Greetings and welcome to Tecnoglass Inc. Second Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Cray, from Investor Relations. Please go ahead, sir.

Thank you for joining us for Tecnoglass' Second 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, 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 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 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 4.

Thank you, Brad, and thank you, everyone, for participating on today's call. We ended the first half of the year on solid footing, delivering strong results during the second quarter. We achieved record revenues and backlog despite the complex operating environment. Our total revenues in the second quarter increased 33% year-over-year to $225.3 million. This marked our tenth straight quarter of double-digit organic revenue growth, fueled by a strong performance in our key end markets. These achievements reflect the resilience of our vertically integrated business model and are also the result of the focused execution of our dedicated team members. Our ability to gain share and the adoption of our innovative products. I could not be prouder of the hard work and dedication of our colleagues across all levels of our business. Multifamily and commercial demand for our products and services again drove our top line growth. This business increased by 48% year-over-year to a record of $138.3 million as we continue to execute on our growing backlog. Our success in delivering high-profile projects helps to drive the momentum we are seeing in large project demand. This is demonstrated by our backlog growing to a record $797 million at quarter end. Our sales to the single-family residential market grew 15% to a record $86.9 million. We are winning through a combination of dealership growth and geographic expansion into attractive markets. We are also benefiting from secular tailwinds, particularly in the Southeast U.S. and new product offerings oriented towards homebuilders where we still see a lot of room for additional growth. Building on our standard sales performance, we were thrilled with the year-over-year expansion of our industry-leading margins and a strong adjusted EBITDA of $85 million. Our disciplined cost control efforts, combined with the structural and sustainable improvements we have made to our vertically integrated platform are generating solid returns. Our multi-year efficiency and automation efforts contributed to adjusted EBITDA margin expansion to 37.7% and year-over-year gross margin growth to 48.7%. We believe both of those margins are well ahead of the industry averages. Excluding the 2022 annual income tax payment, which occurred during the quarter, we again produced exceptional levels of operating and free cash flow. I am so proud of our team for going above and beyond to expand our operational capacity and improve our business. We are very pleased with the outcome of these investments, realizing even more capacity than we had previously planned. We are effectively increasing our installed production base by over 40% to roughly $1 billion of annual sales. This better enables us to meet the ever-growing demand for our high-performance products. Improvements to a vertically integrated platform, such as these have contributed to our ability to deliver high-quality service and products to our customers with even shorter lead times. We continue to be highly reliable as a result of our vertically integrated platform and advantageous labor dynamics. Based on these structural advantages, we feel confident in our strategy to serve a broader market while delivering industry-leading margins and returns. We are as encouraged as ever in our ability to gain market share given our structural advantages, efficient operational structure and the significant investments we have made in our business. As such, we are increasing our full-year revenue and adjusted EBITDA growth outlook to reflect our expectations for Tecnoglass to meet solid demand trends for the rest of 2023. I will now turn the call over to Chris to provide additional operating highlights.

Thank you, Jose Manuel. Moving to our backlog, we concluded the quarter with a record backlog of $797 million, which is a 19% increase compared to last year. This showcases robust bidding activity and project wins throughout the quarter, a trend that has continued into the third quarter, coupled with increasing momentum in the multifamily and commercial sectors. Our clients appreciate Tecnoglass for delivering high-quality products for high-profile projects while consistently maintaining low lead times. Despite elevated interest rates, favorable long-term and demographic trends in our main markets are driving our backlog. By the end of the quarter, our backlog equated to 1.6 times our trailing 12 months revenue in multifamily and commercial, indicating a strong project pipeline extending into 2024 as projects that were previously on hold during the pandemic begin to resume. Our positive outlook is further supported by indicators such as the June ABI Index reading of 50.1, marking the second consecutive reading in expansion territory. The South region, where our presence is largest, recorded an ABI reading of 50.5, which underscores the healthy activity levels and demand tailwinds we are experiencing there. Additionally, around two-thirds of our backlog primarily consists of medium and high-rise residential buildings, which are currently outperforming most other commercial sectors. The remaining third involves a diverse array of commercial projects where demand remains solid. Our growth in single-family residential is not fully captured in our backlog due to the shorter project durations. Nevertheless, our performance in this segment remains positive, achieving record quarterly revenue as we expand our footprint and increase our market share. Thanks to our investments in capacity, our lead times have been reduced to around five weeks for several product lines, which is ahead of many competitors. We are launching new projects in growth areas where new showrooms are operational. Moreover, with our heightened operational capacity, we are well-positioned to serve large homebuilders’ customers as well as cater to the demand for aluminum and glass products. Looking ahead, we are optimistic about the strong demand trajectory in single-family residential along with our growing backlog of multifamily and commercial projects, which bolsters our confidence in our full-year 2023 outlook. We are excited to continue leveraging our innovative portfolio, strong industry relationships, and structural competitive advantages to reinforce our leadership in architectural glass. I will now hand it over to Santiago to discuss our results and improved outlook for 2023.

