Tecnoglass Inc.

Greetings and welcome to Techno Glass Inc. 4th Quarter 2021 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Cray, Investor Relations. Thank you. You may begin.

Thank you for joining us for TechnoGlass' fourth quarter and full year 2021 conference call. A copy of the slide presentation to accompany this call may be obtained on the investor section of the TechnoGlass website. Our speakers for today's call are Chief Executive Officer Jose Manuel Diaz, Chief Operating Officer Chris Diaz, and Chief Financial Officer Santiago Geraldo. 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 Technoglass' 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 Technoglass's business. These risks, uncertainties, and contingencies are indicated from time to time in Technoglass's filings with the SEC. The information discussed during the call is presented in light of such risks. Further, investors should keep in mind that TechnoGlass's financial results in any particular period may not be indicative of future results. TechnoGlass 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. I am excited to discuss our exceptional fourth quarter and full year results, which reflect the focused execution of the Tecnograph team across all areas of our business. During the fourth quarter, we further advanced our leading industry position to produce yet another quarter of record results across nearly all operating metrics. This allowed us to achieve the most profitable and highest cash flow year in technoglass history. Our strong growth continues to be largely driven by outperformance in the sales of our innovative single-family residential product. Single-family sales rose over 140% year-over-year in the fourth quarter, and for the year, our single-family sales increased over 150%. This impressive performance in residential has been supported by a combination of our penetration into the attractive Southeast U.S. region and our track record of excellent customer service, including our ability to deliver products with lead times well below industry average, despite the supply constraints impacting our industry. We continue to take a disciplined approach to managing costs. We are leveraging our vertically integrated structure and prior automation investments to drive operational efficiencies. That has allowed us to further advance our industry-leading margins, This is evident in our fourth quarter gross margins, which increased 710 basis points year-over-year to a record 42.9%, contributing to full-year gross margin improvement of 380 basis points to 40.8%. In November, we took further steps to reinforce our balance sheet through additional amendments to our credit facility. which increased our financial flexibility and reduced our borrowing costs, all to support future growth. These achievements were a recognition by our lenders of our careful working capital management and the growing mix of our revenues from our single-family business, which has a shorter cash cycle. Together, these factors helped us generate our eighth straight quarter of accessible cash flow as we produce a record $117.3 million of operating cash flow in the full year 2021. Our improved cash generation profile has augmented our capabilities to invest further in automation and capacity of our plants. And we also voluntarily prepaid $30 million of debt during the year, further strengthening our balance sheet to achieve the lowest leverage ratio in our history at 0.8 times net debt to adjusted EBITDA. And given the strength of our business and cash flow, in December 2021, we announced a 136% increase in our dividend to further boost capital returns to shareholders. In summary, our fourth quarter results mark the completion of another outstanding year for Tecnoglass. We could not be more pleased with the value we have created from our returns-oriented investments and the actions we have taken to propel our company into a leading architectural glass player. Through our vertically integrated platform, strategic geographic positioning, and prudent growth investments, we have established an exceptional track record of cash flow generation, which is helping us create additional value for our shareholders as we set the foundation for the next chapter in our growth history. As we look to 2022 and beyond, we are confident in the actions we have taken to leverage our structural advantages and strengthen our capital positions. All these will collectively allow us to gain additional market share while maintaining our industry-leading margins and structurally enhanced cash flow profile. 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 five. In addition to the strong operating performance that José discussed, The strength of our business is also evident in our growing backlog, which rose approximately 7.2% year over year to a record 585 million. As I have mentioned in the past, the majority of our backlog is weighted towards medium and high-rise residential projects, which are performing most other commercial sectors. Additionally, our solid single-family residential growth trajectory is is not entirely captured in our backlog, given the shorter-term spot duration of projects. While we recognize backlog represents a multi-year pipeline of revenue, it is encouraging to end the year at a backlog amount that is in excess of our full-year 2022 revenue outlook and provides us with solid visibility on ourselves into 2023. The majority of our backlog continues to represent projects located in attractive Southeast and South Central U.S. regions, as well as others throughout the U.S. Our optimism in our end market is supported by recent January ABI readings of 61.0 for the U.S. South, the highest reading for this geography since 2005. As a prime example of our success, Tecnoglass is already contracted to supply architectural glass to 20 of the 22 tallest towers under construction in South Florida in 2022 and 2023. The fact that we can deliver quality products, exceptional service, and dependable lead times all contributed to the impressive accomplishment. I will emphasize that short lead times are a critical factor in the current market and Tecnoglass can deliver the right product at the right time. Our customers are clear with us that they value that advantage and will pay us for a consistent ability to go above and beyond what other companies can deliver. And the proof is our incredible results. We are encouraged by our significant accomplishment in 2021 and the continued momentum in our business through year-end and into the first quarter of 2022. Looking ahead, we remain highly optimistic on the future of our business as we leverage our innovative product portfolio to further capitalize our solid residential macro tailwinds and the continued pickup in project winds with our commercial customers. I will now turn the call over to Santiago on slide six to discuss the strong demand for single-family products, vertically integrated strategy and financial results, and solid outlook for 2022.

