Tecnoglass Inc. Q4 FY2022 Earnings Call

Thank you for joining us for Tecnoglass' Fourth Quarter and Full Year 2022 Conference Call. A copy of the 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, Jose 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 Jose Manuel, beginning on Slide number four.

Thank you, Brad, and thank you, everyone, for participating on today's call. 2022 was a phenomenal year for Tecnoglass. We are extremely pleased with our performance and the talented group of people at this company. We achieved eight straight quarters of strong double-digit organic revenue growth. We see record results in each quarter as we continue to outperform our end markets even during this uncertain time for the industry. This outperformance was driven by several factors. The focused execution of our dedicated team members, capitalizing on rebounding commercial activity and solid demand for our innovative single-family residential products, of which our sales almost doubled for the full year. This impressive performance has been supported by traction with new and existing customers, given our commitment to exceptional service as well as our focus on deepening our presence in attractive markets, especially in the Southeast U.S. Our continued success is also supported by our vertically integrated business model. This has allowed us to minimize the impact of supply chain constraints and inflationary pressures to our business. We can deliver products with lead times that we believe are well below industry average. This is evident in our record gross margin performance during the full year, which increased 800 basis points to 48.8%. Furthermore, we produced record full year adjusted EBITDA of $266 million at a margin of 27.1%. Our industry-leading margins are partly attributed to our continuous focus on implementing creative automation and capacity investments, which have allowed us to realize immense operational efficiencies in our business. Additionally, we continue to get the strong operating leverage on our growth with positive revenue mix and pricing dynamics. Furthermore, our strong margin performance improved the working capital management allowed us to achieve another year of record cash flow generation. The exceptional cash flow profile we have built up over the past several years has provided us with a lot of financial flexibility to invest in our business. We have voluntarily paid down debt and further improve our net leverage ratio to a very conservative 0.2 times net debt to adjusted EBITDA at year-end. Our cash generation capabilities and the strong balance sheet have also allowed us to create value for our shareholders through our increased dividend and additional investments in automation and capacity our plans. This has significantly enhanced our ability to meet the high levels of demand for our products, as indicated by our growing backlog. In summary, we are thrilled with the direction of our business. We entered 2023 as a much stronger company, supported by a record backlog and improved cash flow position. We have further extended our leadership position in the architectural glass industry. As we look forward, we will continue to leverage Tecnoglass' vertically integrated platform, strategic geographical positioning and proven growth investments to maintain our industry-leading margins, gaining additional market share and create additional value for all our stakeholders. I will now turn the call over to Chris to provide additional details on our record backlog.

Thank you, Jose Manuel. Moving to our backlog on slide six. Our business prospects remain strong heading into 2023. This is reinforced by our growing backlog which rose approximately 24% year-over-year to a record $725 million in the fourth quarter despite a 44% increase in invoicing year-over-year. We were also pleased to see positive overall quoting and bidding activity through the fourth quarter, which has remained healthy into the first quarter of this year. As a quick reminder, approximately two-thirds of our backlog is composed of medium- and high-rise residential buildings, while one third is related to a wide variety of commercial projects. Our single-family residential growth trajectory is not fully captured in our backlog, given the shorter-term spot duration of projects. Our resilient performance above market growth and record backlog continued to be driven by our reputation for exceptional service, innovative product offerings, and reliable lead times that allow us to deliver higher quality products to our customers in a timely manner and at an attractive value. Our track record of exceeding expectations on high-profile projects and maintaining consistent lead time has opened up an increasing number of opportunities across the U.S. While elevated interest rates remain a headwind to overall construction market activity, we are in a good spot because we are gaining share in our markets, and our markets are growing faster than the U.S. average. Secular and demographic trends continue to favor the Southeast and South Central U.S., where we have our largest presence. This is fueling our backlog growth. We are focused on penetrating attractive and economically sound geographies. This has allowed us to capitalize on strong high-rise demand and win market share in single-family residential, which mostly consists of relatively resilient repair and remodel projects that don't carry a high correlation with interest and mortgage rates. Overall, we are encouraged by our significant accomplishments during 2022 and continued momentum across our end markets so far in 2023. As we look ahead, we aim to deepen our presence and gain further share in the attractive Southeast U.S. single-family residential end market, but also to expand geographically by continuing to open showrooms and signing new dealers across the country. The expansion of our revolutionary Multimax power line, which targets production homebuilders is also gaining steam. Our latest automation and capacity enhancement initiatives are on track to increase our installed production capacity to an output equivalent to approximately $950 million of annual sales by the end of the second quarter of 2023. We are already seeing the benefit of that. We ended the year with production capacity equivalent to $800 million of annual sales, and we are already progressively increasing such capacity during this quarter on our way to that $950 million capacity target. These investments will allow us to not only serve our customers better, but we also position us well to meet the higher demand from both existing and new customers. We remain highly optimistic about the future of Tecnoglass given our proven track record to reinvest in our business and leverage our innovative product portfolio to win new customers and enter new geographies. I will now turn the call over to Santiago to discuss our operations, financial results and solid outlook for 2023.