Thank you, Chris. Turning to Slide 6. Our second quarter results extended our exceptional record of strong financial performance. We navigated through a complex macro environment to produce another quarter of solid results. This reflects the resilience of our unique vertically integrated business model and focused execution of our strategic priorities across all aspects of our business. As we've highlighted in recent quarters, we remain better positioned than ever to take advantage of the tailwinds unique to our business, given our ability to deliver superior quality architectural glass products with much shorter lead times at an attractive value. This dynamic is evident in our single-family residential revenues, which grew organically 15% year-over-year in the second quarter. As we look to the remainder of 2023, we expect solid trends in our market share gains, positive demographic trends in our main markets, and the marketing of our innovative products. On Slide 7, I have discussed our structural advantages many times, but it is important for us to continue to emphasize these key points. Our competitive advantages are unique to Tecnoglass and allow us to thrive even during these challenging macroeconomic times. The differentiating factors benefiting our business are: number one, high-return investments in plant automation and capacity upgrades; number two, relatively stable costs through hedging on aluminum input and dependable supply of raw glass through our joint venture with St. Gobain; number three, a people-focused culture to retain quality talent and achieve low turnover as an employer of choice; number four, keeping transportation costs under 5% of revenues; and number five, a sustainable energy model including solar power and cogeneration of power through on-site natural gas. Turning to the drivers of revenue on Slide 9. Total revenues increased 33.2% year-over-year to a record $225.3 million for the second quarter. This increase was led by significant growth in our multifamily and commercial activity as well as double-digit growth in single-family residential revenue, largely reflecting additional market share gains in our key geographies. Both our single-family residential and multifamily commercial revenues are benefiting from the positive demographic trends in our main markets. Looking at the drivers of adjusted EBITDA on Slide 10. Adjusted EBITDA for the second quarter 2023 increased 55.8% to a second quarter record of $85 million, compared to $54.6 million in the prior year quarter. Adjusted EBITDA margin of 37.7% increased 540 basis points compared to the second quarter of 2022. The second quarter gross profit increased 49% to $109.7 million, representing a 48.7% gross margin. This compared to gross profit of $73.6 million, representing a 43.5% gross margin in the prior year quarter. Improvement in gross margin mainly reflected operating leverage on higher sales, favorable pricing dynamics, and greater operating efficiencies related to our prior automation initiatives. SG&A was $35.2 million, compared to $28.1 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, as well as increased corporate costs to support a larger operation. As a percentage of total revenues, SG&A for the second quarter improved 100 basis points to 15.6%. Turning to our structurally improved margin and cash generation on Slide 11. On a trailing 12-month basis, gross margin continued on an upward trajectory in the second quarter, increasing to an average of 51.5% compared to a margin of 31.5% at the end of 2019. The significant improvement in our gross margin over that time is mainly attributable to the teams that we have shared on past calls, namely the structural and sustainable operational improvements related to automation initiatives and our shift in business strategy to diversify into the more profitable single-family residential end market, where we do not perform lower-margin installation work. While our normalized gross margin has been structurally enhanced by over 1,500 basis points since 2019, we still do expect to see some variability from quarter to quarter. As we discussed on our prior earnings call, the record gross margin of 53% achieved in the first quarter was set to retreat based on our gross margin guidance for the year. On a sequential basis compared to the first quarter, the more normalized gross margin in the second quarter was the result of several factors. Number one, over half of the sequential decline was attributable to a strong appreciation of the Colombian peso, which affects a large portion of our costs such as labor, professional fees, maintenance costs, utilities, as well as inventories. Given improved sentiment, both from a country-specific and general macroeconomic perspective, we expect the peso to remain around current levels for the rest of the year. Number two, the next factor impacting sequential gross margin was the mix of product revenues. I will expand on that point. The excess capacity that has recently come online afforded us the ability to sell customers more stand-alone products, namely architectural glass and aluminum framing, which carry lower margins than our fully ensemble windows. Given prior capacity constraints, our finished glass and aluminum products were previously getting allocated to a very cleansed integrated production of windows, which generate our highest margin revenues. The absorption of new capacity and the ability to offer a wider range of solutions to customers is positive overall for our business. The final factor affecting sequential gross margin was a more competitive marketplace. Although this impact was much less than the other two factors, we did experience a modestly more competitive pricing environment, particularly in single-family residential. As we look to the balance of the year, we expect that the current level of the peso, a more diversified product mix, and competitive dynamics will produce gross margins around normalized levels through the remainder of the year. Therefore, we now expect gross margin will be in the 48% to 50% range for the full year 2023. As mentioned on our May earnings call, we expect limited cash from operations in the second quarter, which was entirely due to the timing of the 2022 income tax payments for the Colombian entities, which have now been fully paid. Excluding the annual tax payment, the remainder of cash flow from operations was very strong at approximately $57 million and up year-over-year. Looking to the back half of the year, we expect cash flow generation to be stronger given the absence of these income tax payments and the step-down in CapEx. Now looking at our improved balance sheet and leverage on Slide 12. We have taken many actions over the past several years to fortify our balance sheet. We have improved our weighted average interest rate by over 180 basis points since 2020 and are currently at the lowest interest rate tier under our debt agreement. This has left us with significant financial flexibility to return cash to shareholders and execute growth in other initiatives, such as the 40% addition to our installed capacity. At quarter end, our leverage ratio stayed near record lows at 0.2 times net debt to LTM adjusted EBITDA, down from 0.5 times in the second quarter of last year. As of June 30, we had a cash balance of approximately $105 million and availability under our committed revolving credit facilities of $170 million, resulting in total liquidity of approximately $275 million. On Slide 13, we are committed to delivering strong returns to shareholders. On average, over the past three years, our stronger profitability and meaningful step-up in cash flow generation have driven significant returns. When comparing our ROE and ROIC metrics to those of U.S. building product peers, the returns on reinvestment into our business plus dividends have driven substantially higher value to our shareholders, further validating our strategic approach to driving 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 recent capacity additions to get up to $1 billion in annual revenue. 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 so far and visibility through year-end, we have an improved outlook for 2023. We are increasing the low end of our outlook for both revenue and adjusted EBITDA growth. We now expect full year 2023 revenue to be in the range of $830 million to $855 million. This outlook represents an entirely organic growth of 18% at the midpoint. Based on these sales outlooks, our anticipated mix of revenues, and our expectations for costs and expenses, we expect full year adjusted EBITDA to be in the range of $320 million to $335 million, representing a 23% growth at the midpoint of the range. As I discussed earlier, we expect gross margins to be in the 48% to 50% range for full year 2023. In regards to the cadence of results, the second half of 2023 has significantly more challenging comps than we experienced in the first half. This is reflected in the implied revenue and adjusted EBITDA growth that we expect to achieve in the second half relative to the full year growth for both metrics. Additionally, based on the schedule and timing of projects, we expect third quarter revenues to step down sequentially from the second quarter before picking up in the fourth quarter. As previously discussed, cash flow from operations and free cash flow are expected to be strong for the rest of the year, given the seasonal effect of the annual tax payment in the second quarter, and the majority of our budgeted CapEx having been completed through June. Overall, we are confident that our very clean integrated operating platform will allow us to continue generating industry-leading results and best-in-class service for our customers. With our differentiated product offerings, strategic geographic positioning in attractive markets, highly efficient cost structure, and our latest round of high-return investments, we remain well positioned to capture the demand we see across our end markets.