Thank you, Christian. We're extremely pleased with our record fourth quarter and full year 2021 results. Our strong performance reflects the structural advantages provided by our vertically integrated platform, focused execution of our growth strategy, and the high demand for our innovative architectural glass products, which we can deliver on schedule. Our success is evident in our financial results, where we produced record 2021 revenue and adjusted EBITDA, while expanding margins once again to record levels in both the fourth quarter and full year. Expanding on a theme we've discussed in recent quarters, we were pleased to see a continuation of outsized growth in our single-family residential sales. Our focused efforts to further penetrate the single-family residential market drove increases of 142% and 151% year over year in the fourth quarter and full year 2021, respectively. Single-family sales accounted for 41% of our total fourth quarter sales and represented 36% of our sales in full year 2021. Our rapid expansion and success in this market has also led us to new business wins and farther share gains across the US. Looking ahead, we continue to expect single family residential sales in the US to be the primary driver of our revenue growth with additional upside expected from dealer network expansion and geographic diversification in the Southeast and South Central US. We're seeing good traction with new product launches catering to our untapped opportunity with production home builders, such as our Multimax product line that we began invoicing earlier in the year. This upside opportunity is supported by positive macroeconomic tailwinds, such as the robust remodeling activity, strong housing starts, deurbanization trends, and upgrades to storm-proof windows, which are collectively providing us with opportunities to further penetrate this attractive market. Now, on slide number seven, I would like to reiterate several key themes that are supporting our success in this tight supply environment. Our vertically integrated business model and strategically located operations provide us with a cost-efficient operation and entrenched competitive advantages. A few factors critical to our success that I would like to reiterate include Prior high return investments in plant automation and capacity upgrades. Hedging our aluminum costs and locally sourcing our float glass supply through our JV with Sangoban. Being an employer of choice to maintain quality talent and low turnover in a local environment with an ample supply of employees. Keeping transportation costs at less than 5% of revenues due to the current U.S. and Colombia trading balance, which partially insulates the company from other inflation dynamics seen in other places. And finally, a 15% energy savings from our prior investments in solar and other renewables. As evident in our fourth quarter and full year results, Our improvements continue to provide us with structural competitive advantages that have enhanced our ability to introduce new product offerings, quote, more projects, deliver products on shorter lead times than the industry average, and expand our customer relationships through enhanced delivery capabilities. Turning to the drivers of revenue on slide number nine. Total revenues increased 28% year over year to a record $131.8 million for the fourth quarter, and 32% year over year to a record $496.8 million for the full year, attributable to strong growth in single-family residential activity, market share gains, and accelerating demand for our products. As previously reported, We completed the acquisition of Ventana Solar during the fourth quarter, a Panama domiciled company that served exclusively as an importer and distributor of technoglass products in the country of Panama. After eliminated intercompany sales, Ventana Solar contributed revenues of approximately $2.3 million to our full year revenue. Our results through the nine-month period ended September 30, 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 fourth quarter of 2021 increased 65.7% to a quarterly record of $42.2 million, representing an adjusted EBITDA margin of 32%. Adjusted EBITDA for the full year increased 54.1% year-over-year to a record $150.3 million, representing a margin of 30.2%. We are pleased to produce record fourth quarter and full year gross profit on both a dollar and margin basis. Our gross profit for the fourth quarter increased 53.6% to 56.5 million, representing a gross margin of 42.9% compared to a gross margin of 35.8% in the prior year quarter. The 710 basis point improvement in margin mainly reflected greater operating efficiencies and a higher mix of revenue from manufacturing versus installation activity as we increased our mix of single-family residential products where we do not carry out installation. This strong fourth quarter performance contributed to a year of record full-year gross profit, 80 basis points of margin expansion to a new record full-year gross margin of 40.8%. Higher nominal operating expenses for the quarter mainly reflected incremental variable expenses related to marine and