Thank you, Christian. Turning to slide number seven. We are very pleased with our record fourth quarter and full year 2022 results, which reflects above-market performance attributable to the resiliency of our business model and previously implemented high-return automation and capacity intentions. Our focused efforts to further penetrate the single-family residential market drove fourth quarter and full year 2022 single-family residential revenues, up by 59% and 73%, respectively. This accounted for approximately 43% of total revenues in 2022, compared to only 3% in 2017. Our continued expansion and success in single-family relates to the quality of our products, consistently low lead times and competitive pricing. It is also important to reiterate that approximately two-thirds of our single-family residential revenues are tied to repair and remodel demand, which has remained relatively resilient in our markets and for our products despite higher interest rates and pressure in natural construction activity more broadly. Tailwinds related to tax and insurance incentives are also helping fuel the continued demand in our main markets. We're also seeing growth from traction with new product offerings, including our Multimax product line and innovative, brand-new, high-end blast garage door that we have just introduced. Looking ahead, we continue to expect additional upside to our single-family revenues. We are growing our dealer base and expanding geographically within the Southeast and South Central U.S. We are also introducing more products and opening new showrooms in attractive geographies, where we believe we have the opportunity to gain market share, including New York City and Charleston, South Carolina, which are already operational. Others in Texas, Arizona, and California are planned for the rest of the year. Now on slide 8. I would like to reiterate several key competitive advantages unique to Tecnoglass that are supporting our success in the still-high supply and dynamic cost environment. More specifically, the differentiating factors benefiting our business are: Number one, high return investments in plant automation and capacity upgrades; number two, stabilizing our cost through hedging on aluminum inputs and dependable supply of world glass through our joint venture; number three, a 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 at around 5% to 6% of revenues; and number five, 15% energy savings from green energy, including solar power and cogeneration of power to on-site natural gas. Turning to the drivers of revenue on Slide number 10. Total revenues increased 60.2% year-over-year to a record $211.1 million for the fourth quarter and 44.2% year-over-year to a record $716.6 million for the full year 2022, attributable to a strong rebound in commercial activity, growing demand for our single-family residential products, and market share gains. Importantly, I would like to highlight that our commercial construction revenues grew sequentially in each quarter of 2022 and continues to experience momentum into 2023. Looking at the drivers of adjusted EBITDA on Slide 11. Adjusted EBITDA for the fourth quarter 2022 more than doubled to a quarterly record of $87.2 million, representing an adjusted EBITDA margin of 41.3%. Adjusted EBITDA for the full year increased 76.8% year-over-year to a record $265.7 million, representing a margin of 37.1%. We produced another record fourth quarter and full year gross profit on both a dollar and margin basis. Our gross profit for the quarter nearly doubled year-over-year to $110.2 million, representing a gross margin of 52.2% compared to a gross margin of 42.9% in the prior year quarter. The 930 basis point improvement in margin mainly reflected operating leverage on higher sales, favorable pricing dynamics, greater operating efficiencies related to automation, and a favorable FX trend given the recent depreciation of the Colombian peso. This strong fourth quarter performance contributed to a year of record full year gross profit, including 800 basis points of margin expansion to a new record full year gross margin of 48.8%. Higher nominal SG&A for the quarter and year mainly reflected higher shipping expenses as a result of a higher sales volume, higher shipping rates, and a higher mix of sales going into the more fragmented single-family residential channel due to the scattered nature of job sites. As a percentage of total revenues, SG&A for the fourth quarter improved 220 basis points to 15.8%. For the full year, SG&A as a percentage of total revenues was 17.2% and flat compared to the prior year, which was impacted by nonrecurring professional fees at the beginning of the year and a settlement agreement charge during the third quarter. Now looking at our improved balance sheet and leverage on Slide number 12. Our exceptional track record of cash flow generation continues into 2022, during which we generated operating cash flow of $141.9 million. This impressive cash generation has provided us with flexibility to drive additional shareholder value through