Our first question comes from Tim Wojs with Baird. Please go ahead.

Hi, guys. Good morning. Maybe just first question, just if you can maybe talk a little bit about the overall kind of environment that you're seeing, backlog is still pretty strong. Maybe just talk a little bit about bidding quoting. And I guess with the incremental capacity that you brought on, I mean, have you been able to kind of expand the types or the geographical area of projects that you're kind of bidding on now?

What we're seeing at the moment is a lot of quoting depending on the region. For example, we're still seeing strong quoting in Florida, New York, Maryland, Boston, and Texas is coming along very nicely; some areas are going down like California; we're not getting that many quotes there, but the rest of the country seems to be good.

Have you observed any weaknesses or delays in the quotes compared to the actual bids from a financing or funding perspective?

Yes. For example, in South Florida, the high-end condominiums are selling very well, but the rentals are being delayed because the cost of building, plus the interest rates, are so high that it doesn't make sense for them to go ahead with it. However, I've seen in the last couple of weeks that the prices of construction are coming down. I mean, concrete still seems to be coming down and the builders I speak to are very excited about that because it will make sense again to build rentals.

Okay. And then I guess, Santiago, just on the gross margin line. As you kind of think about the three buckets that you kind of outlined, I mean, as that kind of phases into the back half of the year, how would you expect the Colombian peso appreciation and just kind of the product mix and things like that to kind of phase in on either a sequential or a year-over-year basis? Does it kind of stabilize from where we're at today? Or are there some pieces that kind of move around?