ground transportation and commissions. As a percentage of revenue, operating expenses improved by 100 basis points for the fourth and 240 basis points for the full year compared to the respective prior year periods due to higher revenues and better operating leverage on personnel, professional fees, and other fixed expenses. Now, looking at our balance sheet and leverage on slide 11. Building upon the recapitalization of our debt in 2020, during November of 2021, we further enhance our financial flexibility through the amendment of our senior secure credit facility. This reduced our borrowing costs by approximately 130 basis points, tripled the borrowing capacity on their credit facility to 150 million, and extended the maturity date by one year to the end of 2026. During 2021, We built upon our outstanding track record of cash flow generation to end the year with a record operating cash flow, which increased by $45.5 million to $117.3 million compared to the prior year. Our operating cash flow represents a 78% conversion from adjusted EBITDA for the year, reflecting our shorter cash cycle single family revenues, exceptional working capital management, and lower interest expense. This impressive cash flow generation provided us with flexibility to drive additional value for our shareholders during 2021 as we made additional growth investments in our operations, voluntarily prepaid $30 million in debt, and increased our quarterly dividend by 136%. At year-end, we had a cash balance of approximately $85 million and availability under our committed revolving credit facilities of $163 million, resulting in total liquidity of approximately $250 million. Our efforts to maintain a strong balance sheet allowed us to achieve the lowest leverage ratio in company history. which decreased to 0.8 times net debt to adjusted EBITDA at year end, down from 1.6 times at the end of 2020. On slide 12, I would like to highlight the evolution of our cash generation capabilities over the last several years. The substantial improvement in our cash flows is a direct reflection of better working capital management operational efficiencies from high return investments in our operations, and focused efforts to substantially reduce our overall borrowing costs. The working capital improvements are evident in the reduction in our day sales outstanding that reflects stronger collection efforts overall and a higher mix of sales from single-family products, which feature a shorter cash cycle. We have also significantly reduced our inventory days to 104 days in 2021 compared to 132 days in 2018, in part due to streamlining our aluminum operations through automation in addition to other makeshifts in our business. Overall, we are extremely pleased with all of our efforts to enhance cash generation, which has provided us with the increasing financial flexibility to continue investing in our operations as we prepare for future expected growth. Moving to our outlook on slide number 14. Based on the strong momentum in our business through 2021 and into the first quarter of 2022, we are confident in our ability to continue our track record of growth in the full year 2022. We are introducing our outlook for full-year 2022 revenue to be in the range of $575 million to $600 million. This outlook represents growth of 18% at the midpoint, led by single-family residential. Based on this sales outlook and anticipated mix of revenues, we expect full-year adjusted EBITDA to be in the range of 170 to 190 million, representing a 20% growth at the midpoint of the range. Growth margins are expected to be in the range of 40%, benefiting from our previously completed high-return CapEx investments and the supply chain benefits of our vertically integrated operations, along with the structural advantages of our operations that I discussed earlier. Additionally, We anticipate that we will have a higher mix of product versus installation revenue during the year. We expect CAPEX in 2022 to approximate 17 to 25 million, primarily related to the tail end of our most recent automation investments, as well as further growing investments into our glass and aluminum operations to efficiently manage increasing demand for our products. maintenance capex continues to represent less than 2% of our sales. We believe our structural advantages, the partial insulation from inflationary pressures, tight working capital management, and project mix will continue to drive strong cash flow generation in the full year 2022. In summary, 2021 was another milestone year for Tecnoglass. With our strategic geographic positioning, vertically integrated structure, and targeted investments, we have confidence in our ability to capture an increasing share of demand while continuing to deliver significant cash generation and provide superior returns for our shareholders in 2022 and beyond. With that, we will be happy to answer your questions. Operator, please open the line for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask your question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Julio Romero with Sedoti. Please proceed with your question.

