Tecnoglass Inc.

Good day, ladies and gentlemen, and welcome to the Technoglass 3Q 2022 Earnings Conference Call and Webcast. At this time, all participants have been placed on listen-only mode. The floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Brad Cray of ICR. Sir, the floor is yours.

Thank you for joining us for Technoglass' third quarter 2022 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 way from those expressed or implied by the statements herein, due to changes in economic, business, or 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. The strong momentum in our business continued into the back half of 2022. I could not be more thrilled with our third quarter performance. Once again, we delivered record results across nearly all financial metrics while operating in a complex macroeconomic environment. Our record results were driven by the focused execution of our entire team to capture market share and further advance our leading position in the architectural glass industry. We are especially happy with the continued strong performance of our single-family residential business. In addition to the acceleration we are seeing in our commercial project invoicing, Our success validates our multi-year effort to diversify our business with new customers, innovative products, and end markets within attractive geographies. During the third quarter, we were especially pleased to achieve a record gross margin in excess of 50%. While this gross margin was well ahead of our normalized level, our performance clearly demonstrates the power of our business. This is made possible by how we can leverage our business as we continue to grow through our previous investments in automation and capacity enhancements, our unique vertically integrated platform, and our strategic market positioning. This gives us confidence that our current targeted investments to further modernize, automate, and expand our operations will enable us to maintain our short lead times, increase revenues, and produce the best returns in the industry. Separately, our diversified revenue mix and exceptional working capital management have helped us generate 11 straight quarters of a strong cash flow. We are carefully allocating cash through multiple avenues to create value. Today, based on ongoing business dynamics and growing backlog, we're very pleased to announce the authorization of a new 50 million share repurchase program as an additional pass to return capital to our shareholders. In summary, we expect to continue executing our highly profitable growth strategy to deliver above-market growth while generating strong cash flows and value for the shareholders. We are proud of our team's execution and the prudent approach we have taken to allocate capital effectively to generate attractive returns. We have a highly efficient, vertically integrated, low-cost operation with an innovative portfolio and in-demand products that leave us well situated to produce another year of record results. In the event that macro pressures intensify in our industry, we believe Technoglass is extremely well positioned to gain market share given our advantageous cost structure and the significant investments underway to make our business even more efficient. 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 five. 2022 has been an exceptional year for Tecnolas, and the solid momentum has continued into October, which was our highest invoice in months to date. The resilience of our business performance reflects our ability to capitalize on strong commercial demand in addition to gaining market share in a single-family residential, which is largely repair and remodel work for us. Despite elevated interest rates, the ABI index continues to be in expansionary territory for the 20th straight month as of September. Our activity in commercial end markets continue to pick up as customers resume projects and start new ones in attractive geographical areas where secular trends remain very strong. A reflection of that success is our backlog, which climbed to a record of $697 million at the end of the quarter in addition to a healthy pipeline of permitted projects. The record backlog represents an increase of about 21% compared to the prior year period. Approximately two-thirds of our backlog is mainly composed of medium and high-rise residential buildings, while one-third is related to a wide variety of commercial projects. As a reminder, our single-family residential growth trajectory is not fully captured in our backlog given the shorter-term spot duration of projects. As I mentioned, we have seen continued momentum across our business into the fourth quarter, which is reflected in our upwardly revised full-year 2022 outlook. Santiago will discuss that in more detail. We are all aware of our challenging micro-conditions in many regions and end markets in the U.S. That being said, we have many structural competitive advantages that give us confidence in our ability to continue growing through the cycle. We remain confident in our growth prospects due to our ability to outperform the market with our low-cost vertically integrated operations and short lead times. As seen over the last several years, these advantages should enable us to continue expanding customer relationships and gaining market share on both the residential and commercial side of our business. Therefore, we are investing in our production to further automate, optimize, and expand our facilities. These investments are expected 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 investing to ensure that our lead times remain among the best in the industry, that our world-class vertical integrated operations have room to long-term growth with both an existing and new customer. Our record of producing strong cash flows reinforces the confidence we have in our ability to innovate, obtain new business, and deliver exceptional results. I will now turn the call over to Santiago to discuss our operations, financial results, and improve our luck for the year.