Yes. So, if you recall, Tim, when we guided after Q1, we basically implied that gross margins were going to stabilize for the full year, coming down from 53% to what we said 50%, which we still believe is possible. This accounted for the normalization of the FX rate and the mix of business. If you look at what happened with the FX rate, the Colombian peso was the most revalued currency in the world, which has to do with macro trends, but also country-specific trends that are more positive than they were previously. Now we're seeing that the peso has stabilized for the rest of the year, and that's how we're projecting going forward. So, at the end of the day, if you kind of back into the new range of 48% to 50%, that already implies that the peso is where it's at today. We have a little bit more installation in stand-alone product sales the rest of the year. So, if you look at all of the moving pieces here, it's really related to the revaluation of the peso, which we're being cautious about, along with the mix of business going forward. Yes, we expect at least what we were able to achieve in Q2 the rest of the way, and it's going to depend on mainly those two factors, but we expect from a revenue perspective to continue the healthy trends.

Next question comes from Stanley Elliott with Stifel. Please go ahead.

Hey, good morning everyone. Thank you for the question. Can you talk a little bit about what you're seeing on the residential side? I was a bit surprised. I mean it's flattish on a sequential basis. You guys have put in a lot of resources, a lot of capacity there. Maybe help us with what's going on within the residential markets?

The residential market expansion we undertook was outside of Florida. Initially, we are gradually gaining market share as this is a new market with new products and designs. We prefer to minimize our mistakes and learn about the market and shipping methods before expanding. We observe that insurance companies are pressuring many, particularly in condominiums, to replace windows. Consequently, I believe the residential market will remain stable, though not very strong, especially with construction slowing down due to interest rates. However, we expect stability in Florida and slow growth in other areas. While we do not anticipate significant growth, we are planning for some growth.

It looks like the back half of the guidance kind of implied would indicate kind of flattish sort of revenues for both segments in the second half of the year. Am I getting that correctly? Maybe there's some FX involved? I just want to make sure I was thinking about that holistically.

No. FX wouldn't really make a significant difference here just because 95% of our revenues are in U.S. dollars, as you know. But if you look at what we guided for residential, it's very much in line. I mean we guided Q1 saying there's going to be a step-up sequentially, which you saw in Q1 with the 3.5% growth and this quarter, we did 87%. So, there was a step-up sequentially. The way that we're modeling this out based on the orders that we have today is that it should be kind of flattish the rest of the way, sequentially from Q2, in line with what Jose was saying. Also, we have much tougher comps year-over-year for the second half of the year '22 versus '23. So, on the residential side, you will see some kind of flattishness. On the commercial side, we are seeing growth year-over-year in the second half. I believe we did 115% and 126%, respectively, the last two quarters of last year, and we're modeling growth in the second half of the year '23 versus those numbers on that side. That's mainly where the increased growth is going to come from on a top-line basis.

Right. But on the multifamily commercial side, you're probably looking at kind of like mid-single-digit growth on a year-over-year basis. Is that to kind of get to the midpoint of the guide? I guess that was kind of the genesis of the question.

Yes. If you're just looking for the second half of the year, yes. Obviously, if you back into our original guidance, that makes sense that, that would just temper a little bit because the first half of the year growth was much stronger. So, to get to the original guidance, you would expect that to be the case.

Next question comes from Julio Romero with Sidoti & Company. Please go ahead.

Good morning. Can you maybe talk about the facility expansion, the delta between the $1 billion installed base versus the $950 million expectation? Just if you could expand at all on what part of the expansion is above expectation? Are there specific product lines or window components that make up the incremental $50 million?

Well, it might be beyond that; we are expecting at least $1 billion of capacity, but after taking into consideration everything that will be finished and installed by September. I really believe that we're going to have some extra capacity, and it will depend on how the products made in those lines are used. If we sell them as glass or aluminum, it will add up to $1 billion. If we can put them into windows, we could go even higher. So, we are in a very good position. I really believe that we needed to do this expansion because we were working seven days a week, 24 hours a day, which was not good for maintenance on equipment. Now we can perform better maintenance, we have the extra capacity, and we are ready for the many projects that we have coming up.

Very helpful. And then Christian, you talked about the lead times of five weeks on several product lines. What were those lead times before? And what's your sense of where competitors' lead times would be at?

Well, they used to be 12 weeks, 10 weeks, 11 weeks; we're now down to five weeks. We still have capacity and can even reduce that further. Our competition is around the same time, which makes it so we have better quality, we have a better product, and we can deliver at the same time. So, I think we're going to be gaining market share. I know that this is not a good time to talk about that because there are so many variables going on like inflation and interest rates, but we are very optimistic that 2024 will be our best year ever.