Good morning, guys. This is Noah on for Julio. Thanks for taking the questions. Good morning. With the adjusted EBITDA outlook of $170 million to $190 million, it implies a very strong growth, but it also is a wide variance. Could you talk about the puts and takes that could put you at those high and low ends of that range?

Yeah, it's obviously going to be determined by gross margin. We're implying 40% for this year, which is in line with what we ended up in 2021. Obviously, input costs on raw materials are going to play a part. SG&A, we're expecting to be kind of in line of what you've seen in the year stats, fairly flat. So I think it's going to depend mostly on gross margin and the mix of business that we do, installation versus manufacturing, which, as you know, manufacturing carries a higher margin.

Okay, thank you. And another one, could you give a progress update on the Multimax line and how much revenue did it contribute to the quarter?

Well, we are around 36% residential, and of that, Multimax is around maybe 20% of those 36%, so 7% of ourselves. We are still growing in that sector. We have not made more penetration until we learned the market. Now, things are going to speed up, and I think it's going to be a larger percentage.

Okay. Thank you very much, guys.

Our next question comes from the line of Tim Woj with Robert W. Baird. Please proceed with your question.

Hey, guys. Good morning. Nice job. Good morning. Maybe just to start on kind of the revenue guidance. Santiago, I know you said the growth is going to be led by single-family residential. Can you unpack that a little bit just in terms of maybe where you expect U.S. residential to kind of grow and then maybe the contributions you would expect from the commercial business and maybe Latin America within the guidance?

Yeah, so if you look at the higher end of that guidance, Tim, we're looking for resi to grow between 30% to 35% and commercial to grow about 15%. That's at the higher end of the guidance range. So in line with what we were saying, residential continues to lead the way, but obviously commercial is making a nice comeback. So we are looking for both segments to contribute.

Okay.

And then on the residential... Let me further tell you the following about commercial. Commercial is really ramping up because there are more than 100 buildings 30 floors and up in the works in the South Florida area alone. So we expect residential commercial to pick up a lot.

Okay, that's great. And then when you think about the long-term scope for the residential business, I mean, you're ending this year at, call it just over $200 million kind of run rate. What is kind of the, I guess, three- to five-year type opportunity for the residential business as a whole?

Oh, we expect the residential to grow at least 20% a year. We still have a lot of ground to gain in... In South Florida, the rest of Florida, which we don't serve yet, like the panhandle in the ops of Orlando, Jacksonville, and also we're going to keep growing to other states. We developed a new line with thermal break. which means that we can sell in all the states on the residential line. And we're going to start as of March, April this year.

Okay. Okay. That's great. And then, and then maybe on, you know, just the commercial side of the business. I mean, what, what are you kind of, I know there's a lot of buildings going up, but what are you seeing around just kind of the pace of construction for some of those projects and, How have you kind of factored in any kind of risk of delays just based on labor, installation, or things like that that might be out of your control?

Yes, of course. Well, let me explain this. Commercial is geared by a few things. The permits are taking longer because there is a lot of backup in the offices because it's unprecedented the amount of buildings asking for permits. But they're all sold out. I mean, everything that goes for permit is because they have 50-60% sold. So what they are encountering now is lack of GCs and this and that. I'm only counting in the growth the ones that already have permits and the ones that already have a GC and that we have a contract on or a letter of intent or solid grounds to believe they're going to go up. If All of the building goals do go up. 2023 is going to be at least 40% higher than this year. And this year is already 20% higher than last year.

Okay. Okay, that's really helpful. I appreciate that. I'll hop back in queue, but good luck on 22, guys. Thanks.

Thank you.

Our next question comes from the line of Alex Rigel with B. Riley. Please proceed with your question.

Thank you very much. Good morning, gentlemen. Great quarter. Can you talk a little bit about capacity utilization and the incremental cost? Can you talk a little bit about capacity utilization and the incremental cost to add additional capacity?

The capital utilization, the cappings that we put in place last year?

Just as it relates to manufacturing capacity utilization, you know, how much of your plant you're using right now, how much more capital do you believe you need to add for growth opportunities, and so on?

