Tecnoglass Inc. (NYSE: TGLS) Second Quarter 2022 Earnings Conference Call August 4, 2022 10:00 a. m. m. ET
Participating companies
Brad Cray – Investor Relations
José Manuel Daes – President and CEO
Chris Daes – Chief Operating Officer
Santiago Giraldo – Chief Financial Officer
Conference Call Participants
Alex Rygiel – B. Riley
Zane Karimi – D. A. Davidson
Julio Romero – Sidoti
Josh Chan – Baird
Operator
Hello and welcome to the conference call and webcast on Tecnoglass’ earnings for the quarter of 2022. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, you will have the opportunity to ask questions. [Operator Instructions] Please note that this occasion is recorded.
Now I’d like to talk to Brad Cray about Investor Relations. Continue.
brad cray
Thank you for joining us in the call for the Moment Quarter 2022 convention of Tecnoglass. A copy of the slideshow accompanying this call can be received in the investor segment of the tecnoglass website.
Our speakers today are the Executive Director, José Manuel Daes; Chief Operating Officer, Chris Daes; and the Chief Financial Officer, Santiago Giraldo.
I would like to remind everyone that the topics addressed in this call, with the exception of old information, are forward-looking statements, within the Private Securities Litigation Reform Act of 1995, which add statements related to long-term monetary performance, long-term expansion and long-term acquisitions. These statements are based on Tecnoglass’ existing expectations or ideals and are subject to uncertainty and adjustments in the circumstances.
Actual effects may differ materially from those expressed or implied in such statements, due to adjustments in economic, commercial, competitive and/or regulatory points and other dangers and uncertainties affecting the operation of Tecnoglass’ business. These dangers, uncertainties and contingencies are set out from time to time in Tecnoglass’ SEC filings. The information discussed in the call is presented in light of those risks.
Other investors note that the monetary effects of Tecnoglass over a period of time may not be indicative of long-term effects. Tecnoglass has no legal liability and expressly disclaims any legal liability to update or replace its forward-looking statements, whether as a result of new information, long-term events, adjustments in assumptions or otherwise.
Now I will pass the land to José Manuel from slide number 4.
Jose Manuel Daes
Thank you, Brad, and thank you all for today’s call. We are very pleased to end the first part of 2022 with record levels of revenue, gross margin, adjusted EBITDA and order book. Our overall revenue in the current quarter increased 39% year-over-year to $169. 1 million, marking our fifth consecutive quarter of record revenue through our continued expansion into the single-family residential market, accelerating the expansion of our advertising operations.
Our single-family residential business, which focuses primarily on transformation and renovation projects, grew approximately 86% year-over-year to a record $75. 9 million, or 45% of total revenue. This good fortune reflects the immediate expansion of this business into key regions of the United States.
Our exceptional track record of visitor service and exclusive product offerings have allowed us to continue to gain market share, with new and existing visitors. The momentum of our effects is also supported by the acceleration of activity in our advertising activities, which we expect to continue for the foreseeable future.
Based on our impressive sales performance, we achieved a quarter of record adjusted EBITDA, while maintaining an industry-leading adjusted EBITDA margin of over 30%.
Our cost-disciplined efforts, product innovation, capacity innovations, and combination of higher single-family home earnings all contributed to this strong margin. The dynamics of our effects and our established track record of exceptional money flows validate Tecnoglass’ unique vertically incorporated business model. .
Monetary strength allowed us to reduce our balance sheet leverage to achieve the lowest adjusted adjusted EBITDA ratio in the company’s history, 0. 5 times in June. In addition, given the strength of our business and moneyArray, we today announced a 15% increase in our dividend to increase return on capital for shareholders.
Overall, we are proud of our entire team for their continued determination towards excellence and are excited about our company’s track record. Looking ahead to the rest of 2022, we are confident of our ability to achieve our highest goals to achieve a year of recording results.
I will now turn the call on to Chris to provide more main points about our order book.
chris daes
Thank you Jose Manuel. Let’s move on to our order e-book on slide 5. Our quarterly effects reflect strong functionality in our key US regions in our single-family and multi-family home work, as well as an acceleration of activity in our business. We continue to see strong levels of listing and auction activity contributing to a record order book of $668 million at the end of the quarter, representing a point that represents 1. 2 times our multi-family and advertising revenues over the last 12 months. Backlog increased 19. 5% year-over-year, primarily due to an increasing number of project wins, primarily in the hot market of the southeastern US.
