Tecnoglass Inc. (TGLS) Q2 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to the Tecnoglass Second Quarter 2022 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Brad Cray of Investor Relations. Please go ahead.

Thank you for joining us for Tecnoglass' Second Quarter 2022 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' current expectations or beliefs and are subject to uncertainty and changes in circumstances. Actual results may differ in a material nature from those expressed or implied by the statements herein, due to 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 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 number 4. José Manuel Daes: Thank you, Brad, and thank you everyone for participating on today's call. We were very pleased to end the first half of 2022 with record levels of revenue, gross profit, adjusted EBITDA and backlog. Our total revenues in the second quarter increased 39% year-over-year to $169.1 million, marking our fifth straight quarter of record revenues driven by our continued expansion in the single-family residential end market, accelerating growth in our commercial business. Our single-family residential business, which is mainly focused on remodel and renovation based projects, was up approximately 86% year-over-year, to a record $75.9 million, or 45% of total revenues. This achievement reflects the rapid expansion of this business in key US regions. Our track record of exceptional client service and unique product offerings have allowed us to continue to gain market share, with new and existing customers. Momentum in our results is also supported by accelerating activity in our commercial business, which we expect to continue for the foreseeable future. Building on our impressive sales performance, we produced another quarter of record adjusted EBITDA, while sustaining an industry-leading adjusted EBITDA margin in excess of 30%. Our disciplined cost control efforts product innovation, capacity enhancements, and higher mix of single-family residential revenues all contributed to this strong margin. The momentum in our results and established track record of exceptional cash flow, further validate Tecnoglass' unique vertically integrated business model. A strong cash flow has allowed us to deleverage our balance sheet to the lowest net debt to LTM, adjusted EBITDA ratio in the company's history at 0.5 times as of June. Additionally, given the strength of our business and cash flow, today we announced a 15% increase in our dividend to further boost capital returns to shareholders. Overall, we are proud of our entire team for their continued dedication to excellence and are excited by the trajectory of our business. Looking to the remainder of 2022, we are confident in our ability to achieve our increased guidance to deliver another year of record results. I will now turn the call over to Chris to provide additional details on our record backlog.

Thank you, José Manuel. Moving to our backlog on slide 5. Our second quarter results reflect a strong performance in our key US regions across our single family and multifamily residential work, in addition to an acceleration of activity on the commercial side of our business. We continue to see solid levels of quoting and bidding activity contribute to a record backlog, which was $668 million at quarter end representing a level that is 1.2 times our multi-family and commercial revenue over the past 12 months. Backlog increased 19.5% year-over-year, primarily due to an increasing number of project wins mostly in the attractive Southeastern US market. I am pleased to note that our shipments into mid to high-rise projects have enjoyed accelerating sequential growth in each month of this year. We expect this strong activity to continue and have already experienced another record month of invoicing in July. Our positive outlook is supported by the June ABI Index reading of 53.2, marking the 17th straight monthly reading in expansion territory. The ABI's multi-family shop index reading of 52.6 also supports the favorable trends we are seeing given two-third of our backlog is tied to multi-family residential. Our largest presence is in the Southeastern US, which is currently experiencing healthier activity than other markets. We are also experiencing additional tailwinds of Florida from the state's recent home hardening bill that makes impact-resistant windows and door more affordable by granting a two-year sales tax exemption. Furthermore, our track record of successfully delivering on high-profile multifamily projects has opened up an increasing number of opportunities across attractive US regions. We believe our customers view us as a supplier of choice given our ability to maintain timely deliveries that help keep large projects on schedule. I would like to remind everyone that single-family housing is underrepresented in our backlog because of the shorter-term spot duration of those projects. Therefore, a significant portion of our growth trajectory is not fully captured in our growing backlog of work. Santiago will provide more details on our single-family business in a moment. In summary, we are very pleased with our results to date this year. With our new and long-standing partnerships, our structural competitive advantages and our attractive geographic focus, we are able to continue growing organically while investing prudently in our operations. Our CapEx investments will allow us to end the year with installed capacity to invoice approximately $800 million of revenue. We anticipate this high return on invested capital CapEx will help us to service incremental demand effectively with a payback period of less than 12 to 15 months. These investments in combination with our performance in the single-family residential market continued to surpass our expectations and support our optimism for the quarters and the years ahead. I will now turn the call over to Santiago on Slide 6 to discuss our operations financial results and improve our outlook for the year.

