. As you can see on Slide 15, the upward trajectory of our revenue and adjusted EBITDA remains positive, and there is a lot of runway for growth with the additional capacity slated to come online by the end of the second quarter.

We are as confident as ever in our ability to achieve many years of exceptional growth. Now moving to our outlook on Slide 16. Based on our strong results in the first quarter and positive momentum into the second quarter, including record invoicing months in March and April, we are increasing our full year 2023 outlook for revenues and adjusted EBITDA growth. We now expect full year 2023 revenues to be in the range of $810 million to $850 million. This outlook represents an organic growth of 16% at the midpoint. Based on this sales outlook, our anticipated mix of revenues and our expectations for cost and expenses, we expect full year adjusted EBITDA to be in the range of $315 million to $335 million, representing a 23% growth at the midpoint of the range.

We expect gross margins to be in the 50% range for 2023, mainly attributable to strong operating leverage on higher sales, structural advantages from our vertically-integrated operations and favorable pricing and revenue mix. In closing, we are very pleased with the momentum in our business. Our high-return investments, vertically-integrated low-cost operations, growing portfolio of best-in-class products and conservative balance sheet positions Tecnoglass well to deliver another year of above-market growth in 2023, while maintaining our industry-leading margins and superb operating cash flow generation. With that, we will be happy to answer your questions. Operator, please open the floor for questions.

Q&A Session

Operator: Yes. Thank you. And the first question comes from Julio Romero with Sidoti & Company.

Julio Romero: Thanks. Hey, good morning, José Manuel, Chris and Santiago. I wanted to start on the sales growth in the first quarter, really solid on the commercial construction side. And Christian, you talked about the project pipeline and the backlog starting to grow out to even 2025. If you could just talk about what type of projects are driving the commercial demand, maybe what geographies in the commercial side are driving the orders?

José Manuel Daes: Hi, Julio, José here. We have a lot of high-rises and mid-rises in Miami, very broad Palm Beach county, also in the temporary area, they are booming. It’s unbelievable the amount of people moving to Florida. So we see a strong growth in that sector. And also New York is speaking of, Boston is speaking of, especially universities, and no construction in New York for residential. So we believe ‘24 is going to be a stronger year for commercial and even our pipeline cost to ‘25.

Julio Romero: Okay. Got it. That’s very helpful. And then I just wanted to turn to the cash flow in the quarter. Really solid cash flow for the first quarter. But you talked about cash flow trending down in the second and third quarters. Any sense of how much the tax payment impact should be? And do you still expect positive cash flow from operations on an absolute basis?

Santiago Giraldo: Yes, absolutely positive cash flow from operations, Julio. The thing is that in both Colombia and the U.S., the timing of payments are April and July, and not so much in Q1. So there is a seasonal component to it. But it’s not going to be a drop where we’re going to be near – anywhere near not generating positive cash flow. I would estimate that a downtick maybe $10 million, $15 million for the quarter. So nothing dramatic.

Julio Romero: Got it. That’s really helpful. And then, this is the highest cash balance, it might be in company history for you guys. Does that sway you to be more aggressive with debt reduction or maybe building out capacity a little earlier than usual?

Santiago Giraldo: The buildout of the capacity is going to be determined by the pipeline. As you just heard José, the pipeline continues to be strong, and you can see how the backlog is growing. So throughout the year we’re certainly going to make decisions as to whether more capacity is needed down the road. As we have mentioned, by the end of the quarter will be north of $950 million, but if the pipeline continues to grow at this pace, I’m sure there is going to be more investments coming down the road. Debt repayment is also an option. We just increased our dividend. So we’re assessing all different avenues to return capital to shareholders and to reinvest in the business to continue supporting our growth.

Julio Romero: That’s helpful. Thanks very much. I will pass it on.

Operator: Thank you. And the next question comes from Brent Thielman with D. A. Davidson.

Brent Thielman: Hey, thanks. Good morning. Congrats on a really great quarter and outlook. Santiago, I guess, just thanks for the update on the gross margin. It sounds like you think it’s going to normalize in the 50% range this year. Just wanted to get your thoughts on kind of the appropriate long-term gross margin range for the company, at least for us to think about, I guess, looking beyond this year, obviously, very high level, what we’re going to see here in 2023?

Santiago Giraldo: Yes. Good morning, Brent. And what’s going to be driving gross margins upwards beyond the level that we have guided to is going to be the operating leverage. We were able to gain about 300 basis points of operating leverage on a gross margin perspective quarter-over-quarter. So that continues to be a tailwind to gross margins. Some of it is coming from pricing but obviously, we adjusted pricing in Q2 of last year. So from a comparable basis, that will not continue to be the case going forward. So anything above what we’re doing is going to come from operating leverage and further automation. I think we – over time, we can still gain maybe another 100 bps, 150 bps depending on the level of operating leverage that we can get.

But we’ve been pleasantly surprised over the last couple of quarters, obviously, more to come, but the expectation is that we will be able to sustain what we’ve been doing and depending on operating leverage, hopefully, gaining a little bit more.

Brent Thielman: Okay, really helpful. I was wondering if you could talk about – a little more about the Wells Fargo partnership, that’s really interesting, obviously early to talk about financial implications. But maybe you could help us think about how this expands your total addressable market from where you are, I guess, previously the – what this opens it up for you going forward?