I am pleased to note that our shipments on medium and high-rise projects have noticed an acceleration in sequential expansion each and every month this year. We expect this strong activity to continue and we have already noticed another record month of turnover in July. Our positive outlook is supported by the June ABI index reading of 53. 2, marking the 17th consecutive monthly reading in expansion territory. The ABI multifamily store index reading of 52. 6 also supports the favorable trends we are seeing as two-thirds of our order book is similar to multifamily residential.
Our largest presence is in the southeastern United States, which is experiencing healthier activity lately than other markets. We’re also experiencing more tailwinds in Florida since the state’s recent housing hardening bill that makes shock-resistant windows and doors more affordable by granting two sales tax exemptions per year. In addition, our track record of effective delivery of large-scale multifamily projects has opened up an increasing number of opportunities in U. S. regions. USA We, our consumers, see us as a selection provider given our ability to hold on – on-time deliveries that help keep giant projects on time.
I’d like to remind everyone that single-family homes are underrepresented in our order eBook because of the shorter one-time duration of those projects. As a result, a significant part of our expansion trajectory is fully reflected in our developing order book. Santiago will provide more important points about our single-family company in a moment.
In short, we are very happy with our effects so far this year. Thanks to our long-standing new partnerships, structural competitive benefits, and hot geographic focus, we are able to continue our biological expansion while making a prudent investment in our operations. CapEx’s investments will allow us to end the year with an installed capacity of approximately $800 million in revenue.
We anticipate that this maximum return on capex investment will help us meet more demand with a payback period of less than 12 to 15 months. These investments combined with our functionality in the single-family residential market continued to exceed our expectations and optimism for the coming quarters and years.
I will now turn the floor to Santiago on slide 6 to talk about our monetary effects of operations and our outlook for the year.
santiago giraldo
Thank you, Christian. Our strong functionality in the current quarter is a direct mirror of our ability to operate on our vertically incorporated platform and leverage our strategic positioning in geographies. We provide exceptional service to our consumers through strengthening our relationships with our consumers. and get new business. This is evident in our single-family residential business in which we gain a higher market share due to our ability to supply products of incredible quality at incredible prices with shorter lead times.
We are incredibly proud of our track record of strong monetary performance, specifically with respect to our single-family residential business, which saw an 86% year-over-year increase in earnings in the current quarter. This activity now represents 45% of our overall earnings, up from 34% in the current quarter of 2021. Our growing presence in the successful finishing market has helped create a sea change in our profitability.
A very important point I would like to point out is that around 65% of our single-family residential income source is similar to redevelopment and renovation projects that are not very sensitive to fluctuations in loan rates. We are also seeing additional construction in our market share through the expansion of our broker base, our geographic diversification into the southeast and south-central United States, and the expansion of sales of our state-of-the-art Multimax product line that addresses the largely untapped opportunity with production space builders. These expansion winds are more supported by the ancient trend of population migration to the southern states, where we have our greatest presence.
Now, on slide 7, I would like to reiterate how our vertically incorporated business style and strategically located operations are the foundation of our good fortune in today’s environment of source shortages and charge inflation. Specifically, the differentiating points we see in our business are; first, past high-performance investments in plant automation and capacity upgrades; second, to stabilize our prices through the aluminum input policy and a reliable source of rock glass through our joint venture with Saint-Gobain; third, to be an employer of quality skills selection and low turnover in a labor market where the source of skills is abundant; fourth, shipping prices are around 5% of revenue; and fifth, 15% energy savings through green energy through our solar energy and our electric power cogeneration through on-site herbal fuel emissions.
As evidenced through our effects during the first part of the year, our strategic investments continue to provide us with significant structural benefits over our peers. Our top of our price chain has allowed us to offer more projects and deliver products in shorter timeframes. .
Now let’s move on to the profit drivers on slide number 9. Total earnings increased 38. 9% year-over-year to a record $169. 1 million in the current quarter. This buildup is due to a strong expansion in single-family residential activity, the percentage earnings market, and the continued increase in our advertising projects. As Chris said, our advertising structure profit grew sequentially every month from the beginning of the year to the current quarter.
As a reminder, in the fourth quarter of 2021 we completed the acquisition of Ventanas Solar, a Panama-based corporation that served exclusively as an importer and distributor of Tecnoglass products in the country of Pasnama. After we divested business-to-business sales, Ventanas Solar contributed approximately $2. 2 million in profits to our 2021 earnings. Our effects for 2021 were adjusted to reflect the retroactive review of effects pursuant to ASC 805-50 to reflect the consolidation of acquisitions under non-unusual control.