Thank you, Christian. Our strong performance in the second quarter is a direct reflection of our ability to execute on our vertically integrated platform and leverage our strategic positioning in attractive geographies. We are providing exceptional service to our clients strengthening our customer relationships and winning new business. This is particularly evident in our single-family residential business in which we are gaining additional market share due to our ability to supply superior quality products at an attractive value with shorter lead times. We are extremely proud of our established track record of strong financial results, particularly as it relates to our single-family residential business, which saw an 86% year-over-year revenue increase in the second quarter. This business now represents 45% of our total revenues compared to 34% in the second quarter of 2021. Our increasing presence in the highly profitable end market has helped to create a step change in our profitability. A very important point I would like to highlight is that approximately 65% of our single-family residential revenues are tied to remodel and renovation projects that are not highly sensitive to mortgage rate fluctuations. We also see further market share upside through our expanding dealer base our geographic diversification in the Southeast and South Central US and the expansion in sales in our innovative Multimax line of products catering to the largely untapped opportunity with production homebuilders. These growth tailwinds are further supported by the secular trend of population migration into southern states where we have our most significant presence. Now on Slide 7, I would like to reiterate how our vertically integrated business model and strategically located operations are driving our success in the current tight supply and cost inflation environment. More specifically, the differentiating factors we see in our business are; number one, prior high return investments in plant automation and capacity upgrades; number two, stabilizing our cost through hedging on aluminum inputs and dependable supply of rock glass through our joint venture with Saint-Gobain; number three, being an employer of choice to maintain quality talent and low turnover in a labor market with ample talented supply; number four, keeping transportation costs at around 5% of revenues; and number five, 15% energy savings from green energy through our solar power and our cogeneration of power through on-site natural gas emissions. As evident in our results in the first half of the year our strategic investments continue to provide us with meaningful structural advantages over our peers. Our control over most of our value chain has allowed us to quote more projects and deliver products with shorter lead times. Now turning to the drivers of revenue on slide number 9. Total revenues increased 38.9% year-over-year to a record $169.1 million for the second quarter. This increase was driven by strong growth in single-family residential activity, market share gains and the ongoing ramp-up of our commercial projects. As Chris mentioned, our commercial construction revenues saw sequential growth each month year-to-date through the second quarter. As a reminder, we completed the acquisition of Ventanas Solar during the fourth quarter of 2021, a Panama domiciled company that served exclusively as an importer and distributor of Tecnoglass products in the country of Pasnama. After eliminating inter-company sales, Ventanas Solar contributed revenues of approximately $2.2 million to our full year 2021 revenue. Our results for 2021 have been adjusted to reflect the retroactive recasting of results in line with ASC 805-50 to account for the consolidation of acquisitions under common control. Looking at the drivers of adjusted EBITDA on slide number 10. Adjusted EBITDA for the second quarter 2022 increased 51.7% to a quarterly record of $54.6 million, compared to $36 million in the prior year quarter. Adjusted EBITDA margin of 32.3% increased 280 basis points, compared to the second quarter of 2021. Second quarter gross profit grew 49.9% to $73.6 million, representing a 43.5% gross margin. This compares to gross profit of $49.1 million, representing a 40.4% gross margin in the prior year quarter. Our 310 basis point improvement in margin, mainly reflected higher sales, greater operating efficiencies related to automation and a higher mix of revenue from manufacturing versus installation activity due to an increase in the mix of our single-family residential products where we do not perform installation. SG&A