Santiago Giraldo: Yes, absolutely. We were very excited to sign that agreement with them, a very large financial partner that has a presence nationwide, which bodes very well with our expansion strategy into different markets. And we think it’s certainly going to help sales over time. We have already signed several dealers into the program in these early stages. And clearly, we feel that it’s going to help out and clients to finance windows – a very low finance rates even in an environment where interest rates are high, we’re being able to provide very competitive rates for end clients. So I think over time, it’s going to be quite a bit of a tailwind to revenues once it gets going. But as you mentioned, it’s clearly in the early stages still, but the early signs are encouraging.

Brent Thielman: Okay. Really interesting. Lastly, I was just looking at the map on Slide 6, I mean Florida has been obviously a huge driver for your single-family business. But I guess I want to get your – maybe an update just on your progress in Texas, which seems like just sort of the next great opportunity for you and to the inroads you’re gaining there.

José Manuel Daes: Yes. We’re working on opening. We have already a partner in Texas, in Houston, but we’re working on opening also in three other cities, Austin, San Antonio and Dallas. And will be – by the end of the year we have full line of dealers and distributors in Texas. We’re also working in South Carolina, North Carolina and all the way up to New York. We’re very enthusiastic about our new lines going to other states.

Brent Thielman: Okay. Great. Thanks for taking the question. I will pass it on.

Santiago Giraldo: Thanks. Brent.

Operator: Thank you. And the next question comes from Alex Rygiel with B. Riley.

Alex Rygiel: Thank you very much. Now understanding that a very large portion of your residential business is in the R&R. But looking at the other segment as it relates to penetrating into national homebuilders, can you talk about some of the successes there and directionally, how that has grown over the last couple of quarters?

José Manuel Daes: Yes. We have four national builders that are buying and increasing their buys from us on a steady basis. And they have found that we have much better array of products, the performance of our windows is really good for them and their clients. And we keep gaining little by little in that sector. We are just now south of Orlando. And we are developing products to go off north to where there is no hurricane impact windows. We’re working on that. And we believe that’s going to be a change for the company with the homebuilders.

Santiago Giraldo: Just to add to that, Alex, just to give you some perspective. Q1, we were able to drive Multimax sales above $20 million for the quarter, which is a step up versus what we were doing. And I think with the incremental capacity that we have in place and that we have increased over the last few months, that’s only going to help out even more because now we can allocate capacity to both the legacy products as well as the Multimax line.

Alex Rygiel: That’s great. And then any update on the Saint Gobain glass plant and timing?

Santiago Giraldo: I’ll let Chris take that.

Chris Daes:

20-some percent:

Alex Rygiel: That’s great. Thank you very much. Nice quarter.

Santiago Giraldo: Thanks, Alex.

Chris Daes: Thank you.

Operator: Thank you. And the next question comes from Tim Wojs with Baird.

Tim Wojs: Hey, guys. Nice quarter.

Santiago Giraldo: Good morning, Tim.

Tim Wojs: Maybe just a modeling question, Santiago. Just if I take your adjusted EBITDA number for the first quarter and just kind of annualize it, I get to a number that’s kind of above your guidance. So I’m just trying to kind of understand what the puts and takes to that might be for the rest of the year?

Santiago Giraldo: So if you take the same kind of EBITDA that we did in Q1 throughout the year, you get to the higher end of the guidance. The biggest is what happens with kind of like the single-family orders in the second half of the year, because we already know that Q2 is coming strong, basically, and we said that April was a record invoicing month. So we already have the orders that will be invoiced over the course of Q2. The question comes as to what happens in Q3 and Q4. But what we’re baking in is essentially just kind of stable EBITDA for Q2 and Q3 against Q1 and then a seasonal step down in Q4. And that’s how you get to about $335 million.

Tim Wojs: Okay. Good. And then just from a capacity perspective, we’re adding the automation by the end of the second quarter. I mean, would that translate into more shipments in the back half of the year or do you think the revenue kind of trends similarly to what the EBITDA is trending?

Chris Daes: Well, the capacity will be there to even increase our sales above $950 million if we need to, but it all depends on how much we can sell. And my brother here will say – he’s saying that he’s going to sell a lot of it. So we’re hopeful that we will fill capacity again.

Santiago Giraldo: From a modeling perspective, Tim, again, Q2 and Q3 where our base case is that, there is a step up from Q1 in revenues in top line, and then a seasonal step down in Q4. But again, if resi outperforms our base case, then there is definitely upside on both metrics, top line and adjusted EBITDA.

Tim Wojs: And the resi base case is flat for the year?

Santiago Giraldo: Flat versus Q1?

Tim Wojs: Yes. I guess flat versus Q1, what is the base case for resi this year, I guess.

Santiago Giraldo: No. It’s higher than Q1. Remember that Q1 is a shorter quarter in the sense that we have 2 weeks in January where their scheduled maintenance in pretty much shut down, right? So there is a step-up in the base case in Q2 and Q3, and again, trending down seasonally in Q4.

Tim Wojs: Okay, good. Well, keep up the good work guys. Thank you.

Santiago Giraldo: Thanks, Tim.

Operator: Thank you. And this concludes question-and-answer session. I would like to return the call to José Manuel Daes for any closing comments.

José Manuel Daes: Okay. Thank you, everyone, for participating on today’s call. Keep tight, we will keep working hard to give you great news to all our shareholders. Thank you.

Operator: Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.