Thank you, Christian. Turning to slide number six. We are extremely pleased with our outstanding results during the third quarter of 2022. Our performance represents yet another quarter of solid execution and market outperformance. Third quarter revenues were driven entirely by organic growth in both our commercial and single-family residential businesses. As Jose Manuel and Christian mentioned, we are benefiting from the structural advantages provided by our vertically integrated platform, focused execution of our growth strategy to capture demand for our innovative products, and our ability to provide short lead times, which has made Technoglyze a supplier of choice. Third-quarter single-family residential revenues increased 44% year-over-year to a record $85.8 million and accounted for 43% of total revenues, reflecting an expanding customer base and share gains. An important point I'd like to reiterate is that approximately two-thirds of our single-family residential revenues are tied to the remodel and renovation activity, which is not as highly sensitive to mortgage rate fluctuations when compared to new residential construction. We are in the process of opening showrooms in New York and South Carolina with additional showrooms openings planned in other regions. to fuel the geographic expansion of our single-family residential business and complement our already strong presence in the Southeast and South Central U.S. We're also seeing benefits from new products, including Multimax and a brand new garage door product that we have developed internally. Now, on slide seven, I would like to reiterate several key competitive advantages unique to Tecnoglass that are supporting our success in the current tight supply and cost inflation environment. More specifically, the differentiating factors benefiting our business are, number one, prior higher return investments in plant automation and capacity upgrades. Number two, Stabilizing our costs through hedging on aluminum inputs and dependable supply of raw glass through our joint venture with Saint-Gobain. Number three, a people-focused culture to retain quality talent and low turnover as an employer of choice. Number four, keeping transportation costs at around five to six percent of revenues. And number five, a 15% energy savings from green energy, including solar power and cogeneration of power through on-site natural gas. Now, turning to the drivers of revenue on slide number nine. Total revenues increased 53.3% year-over-year to a record $201.8 million for the third quarter. This increase was driven by solid all-organic growth in both commercial and single-family residential activity, in addition to market share gains. Our commercial construction revenues have grown sequentially in each quarter through 2022, with continued momentum expected through the year. Looking at the drivers of adjusted EBITDA on slide number 10. Adjusted EBITDA for the third quarter of 2022 more than doubled to a quarterly record of 78.5 million compared to 38.5 million in the prior year quarter. Adjusted EBITDA margin of 38.9% increased 970 basis points compared to the third quarter of 2021. Third quarter gross profit roughly doubled to 105.3 million, representing a 52.2% gross margin. This compares to gross profit of 51.5 million, representing a 39.2% gross margin in the prior year quarter. Our significant improvement in margin mainly reflected operating leverage on higher sales, favorable pricing dynamics, greater operating efficiencies partly due to automation, tight cost controls, and favorable FX trend given the recent strengthening of the U.S. dollar. SG&A was $35.2 million compared to $21.7 million in the prior year quarter, with the majority of the increase attributable to shipping expenses as a result of a higher sales volume and higher unit shipping costs. in part to serve a more fragmented single-family residential market. Additionally, we incur into a one-time settlement expense related to a project contracted in 2016, which is now fully resolved. As a percentage of total revenues, SG&A was 17.4% compared to 16.5% in the prior year quarter. Excluding the settlement, SG&A as a percentage of total revenues improved by 180 basis points compared to the prior year quarter. Now, looking at our improved balance sheet and leverage on slide 11. We have taken many actions over the past several years to fortify our balance sheet and we have improved our weighted average interest rate by over 350 basis points since 2020. This has left us with significant financial flexibility to execute growth and other initiatives. At quarter end, our leverage ratio once again improved to a new record low of 0.4 times net debt to LTM adjusted EBITDA, down from 0.9 times in the third quarter of last year. As of September 30th, we had cash balance of approximately $84 million and availability under our committed revolving credit facilities of $170 million, resulting in total liquidity of approximately $255 million. Turning to our structurally improved margins and cash generation on slide number 12. The improvement in our gross margin performance has been driven by themes we've discussed in recent calls. The structural and sustainable operational improvements related to automation initiatives. The shift in our business strategy to penetrate the higher-margin single-family residential end market where we don't do installation, and improve operating leverage on higher revenues which have more than offset depreciation, labor, and other indirect manufacturing costs. Taking into account these factors, we now expect our gross margins to be in the mid to high 40s range for the full year 2022, compared to 32% in 2019. Beyond 2022, as we think longer term, we now see upside to our low to mid 40% normalized gross margin range that we previously communicated. Building on our strong margin performance, we have maintained an exceptional track record of cash flow generation with third quarter operating cash flow of 29.1 million. Our impressive history of cash generation has provided us with financial flexibility to drive additional value for our shareholders. including a recent 15% increase to our quarterly dividend announced last quarter and today's authorization of a new $50 million share repurchase program. We have also been able to further enhance our glass and aluminum facilities to increase production capacity and automate operations to prepare us for the future increased demand indicated by our growing backlog. As Christian mentioned, We are on track to increase our installed production capacity by over 35% to an amount equivalent to approximately $950 million of annual sales by the end of the second quarter of 2023. This project has been funded entirely by our operating cash flow generation. Overall, our increased profitability Better working capital management, reduced interest expense, and a more favorable mix of revenues have collectively provided us with multiple levers to create additional value. We continue to expect strong cash flow for the full year 2022, further strengthening our resources to invest in value enhancing initiatives. Moving to our outlook on slide number 14. Based on our exceptional third quarter performance and strong invoicing into October, we are increasing our full year 2022 outlook for revenue and adjusted EBITDA. We now expect full year 2022 revenue to be in the range of $680 million to $700 million. This outlook represents growth of 39% at the midpoint, led by single-family residential. Based on this sales outlook, our anticipated mix of revenues and our exceptional margin performance, we now expect full year adjusted EBITDA to be in the range of 240 to 255 million, representing 67% fully organic growth at the midpoint of the range. Gross margins are now expected to be in the mid to high 40s range for 2022, mainly attributable to the leveraged on higher sales, favorable pricing and FX dynamics, structural advantages from our vertically integrated operations, and an overall higher mix of product versus installation revenue for the year. In summary, we are extremely pleased with the momentum in our business. As Jose mentioned earlier in the call, We believe that we can maintain our performance and share gains in the event that macro pressures intensify given our highly efficient cost structure and the significant investments we have undertaken to further increase the efficiency of our vertically integrated operation. We have delivered record results in each year since 2018 and are well on our way to produce another record year in 2022. With that, we will be happy to answer your questions. Operator, please open the line for questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. And the first question is coming from Alex Regal from B. Reilly Securities. Alex, your line is live.