Looking at the drivers of adjusted EBITDA on slide number 10. Adjusted EBITDA for the current quarter of 2022 increased 51. 7% to a quarterly record of $54. 6 million, to $36 million in the prior-year quarter. Adjusted EBITDA margin of 32. 3% higher across 280 core issues at the time of the 2021 quarter. Second-quarter gross profit increased 49. 9% to $73. 6 million, representing a gross margin of 43. 5%. This compares to gross profit of $49. 1 million, representing a gross profit of 40. 4% in the quarter of last year.
Our 310 basis point margin improvement primarily reflects higher sales, higher automation-like operating power, and a higher mix of gains from production versus installation activity due to a buildup in the diversity of our single-family residential products where we do not carry outside the facility.
General and administrative expenses as a percentage of total revenue increased to 16. 6%, compared to 16. 7% in the prior year quarter, primarily due to higher sales and higher operating leverage on personnel, fees and other ongoing expenses, rather than offsetting superior shipping rates and secure non-recurring expenses. Expenses similar to professional and accounting fees.
Now let’s take a look at our advanced balance sheet and leverage on slide number 11. Our exceptional track record of generating cash flow continued into the current quarter with operating cash flow of $35. 9 million. This generation of money and the prudent steps we have taken in recent quarters for our balance sheet has given us the monetary flexibility to reinvest in expansion CapEx to prepare for long-term demand, as evidenced by our developing order book. EBITDA at the end of the quarter, up 1. 1 times in the current quarter last year.
At the end of the quarter, we had a cash balance of approximately $98. 6 million and availability under our committed revolving credit facility of $170 million, resulting in overall liquidity of approximately $269 million. Based on a record of exceptional monetary functionality in May 2022, we have extended our credit agreement with our syndicate of banks. The main update of this amendment removed the previous limit on deployable capital as long as we keep our leverage ratio below 1. 5 times net debt over adjusted EBITDA for the past 12 months. This gives us greater flexibility in our capital allocation opportunities.
I would now like to highlight the progress of our gross margin strengthening and money generation on slide number 12. The dramatic change in our gross margin performance was driven through structural and sustainable operational innovations similar to automation projects and our further expansion into the one-market family residential finishes where we do not carry out low-margin installation work. As our revenue increases, so does operating leverage on constant and semi-constant costs, such as depreciation, hard work, and production overhead. Given those factors, we continue to expect our gross margins to normalize between the downside and half of the 40 by 2022, compared to 32% for the full year 2019.
Our operational innovations have also benefited our money generation. Increased profitability, increased current capital management, reduced interest expense and a more favorable earnings mix have all contributed to our strong money-generating balance sheet, given the transformative structural nature of those innovations, giving us monetary flexibility to execute expansion and price creation, adding 15% accumulation to our dividend announced today.
Based on the strong momentum of our business in the first part of 2022 and our pipeline of projects in development, we are expanding our earnings expansion outlook and adjusted EBITDA for the full year 2022. Now expect earnings for 2022 to be between $620 million and $640 million. This outlook represents a 27% expansion in the midpoint led by single-family homes.
Based on this sales outlook and expected revenue composition, we now expect full-year adjusted EBITDA to be between $208 million and $220 million, representing a 44% expansion in average diversity. expects to normalize into the low to mid-40 diversity by 2022, primarily due to structural advantages, vertically incorporated operations, and superior product mix relative to installation revenue. We reiterate our expectations for strong operating money to drive the finishing touch of our recent peak investments in automation, as well as other investments in our business.
To this end, we expect to generate a year of strong cash flow, which will further position us to meet our long-term expansion strategy. Our capEx expansion investments are on track to provide more than $800 million in new installation capacity through the end. of the year. Overall, we are incredibly pleased with our remarkable functionality in the first part of 2022. Our strong year-to-date effects put us on track for a year of double-digit expansion in sales and adjusted EBITDA, as we leverage our unique vertical platform integration to capitalize on the many positive enablers defined in today’s call. We are confident in the direction of our business and look forward to achieving our strategic goals in 2022 and beyond.
With that, we will be satisfied with your questions. Operator, open the line for questions.
Q&A session
Operator
Thank you. [Operator Instructions] And the first one comes from Alex Rygiel from B. Riley. Alex, your line is online.