the significant growth investments we've made in our operations. At year-end, our leverage ratio, once again, improved to a new record low of 0.2 times net debt to LTM adjusted EBITDA, down from 0.8 times at the end of 2021. As of December 31, we had a cash balance of $103.7 million and availability under our committed revolving credit facilities of $170 million, resulting in total liquidity of approximately $270 million. Turning to our structurally improved margins and cash generation on Slide number 13. The step-up in our gross margin is directly related to the structural and sustainable operational improvements we've made in our business through our high-return automation initiatives as well as a higher portion of revenues in single-family residential, which is more accretive to margins given the higher mix of manufacturing revenues versus lower margin work. Additionally, we continue to experience the benefits of operating leverage from our higher revenues on fixed and semi-fixed costs, which has more than offset higher depreciation, labor, and other indirect manufacturing costs. We expect our gross margins to normalize in the high 40s range for the full year 2023 based on our current expected mix of commercial versus residential revenues. The substantial improvement in our cash flow generation capabilities is a direct result of our tight working capital management, reduced interest expense from our recent efforts to strengthen our balance sheet and a more favorable mix of revenues from the single-family residential end market, which includes upfront payments and shorter sales cycles with no repayment. We have also significantly reduced our days sales outstanding, driven by our improved collection efforts and the benefits from our higher mix of single-family residential revenues as discussed. Our impressive cash generation has provided us with financial flexibility to drive additional value for our shareholders through the 15% increase to our dividend in November and the funding of our investments to increase production capacity by over 35% by the end of the second quarter of 2023, compared to the end of 2021. Overall, we are very pleased with all of our efforts to enhance our cash generation capabilities, which, in turn, has provided us with multiple networks to create additional value in our company. Based on our structurally improved operations and ongoing value-enhancing initiatives, we expect strong cash flow for the full year 2023, which we expect to be backloaded based on the timing of tax payments for our Colombian subsidiaries. Before we turn to our outlook, I would like to take a moment to discuss the evolution of our revenue and adjusted EBITDA on Slide number 15. Since becoming a public company in 2013, our top and bottom line results have grown tremendously, particularly in the past years as we have realized the benefits of prior accretive growth investments in addition to momentum in our single-family residential business. Our focused penetration into this market through an expanded sales force and track record of successfully delivering on high-profile projects and maintaining superb lead times helped drive our significant growth over the past few years. Our innovative product portfolio, strong industry relationships and structural competitive advantages have also allowed us to capitalize on solid commercial activity, which is reflected in our expanding backlog of multifamily and commercial projects. As we move to 2023, we are confident in achieving another year of exceptional growth. Now moving to our outlook on Slide number 16. Based on the positive momentum in our business throughout 2022 and a solid start in the first quarter of 2023, we are confident in our ability to achieve another year of record growth in revenue and adjusted EBITDA for the full year 2023. We are introducing our outlook for full year 2023 revenue to be in the range of $790 million to $830 million. This outlook represents organic growth of 13% at the midpoint. Based on this sales outlook, our anticipated mix of revenues, and our expectations for costs and expenses, we expect full year adjusted EBITDA to be in the range of $300 million to $320 million, representing a 70% growth at the midpoint of the range. We expect gross margins to be in the high 40s range for 2023, mainly attributable to operating leverage on higher sales, structural advantages from our vertically integrated operations, partially offset by an increase in the mix of installation versus product revenue for the year. In summary, 2022 was another transformative year for Tecnoglass. We continue to outperform within our industry and offset headwinds from macro pressures through a highly efficient cost structure, targeted investments, and strategic geographic positioning in attractive markets. As we move to 2023, we believe we are well positioned as an industry leader in architectural glass with a high cash flow generating profile and multiple avenues to drive additional value in our business. With that, we will be happy to answer your questions.