as a percentage of total revenues improved to 16.6%, compared to 16.7% in the prior year quarter, primarily due to higher sales and better operating leverage on personnel, professional fees and other fixed expenses, more than offsetting higher shipping rates and certain nonrecurring expenses related to professional and accounting fees. Now looking at our improved balance sheet and leverage on slide number 11. Our exceptional track record of cash flow generation continued into the second quarter with operating cash flow of $35.9 million. This cash generation along with the prudent actions we've taken over the past several quarters to strengthen our balance sheet have given us financial flexibility to reinvest in growth CapEx to prepare for future demand as evidenced by our increasing backlog. We have also improved our leverage ratio to a record low of 0.5 times net debt to LTM adjusted EBITDA at quarter end, down from 1.1 times in the second quarter of last year. At quarter end, we had a cash balance of approximately $98.6 million and availability under our committed revolving credit facility of $170 million, resulting in total liquidity of approximately $269 million. Based on a record of exceptional financial performance in May 2022, we amended our credit agreement with our syndicate of banks. The main change from this amendment removed the previous cap on deployable capital as long as we keep our leverage ratio under 1.5 times net debt to LTM adjusted EBITDA. This provides us with additional flexibility in our capital allocation opportunities. I'd now like to highlight the progress of our strengthened gross margin and cash flow generation on slide number 12. The step change in our gross margin performance has been driven by the structural and sustainable operational improvements related to automation initiatives and our further expansion into the single-family residential end market where we do not carry out lower margin installation work. As our revenues grow, so too does the operating leverage on fixed and semi-fixed costs, such as depreciation, labor and manufacturing overhead. Taking these factors into account, we continue to expect our gross margins to normalize in the low to mid-40s for 2022, compared to 32% for the full year 2019. Our operational improvements have also benefited our cash flow generation. Increased profitability, better working capital management, reduced interest expenses and a more favorable mix of revenues have all contributed to our strong record of cash flow generation given the structural transformative nature of these enhancements giving us significant financial flexibility to execute growth and value creation, including the 15% increase to our dividend that was announced today. Moving to our outlook on Slide number 14. Based on the strong momentum in our business in the first half of 2022 and our growing project pipeline, we are increasing our full year 2022 outlook for revenue and adjusted EBITDA growth. We now expect full year 2022 revenue to be in the range of $620 million to $640 million. This outlook represents growth of 27% at the midpoint led by single-family residential. Based on this sales outlook and anticipated mix of revenues, we now expect full year adjusted EBITDA to be in the range of $208 million to $220 million, representing 44% growth at the midpoint of the range. As I mentioned earlier, gross margins are expected to normalize in the low to mid-40s range for 2022, mainly attributable to the structural advantages, vertically integrated operations and higher mix of product versus installation revenue. We reiterate our expectations for a strong cash flow from operations to fuel the tail end of our most recent automation investments as well as other investments in our business. To that end, we expect to deliver another strong cash flow year, which will further position us to deliver on our long-term growth strategy. Our growth CapEx investments are on pace to provide a new install capacity of over $800 million by year-end. Overall, we are extremely pleased with our exceptional performance in the first half of 2022. Our strong year-to-date results puts us on track to deliver another year of double-digit growth in sales and adjusted EBITDA as we leverage our unique vertically integrated platform to capitalize on the many positive catalysts outlined on today's call. We are confident in the direction of our business, and look forward to executing further on strategic objectives in 2022 and beyond. With that, we will be happy to answer your questions. Operator, please open the line for questions.