Alex Rygiel
Thank you for answering my question, and gentlemen, congratulations on another quarter. First of all, the expansion of its margin has been Array. Can you tell us a little bit about some of the inflationary tensions that are developing?As I perceive it, they discussed a number of other controls that it has put in position to handle this inflation. But if you could tell us a little bit about this inflationary tension and how you see its evolution over the next 12 months, that would be helpful.
santiago giraldo
Thanks Alex. We see it normalizing. And I think we’ve talked about this in the past, that we’ve been away from some of the same pressures because of our vertically incorporated process, our joint venture with Saint-Gobain to get glass, to be able to cover aluminum at a moderate price, so as not to have the same hard work limitations as some of our peers in the U. S. In the U. S. , hard work is limited compared to Colombia, where it has an 11% unemployment rate. And we have very little turnover. So I think the dynamic is very different and that’s also helping us keep deadlines at pre-COVID levels, right?
So, I think it’s a mix of points that puts us in another position. We see things generalizing or returning to a general type of world. So, we’re not forecasting, in what we’re preparing for the rest of the year, we don’t expect inflation-related headwinds given our structural position and what we’re seeing from a macro perspective.
Alex Rygiel
Very, very useful. And then, as far as your residential business is concerned, what do you think were the main reasons for Market Place Place’s percentage profits?And it’s transparent that the Market Place Place residential housing market in the U. S. is not very good at the market. Do you think the percentage gains from your marketplaceplaceplace are sustainable and can continue to grow even in a more challenging housing marketplaceplace?
santiago giraldo
I’ll let Joseph take that one.
Jose Manuel Daes
Yes, I think so. We can continue to grow. I mean, first of all, let me tell you, there’s a lot of market. Each of our competitors is developing. The market is developing on its own. We are ahead of everyone because we have a bigger window. We have a larger package. And I think the whole concept of the many products we have is coming very well to the market. And they all adapt and like it. I mean, today, a lot of other people call us to open their accounts. We don’t have to. start looking for new accounts. They come to us.
Alex Rygiel
it’s for listening. Good community gentlemen. Keep it up.
santiago giraldo
thanks alex Talk soon.
Operator
Merci. La next one comes from Zane Karimi of D. A. Davidson. Zane, his line is online.
Zane Karimi
Hello gentlemen and congratulations on the results.
santiago giraldo
Nice day.
Jose Manuel Daes
Thank you so
Zane Karimi
So, I think the outlook implies low margins in the mid-40s. But what would cause gross margin to fall below its 40% target at this point?
santiago giraldo
I think Zane’s main variable is the composition of the company. As we have discussed in the past, the more we enter the residential segment, the more margins increase, given that we do not carry out the installation in this segment. So I would say that’s the main variable that can potentially replace anything or derail what we’re projecting.
Conversely, if we outperform in terms of profits, we expect to achieve operating leverage in the company. So, I would say that at the end of the day, the two would be the two main considerations, if we are going to achieve our profit goal, what we are very sure of ourselves and what kind of combination of activities we can think of.
Zane Karimi
It is ok. Thank you for that. And on the other hand, his order book has been very concentrated in the southeast. Do you see more markets opening outside the gates of this important territory?
santiago giraldo
I let Joseph take it.
Jose Manuel Daes
Yes. We are penetrating very well in the Northeast and plan to expand our residential to the entire Northeast. We are firmly finalizing the design of a new logo diversity of windows with other needs and also plan to expand to the West. however surely. It doesn’t need to grow too soon, but it also doesn’t need to be too slow. So we do our job. We’re fine.
Zane Karimi
Yes. Thank you for that. And the last one for me. He has done a very clever task in managing cargo volatility. But what do you see in terms of availability of fabrics like aluminum?And how did it make it harder?
chris daes
We believe we are vertically incorporated and have very smart suppliers. We have a very solid scenario right now. We had a lot of movement between February and June, but July is very fluid and seems better for the rest of the year from now on. So we’re preparing the company to sell a $100 million catalog next year.
Zane Karimi
It’s great. Thank you so much guys for the time.
santiago giraldo
Okay, Zane. Talk soon.
Zane Karimi
Talk soon.
Operator
Merci. La next one comes from Julio Romero de Sidoti. Julio, your line is live.
July Rosemary
Hey. Hi, guys. Thank you for answering the questions.
Jose Manuel Daes
Nice day.
santiago giraldo
Hello Julio.
July Rosemary
So staying on the residential side, your expansion path in new residential, given the low sales dollars, I mean your expansion path like gaining percentage with homebuilders and expanding that shouldn’t replace much with emerging rates. I mean, I think you’re a little bit more immune to the market than others?Is that kind of characterization fair?