Our first question today is coming from Brent Thielman of D.A. Davidson.

This is John for Brent. Just regarding your backlog, can you discuss the sequencing of the burn in backlog over the next few years? And how much do you expect to deliver in 2023 versus the out years?

The expectation is for the backlog to continue growing. So when you're talking about backlog burn, we don't expect the backlog to decrease from what we're projecting for revenues. And that's based on what we're seeing still on the commercial front, mainly because, as you know, the backlog doesn't capture much of the single-family residential segment. So yes, right now, what we're seeing in the pipeline, we're actually signing more into the backlog than what we're invoicing.

Okay. And can you remind us of the status of your repurchase program? What's the remaining availability?

I mean, it's open-ended. It didn't have a specific time in place. So we're evaluating all avenues to return cash to shareholders on an ongoing basis. So it remains open, and the board will analyze it as we go. Clearly, as we are able to produce more cash flow, different avenues to return cash to shareholders become more and more available. So we'll analyze it as we go.

The next question is coming from Sam Darkatsh of Raymond James.

A couple of questions, if I might. You mentioned the strong invoicing continuing in the first quarter here. Based on the fact that I guess you're temporarily still out of capacity, any reason to think why the first quarter sales, gross margin, and EBITDA wouldn't look very similar to Q4?

No. Typically, Q1 is very similar to Q4 from a seasonal perspective. And as far as installed capacity is building up gradually. So from where we were at, at the end of '22, we have put in place incremental capacity as of today. So...

However, it is important to note that we will be closed for winter vacations until January 11th. February is a shorter month with only 28 days, and we will be closed for three days due to Carnival. We believe we can still achieve a strong quarter, and that is our expectation.

Got you. And then related to that, you did come in better than you expected as of the initial part of December. Was that due to less maintenance shutdown than you were anticipating? Or what was the variance caused by, Santiago?

Two factors there, Sam, mainly. One, FX helped when we are reguiding in December 1. Since then, there was a slight devaluation of the peso. So that basically was not baked into that projection at that point in time. And secondly, we did work a handful of extra dates given the year-end demand. So yes, your intuition is right. We actually ended up having less of a shutdown as originally expected.

Got you. And then my final question before I hop back into the queue here. Can you help with what your specific assumption is for single-family residential sales or sales growth in fiscal '23? And then what is your market expectation that informs that goal?

Yes. So essentially, it's kind of slightly higher than Q4, if you kind of do the math, and that gets you to between 10% to 15%, depending on where you are in the range. And that comes from different avenues, right? We're much more exposed to repair and remodeling. So we continue to be confident that we can continue to outperform there, and then you have the geographical expansion that is taking place. So that's what we baked into these assumptions.

The next question is coming from Tim Wojs of Baird.

I've got a couple of bigger picture ones and then a specific one. But I guess, bigger picture. So you talked about just your lead times and service really driving expanded relationships. Is there any way to kind of, I guess, expand upon that, maybe what the backlog composition looks like from maybe new customers you've added over the last two to three years versus maybe legacy customers? Just trying to get a flavor for like how much of the growth is being driven by new relationships versus legacy ones?

This is Jose. We've been growing in both ways with existing customers because the customers are more than happy with the program change. And we are bringing in new customers as we expand to the northeast and west. We believe we can keep increasing the volume in that way. Our residential side is growing and also the commercial side is growing tremendously in South Florida. I mean, from Tampa down the commercial side.