With the investment that we did last year and with the capital that we're going to do this year, we'll be able to reach $700 million of sales at least if we have the demand for the product, which I think we will. We won't have any problem reaching 600 or 650 this year if we can make it all happen. And if we add on, like we added on in March, in April we're coming in with two additional laminating lines. We're coming up with another extrusion press. We're coming up with six new lines of windows, so we should be able to reach, with the money invested last year and this year, up to $750 million easy without any big effort.

Excellent. And then I think last quarter you mentioned that you had maybe about five relationships with U.S. home builders. Maybe you could update us on that, assuming it's expanded a little bit. As well, you talked a little bit about expanding your residential product outside of the state of Florida.

Maybe you can give us an update there. Trust us, and they keep revealing business.

As I mentioned in the last call, we like to start slow and let the business grow, and it's growing. They're giving us more communities. And we are designing also now for up north. We'll be starting March or April getting businesses outside of Florida. And we expect the residential side to grow, like I said before, at least 20% a year and hopefully more.

Great. Thank you very much.

Our next question comes from the line of Joshua Wilson with Raymond James. Please proceed with your question.

Good morning. Thanks for taking my question. Congrats on the quarter.

Thanks.

Good morning, Josh. First, just to clarify on the capacity question, so exiting 2022, you'll have capacity for $750 million in sales. Did I hear that right?

Yes, you did.

Yeah. Okay.

So after the CAPEX that was put in place last year plus the CAPEX that is being invested this year, that would be the capacity.

Got it. And then as it relates to the true commercial non-residential office part of your business, what are the latest readings you're seeing there in terms of activity?

So most of what we're doing still, and you can see it in the presentation, is related to multifamily within that commercial space, right? but the reading in other places, especially in the main geographies where we are, in the southeast, are strong, like hotels and office space.

Yeah, there is a lot of office demand now in Palm Beach, in Miami. There is a lot of companies moving to Florida, and so they are building new offices The hotels in Miami are packed. I mean, it's like 97% capacity. They are sold out. So there is a lot of hotels also going up. And we in Florida, we get a majority of sales. I mean, we get 70%, 80% of anything that goes up.

Excellent. Thanks so much.

Our next question comes from the line of Zane Karimi with DA Davidson. Please proceed with your question.

Good morning. Congratulations on the quarter, and thank you for taking my questions. Good morning, Zane. So to follow up on Tim's question earlier on residential growth, are there supply chain and labor issues which some of the home builders are experiencing, creating bottlenecks for your residential products?

Well, let me tell you this. They are with other trades. Other trades, I mean the concrete or the wood or whatever. But in my trade, which is aluminum windows, everybody that we are serving is very happy because we are on time. We have short delivery times and the quality of our product compared to our peers is way, way, way better. And they are as happy as they can be.

Okay. Thank you for that. And Maybe on the backlog, how is pricing on new work in commercial backlogs, and what are some of these competitive dynamics looking like currently?

Well, the prices are the prices. I mean, every time we sell a business, we already lock the prices on everything for the future. And, I mean, our margins look good, and We obviously are increasing the prices because aluminum has jumped in just this year from $2,850 to $3,700 today. So every month or every two weeks that the prices jump, we increase the prices to whatever is not sold. Whenever it's sold, we have to log the price, and we do it also with our suppliers.

Just to add to that, if you look at what we are guiding for this year, we're implying gross margin in line with last year, right? So 40% basically accounts for what Jose just said. I mean, to the extent that input costs go up, we'll pass that through to the end clients. But on the commercial segment, when you have these long-term contracts, you're ready to kind of lock up prices and input costs. So that's what we based our gross margin projections on.

Okay. Thank you for that. And last one from me. But what are you guys thinking about buybacks at the current price versus other investments?

I think that's something that has to be on the board's plate to evaluate everything. And we'll just kind of base that on... on the projected cash flow and the opportunities that are presented to the company. But, you know, we'll evaluate every option. And as you know, we already increased the dividend for shareholders to return incremental cash to shareholders. So everything is on the table, and if it makes sense, it will be evaluated.

Thank you again, and congrats on the quarter. Thanks.

Thank you.

That is all the time we have for questions. I'd like to hand the call back to Jose Manuel Deyes for closing remarks.

Thanks, everyone, for participating on today's call. We'll keep improving in every way we can, in production, in sales, in expanding geographically. and we'll keep giving good news for the company that is well-managed and is the best badges in the industry. Thank you.

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