Thank you. [Operator Instructions] And the first question is coming from Alex Rygiel from B. Riley. Alex, your line is live.

Thank you for taking my question, and gentlemen congratulations on another fantastic quarter. A couple of questions here. First, your margin expansion has been fantastic. Can you talk a little bit about some of the inflationary pressures that are developing? I understand you mentioned a number of different controls that you have in place that are managing that inflation. But if you could talk to a little bit of that inflationary pressure, and how you see it progressing over the coming kind of 12 months that would be helpful.

Thanks Alex. We see it normalizing. And I think we've talked about this in the past that we have been somewhat insulated from some of the same pressures given our vertically integrated process, our joint venture with Saint-Gobain to provide glass, being able to hedge aluminum at reasonable pricing, not having the same labor constraints as some of our peers in the US where labor force is tight versus Colombia where you have an unemployment rate of 11%. And we have very little turnover. So I think the dynamics are significantly different and that's also helping us with lead times maintaining lead times at pre-COVID levels, right? So I think it's a combination of factors that puts us in a different position. We are seeing things normalizing or getting back to some type of normal type world. So we don't expect -- in what we're baking in for the rest of the year, we're not expecting headwinds associated with inflation given our structural position and what we're seeing from a macro perspective.

Very, very helpful. And then, as it relates to your residential business, what do you think some of the primary reasons for your market share gains have been? And clearly the residential housing market in the US and certain geographies has softened a bit here because of higher interest rates. Do you think your market share gains are sustainable and can continue to grow even in a more challenged housing market?

I'll let José take that one. José Manuel Daes: Yes, I believe so. I believe that we can keep growing. I mean first of all, let me tell you, there is a lot of market. Every competitor of ours is growing. The market is growing by itself. We are outpacing everybody else, because we have a better window. We have a better package. And I believe the whole concept of the many products that we have is getting to the marketplace very nice. And everybody is adapting to it and they like it. I mean today, a lot of people call us to open their accounts. We don't have to start chasing new accounts. They come to us.

That's great to hear. Nice quarter gentlemen. Keep it up.

Thanks Alex. Talk soon.

Thank you. The next question is coming from Zane Karimi from D.A. Davidson. Zane, your line is live.

Hey. Good morning, gentlemen and congratulations on the strong results.

Good morning. José Manuel Daes: Thank you.

So, I understand that the outlook implies low to mid-40 margins. But what would cause the gross margin to fall below your 40% target at this point?

I think the main variable Zane is the mix of the business. As we have discussed in the past the more that we penetrate the residential segment, the more accretive to margins that is, given the fact that we don't perform installation services on that segment. So I would say that that's the main variable that could potentially shift anything or derail what we are projecting. To the contrary, if we outperform on revenue, we do expect to get operating leverage on the business. So I would say, at the end of the day, that would be the main two considerations, whether we're able to hit our revenue target, which we're very confident on and what kind of mix of business we end up with.

Okay. Thank you for that. And on the flip side, your backlog has been heavily focused in the Southeast. Are you seeing more markets open up outside of this core territory?

I’ll let José to take. José Manuel Daes: Yes. We are penetrating the Northeast very nicely and we plan to expand our residential to all the Northeast. We're finishing the design of a whole new line of windows with different requirements firmly and we plan to expand to the West too. I mean slowly but surely. You don't want to grow too much too soon, but you don't want to be too slow either. So, we're doing our job. We're doing good.

Yes. Thank you for that. And last one for me. You guys have done a really good job managing cost volatility. But what are you seeing in terms of the availability of materials such as aluminum? And how has that become more challenging?

No. We think that we are vertically integrated and we have very good suppliers. We have a very stable situation right now. We had a lot of movement between February and June, but July was very smooth and is looking better for the rest of the year from now on. So we are getting the company ready to sell $100 million catalog next year.

That’s great. Thank you guys so much for the time.

All right, Zane. Talk soon.

Talk soon.

Thank you. The next question is coming from Julio Romero from Sidoti. Julio, your line is live.

Hey. Good morning, guys. Thanks for taking the questions. José Manuel Daes: Good morning.

Hey, Julio.

Hey. So just staying on the residential side, your growth runway in new residential, given how small those sales dollars are, I mean your growth runway of like gaining share with the homebuilders and increasing that that shouldn't really change much with rising rates. I mean I would think you're a little bit more immune to the market relative to others? Is that kind of a fair characterization? José Manuel Daes: I believe so. I agree with you. Yes. Like Santiago said in the presentation, we are more in the R&R replace and remodel. And I mean I see a strong growth, especially in Florida, because the Governor gave an exemption to the tax, 7% tax for the next two years. A lot of people are jumping into changing their windows. And I mean, we've seen no recession so far. We're doing really good.