I will follow up with you on that. From a capacity standpoint, I understand this may be more theoretical, but you are still investing in automation to expand capacity this year. If your business continues at this pace, when do you anticipate needing to add capacity again? Would this be an annual occurrence? Also, what are the current lead times for the equipment?

Well, Jose doesn't let me talk too much about the capacity. We do have enough capacity built up now to grow 30%, 40% a year, and we keep adding new capacity and new businesses. We will be coming up shortly with some good announcements on new products that we're going to build. This is all being taken into consideration all the time. We keep buying land next to our factory. We see a lot of future ahead of us, and we don't sleep.

Okay. Lastly, do you have any early insights or feedback from the showrooms in New York and South Carolina? I realize they haven't been open extensively, but is there anything noteworthy? Also, regarding the margins for those products, particularly outside Florida, I initially thought they might be lower due to transportation and related factors. However, I've heard that the average selling prices per unit could potentially be higher for these products. What are the margins or anticipated margins for the residential business outside of Florida?

The margin is much better outside of Florida. In Florida, we have very strong competition with many competitors. Outside of Florida, in high-end residential, there's only a few, especially in aluminum; we have a lot of projects coming in. For aluminum, there are mainly three or four competitors, and they are all hiring from outside those markets. They're mostly in California, Minnesota, and the cost of transportation is also high. So the margin is better. The cost of transportation is minimal. Nevertheless, we are the newcomer. Our prices, we always start with a lower price to capture market share. We expect the gross profit to be around the same or slightly more at the beginning, and then they will increase as the years go by, and people understand that we have a very good product, equal to or better than the competition, and then we can level the price.

The next question is coming from Julio Romero of Sidoti.

So I wanted to maybe piggyback on Tim's question a bit, if I could. Staying on the capacity expansion, just theoretically, what would be the first bottleneck that could begin to limit or slow any additional capacity expansion in '24, '25, et cetera?

No. First of all, with the capacity we are adding this year, it will be ready by June or July. We could increase sales of laminated glass by 60% and insulated glass by 200%. This additional capacity could easily push us over $1 billion in sales. We prefer to underpromise and overdeliver, so we are cautious about our projections. The capacity increase we are implementing will extend at least through 2025. We are also adding new product lines that are unrelated to our current offerings. These new products will require some capital expenditures, but not excessively. That’s why we’re estimating our capital expenditures this year to be about $35 million, and we will continue to provide updates regarding our EBITDA and sales.

Great. Christian, I really appreciate your insights. It seems like there is a good opportunity to expand. I don’t want to assume too much about your thoughts on increasing capacity, but I am curious about the land you mentioned near your factory. What kind of challenges could potentially prevent you from expanding further?

As long as the market remains robust and we continue to expand into new areas, we will keep increasing our capacity. The demand is very high, and we are still receiving a significant number of orders. We expect to have new production lines ready soon, and you will hear more from us in the coming months. This is why I am acquiring land; I'm uncertain about our future growth, but I want to ensure that we have sufficient space in advance to avoid last-minute purchases. We are investing around $6 million in this land, which will allow us to develop another million square feet of facilities, so it's a positive move for us.

Sounds really exciting. And then maybe just the last one for me. You guys mentioned the showrooms you have in New York City and Charleston and then opening up in a few more geographies in '23. Can you maybe speak to how much, if any, incremental revenue from the showrooms is embedded in the guidance?

Actually not so far because we're more or less 100% and we cannot project exactly how it's going to play out. We expect that 10% of the share of reservation of new residential. But since we are not sure, it's not accounted for.

Just to add if you listen to the question that Sam asked earlier, what we're baking in is essentially a little bit higher than Q4 on a run rate basis, right? So if you just assume that and kind of prorate throughout the year, that's where you get for full residential for '23. So to Jose's point, anything that comes from that is going to be upside to this guidance.

At this time, I'd like to turn the floor back over to Jose Manuel for closing comments.

Thanks, everyone, for participating in today's call. We are really excited about the connection with our company. We worked hard to ensure our shareholders get the best returns, our employees, and our investors. Thank you, and see you soon with better news.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines at this time. Log off the webcast and enjoy the rest of your day.