Next question comes from Joshua Wilson with Raymond James. Please go ahead.

Good morning. Thank you for taking my question. Could you give us your latest thoughts on what your total CapEx budget will be for '23? And any early thoughts on what it would look like in '24?

Yes, if you examine the year-to-date capital expenditures, we have completed much of what we had planned. Therefore, we anticipate a significant reduction in the second half of the year. I expect our total capital expenditures for 2023 will be between $40 million and $45 million. For 2024, we anticipate a decrease by about half, unless there are new projects or expansions necessary for future growth, which would be our base case. Based on the installed capacity that Chris mentioned, this will depend on how our backlog and pipeline evolve. However, under normal conditions, we expect it to reduce to less than half next year.

Got it. And could you talk about what the productivity has been of the single-family showrooms thus far versus your expectations?

Well, the showrooms are working very well. We have a lot of people coming in. As I mentioned before, we don't want to rush and sell a ton of projects and then find out that we didn't know how to ship them because there are new products. Every new market has new products that we decide. So, we're working diligently with the clients. We have shipped to all of the new zones and the reception has been great. Now we're landing new projects; I believe next year, like Santiago has already said, we are very optimistic about 2024. We have a lot of faith in what we're doing. We have shown that we don't play games; we know where we're going, and we are doing it right. We are opening more showrooms; we're opening a couple more in Texas and plan to open in western states very soon too.

If I could sneak in one more on the FX impact, whichever is easier, what would you say your guidance would have been today if the peso had not changed, just to give us a sensitivity to any future changes?

Well, you can back into it. I think based on the peak of the year to where it is today, the peso has strengthened about 18% or so, being the most revalued currency in the world. That impact to this quarter was about 3% to operating margins. So, if you were just to model it out with a 3% impact the rest of the way, positive impact the rest of the way, you can kind of back into our number.

Next question comes from Alex Rygiel with B. Riley Securities. Please go ahead.

Good morning, gentlemen, nice quarter. You talked about a little bit of a favorable pricing in the quarter. How should we think about that going forward in light of your comments about the competitive environment?

What we see is that some of our competitors, the biggest ones, have increased their prices because they were not doing that well with low margins. So, we have less pressure on pricing. The glass has stabilized somehow, as has the aluminum. So, we don't see any pressure on pricing. It's just the market; I think it's going to be favorable for everybody. And as soon as the interest rates stabilize, we see a lot of people buying and renovating their houses, creating a strong market, especially in Florida where insurances are putting a lot of pressure on that.

And then secondly, can you talk about the new products, the success they're having, and the importance of those driving growth in 2024?

Yes, of course. Every market, as I said, has different products. For example, in the Northeast, they're looking more into temperature control and saving on heating. And the coefficients are really low. So, we design products for that area. But since we are new in the market and we try to design better, there is a learning curve. We ship a few products or a few projects and see how they work, how difficult the installation is at the end. Then we improve the product. We leave it alone. We've gained a lot of feedback that makes us believe that we're going to gain a lot of market share in those areas. So we are very enthusiastic.

Our next question comes from Brent Thielman with D. A. Davidson. Please go ahead.

This is John for Brent Thielman. I'll start with the two-part question. Could you provide an update on the residential business expansion in Texas? And just provide some color on the type of progress you're seeing? And for the second part, accounting for the strength in the Southeast, which of your other markets in the U.S. is picking up in residential?

Well, rental is doing well in Texas, but not with us because we're just starting. We're opening a showroom in Houston soon. We have sold a couple of small jobs. As I said before, the feedback was good. So, we're going full speed on that. But Austin, Houston, and Dallas are building like crazy, and we want to take advantage of some of that. We are exploring Arizona and California, which are a little slower today, but there is a lot of market to explore for us because we're new. And in the Northeast, I mean, from South Carolina up, we have done a few jobs, as I said before, and the reception has been great. So, we're very happy.

Thank you. And regarding construction labor shortages in Florida. Have you seen any impact on your business? And if so, thinking of revenue, how have you been able to navigate the labor shortage?

We have not seen any labor shortages on our end. All the jobs we have are staffed with people, and we have no shortage. I notice construction is thriving, and we have not experienced any issues with labor.

There are no further questions at this time. I would like to turn the floor back over to Jose Manuel Daes for closing remarks.

Well, thanks, everyone, for participating. We are very enthusiastic about the company's future and I believe that we are poised to keep growing and giving our shareholders what they deserve. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.