It's important to highlight, Julio that I think sometimes people get the wrong impression that we're heavily tied to new home construction and that's not the case. That's why we wanted to highlight the percentage of R&R business as José mentioned, which is obviously not as closely correlated to higher mortgage rates.

Yes. No absolutely. But one key driver I mean other than the market is just like your lead times, right relative to your competition. How are those trending these days both on an absolute basis and maybe relative to others?

Well, mainly the majority of the business that we are doing we are able to deliver within seven to eight weeks maximum. That's 99 – 95% of what we do. On the commercial side, we get the plan to deliver ahead of time. So we can plan for it. Deliveries are mainly on time, thank God. We are outperforming, growing production. This month of August, we started two new lines of windows and we plan to keep growing all year on all 2023 and 2024.

Okay. Great. And then last one for me is just a little more of a broader question but we're about 1.5 months post the Colombian presidential election. Any change to the operating environment at all, or any change you expect going forward for you guys? José Manuel Daes: Go ahead Christian.

We don't expect much to change. The new president has said that he's looking to keep companies very profitable that we are at the heart of the economy. It's politics and we try to stay away from it but we are not worried about the political situation in Colombia as of today. So we see a good future ahead. That's why we keep expanding. That's why we're spending CapEx this year because we want to make sure that with endowment we get ready for the 30% increase that we plan or that we want to grow next year. Obviously, it's too early to say how much we will grow next year but we will have the capacity install. So if we get to grow 30% we can deliver the products on time.

Just to add to that Julio, from a macro perspective, a couple of things under this new presidential regime. Number one, the fiscal reform that they're intending to pass is actually going to increase taxes at the personal level but they're talking about actually reducing taxation for corporates. So that's a net positive. We'll see what comes out of that. And number two, since the new regime was announced, the peso has actually devaluated, about 5%, which on a net basis, given our cost structure is a net positive for the company. So we have not seen any potential impacts, negative impacts as a result of the new administration.

Okay. Thanks very much. I’ll pass it on. José Manuel Daes: Thank you.

[Operator Instructions] The next question is coming from Josh Chan from Baird. Josh, your line is live.

Hi. Good morning. Congrats on a good quarter. José Manuel Daes: Good morning, Josh.

Good morning. I guess, maybe turning to the nonresidential business, which also had a very good result this quarter. I guess are you seeing that the projects in the pipeline start to come through post COVID? And then could you talk about, what you see in terms of project timing on the nonres side over the next couple of quarters? José Manuel Daes: Well, what we see is a very strong growth in commercial projects. Miami, is booming. I mean there is a lot of companies moving to Miami, that requires a lot of office space. It requires a lot of apartments for the people who move here to work here. And the strength of the market is there. The projects are not being delayed. On the contrary, sales are strong for them. We talk to them all the time and to the developers. And we're very excited and happy. We have a huge backlog growing and growing by the day, because of no closures.

That's, great to hear. And then on the backlog point, I know that your backlog continues to grow. Could you talk about kind of the activity that happens, before the backlog? How is quoting activity? How's sort of the initial indication of interest, as we think about kind of the macro environment? Thank you. José Manuel Daes: Well, we have to hire a few more people in the quoting department, because we are overwhelmed with quotes. And not only in Southeast Florida, I mean everywhere. I mean Tampa, is going to be double the size in the next five years. And also in the Northeast, I mean Massachusetts, I mean most particularly New York. New York, is coming back strong. So we don't see any slowdown. I mean, I believe this time, there's going to be a soft landing to the economy, which is necessary because of the high inflation, which is pressuring the middle class. But it's not going to be like the last time, because the last time the fundamentals were wrong. I mean all the mortgages were flat. This time it's just too much money in the market. And with the higher rates, things are coming down to where they should be.

Thank you very and good luck for the second half. José Manuel Daes: Thanks, Josh Chan.

Thank you. And that's all the questions, we had in queue at this time. I would now like to hand the call back to José Manuel, for closing remarks. José Manuel Daes: Okay. Thanks, everyone for being on the call. We'll keep working hard to please our shareholders and to keep the good news coming. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.