Jose Manuel Daes
Me like that. I agree with you. Yes. As Santiago said in the presentation, we are more into replacing and transforming the R
santiago giraldo
It is important to note, Julio, that I think others have the false impression that we are strongly tied to the construction of new homes and this is not the case. That is why we seek to highlight the percentage of R activity
July Rosemary
Sí. No absolutely. But one key thing I’m referring to, besides the market, is like your delivery times, just compared to your competitors. How are those trends evolving these days, either on an absolute basis and relative to others?
chris daes
Well, most of the business we do is deliver within a maximum of seven to eight weeks. That’s 99-95% of what we do. Commercially, we get the delivery plan in advance. So we can plan it. Deliveries are usually on time, thank God. We exceed and increase production. This August we started two new lines of windows and plan to continue growing throughout the year throughout 2023 and 2024.
July Rosemary
It’s bien. Super. Et and then the last one for me is just a little broader question, but we’re about 1. 5 months into Colombia’s presidential election. Is there an update in the operating environment or an update waiting for you?
Jose Manuel Daes
Forward Christian.
chris daes
We don’t expect much change. The new president has said he is looking for highly successful businesses while we are at the center of the economy. This is politics and we try to stay away, but we are not worried about the political scenario in Colombia to date. see a brilliant long term ahead of us. That’s why we continue to grow. That’s why we’re spending CapEx this year because we need to make sure that with the endowment, we’re preparing for the 30% buildup that we’re planning or less to expand next year. Obviously, it’s too early to say how much we’re going to grow next year, however, we’re going to have the ability to install. So, if we manage to grow by 30%, we can deliver the products on time.
santiago giraldo
Just to raise that July, from a macro point of view, some elements under this new presidential regime. First, the tax reform they intend to pass will increase non-public taxes, but they are talking about reducing corporate taxes. This is a transparent positive. We’ll see what comes out of there.
And secondly, since the announcement of the new regime, the peso has been devalued, by around 5%, which, in net terms, given our charge structure, is positive for the company. Therefore, we have not noticed any prospective effects, any negative effects as a result of the new administration.
July Rosemary
It is ok. Thank you so much. I will.
Jose Manuel Daes
Thank you so
Operator
[Operator Instructions] The next one comes from Josh Chan of Baird. Josh, your line is active.
jose chan
Hello. Hello. Congratulations on a quarter.
Jose Manuel Daes
Hi Josh.
jose chan
Bonjour. Je assumes, by moving to non-reassignive activity, that it also worked very well this quarter. I guess you see that ongoing assignments are starting to come in after COVID?And then, can you tell us about what you see in terms of assignment?time in the non-reactive aspect during the next two quarters?
Jose Manuel Daes
Well, what we’re seeing is a very strong expansion in advertising projects. Miami, it’s booming. I mean there are a lot of corporations moving to Miami, which requires a lot of workspace. It takes many apartments for other people moving here to paint here. And the strength of the market is there. The projects did not take long to arrive. On the contrary, sales are strong for them. We communicate with them all the time, as well as with the developers. And we are very excited and happy. We have a massive accumulation that helps to continue developing day by day, because there are no closures.
jose chan
it’s for listening. And then, at the point of accumulation, I know that your accumulation continues to grow. Could you tell us about the type of activity that occurs, before accumulation?What is the type of initial indication of interest, since we think about the type of macro environment? Thank you.
Jose Manuel Daes
Well, we want to hire some other additional people in the quote department, because they beat us with quotes. And not just in Southeast Florida, I mean everywhere. I mean Tampa will double in length in the next five years. also in the Northeast, I mean Massachusetts, I mean especially New York. New York is back in force.
So we don’t see any slowdown. I mean, this time there’s going to be a comfortable landing of the economy, which is mandatory because of high inflation, which is putting pressure on the middle class. But possibly it wouldn’t be like last time, because last time the basics were wrong. I mean all the mortgages were fixed. This time, it is too effective in the market. And with higher rates, things are getting back to where they deserve to be.
jose chan
Thank you very much and good luck for the moment half.
Jose Manuel Daes
Thank you Jos Chan.
Operator
Merci. Et, those are all the questions we had online at the time. Now I would like to pass the call to José Manuel for the final comments.
Jose Manuel Daes
It is ok. Thank you all for taking the call. We will continue to work hard to please our shareholders and for that comes good news. Thank you.
Operator
Thank you and gentlemen. This concludes today’s conference. You can disconnect your lines right now and have a glorious day. Thank you for your participation.