Hi, good morning. This is actually Min for Alex this morning. Congratulations on a great quarter. Just a few questions. Yes, Jose Manuel, you mentioned that you had the highest level of invoicing month-to-date in October. I was wondering if you could provide any detail around that in terms of mix, pricing, any changes from the 3Q results?

Well, actually, no. It's been increasing in every aspect of our business. We have more residential. We have more commercial. The only change that we are seeing is that we are penetrating new markets. That doesn't add a lot today. But we believe that from January on, it's going to be increasing rapidly until the end of the year. We hope that in a year or two, we can be 50% outside of Florida.

Excellent. That's great to hear. Also, Santiago, it looks like the settlement expense is probably around $5 million or so. Is the 14.7% SG&A in the quarter, excluding that charge, is that sustainable kind of in the fourth quarter and into 2023? Or did you hold back on any spending in the quarter that may kind of come back next year?

No, I think it is. Based on this level of sales, we have always felt that we can get very strong operating leverage on SG&A, given that there's a lot of fixed costs within that line. So it is. Obviously, the FX this quarter was a tailwind, given how strong the dollar became against the peso. But everything held equal. We believe that that is sustainable.

Okay, perfect. And then this last question for me. Can you talk a little bit about your Multimax product? Obviously, outlook for home builders on the new construction side is coming down or has been down, given... the rise in rates, but I'm assuming that you still expect growth through geographic expansion and share gains. So just any details around Multimax, you know, customer relationships, geographic expansion would be helpful.

Yes, we have nothing on the West Coast. Now we landed two or three jobs. And now that they're seeing the performance, All the builders are reaching out to us, which is unusual. Normally we have to hunt for them. Now they're reaching out to us for us to quote, and we have a really reliable company. We deliver on time, and we have a very good product, and they like it. They see the competition doing well with our product. So I believe we're going to keep growing.

Great. Thank you. Thank you, Min. Thank you. And the next question is coming from Tim Walsh from Baird. Tim, your line is live.

Yeah, hey, guys. Good morning. Great job. Maybe just on the guidance sequentially, just kind of making sure that, you know, nothing's, you know, missing something because, I guess if I take your kind of implied Q4 from the full year guide, it does kind of indicate that there's a little bit of a step down in revenue, even though October was pretty strong. So I just want to make sure I'm not missing anything around seasonality or anything like that that might explain it.

No, you hit it, Tim. Typically, December is a slower month, given the fact that you have the holidays in place, you have the winter months. We go into schedule maintenance. So if you look backwards, Q4 has typically been a seasonal low quarter. That's not to say that if we have a ton of orders and we have to keep working, we will, but that's not the base case. So we are baking in a little bit of a step down given seasonal reasons.

Okay. Okay, good. And then just on FX... I guess where the peso is today relative to the dollar, I mean, it seems like it's not just going to be a benefit this quarter. I mean, it seems like it's going to be an even bigger tailwind over the next three to four quarters just on the margin. So I guess could you just remind us your Colombian peso denominated expenses and kind of where those fall in the income statement?

Yeah, absolutely. Our cost structure is one where we have about 65% of our cost and expenses in U.S. dollars and 35% in Colombian pesos. So obviously, with us selling 96% into the U.S., the continued weakness in the Colombian peso is beneficial to our P&L. To give you a sense of perspective, this quarter alone, As far as gross margin goes, we had a benefit of about 2.9% if you compare it to last year. What happens going forward remains to be seen, but if the peso continues to be weak, we'll continue to have a benefit from a P&L perspective for sure. And that's pretty much across the P&L, to answer your question. It'll be in COGS and it'll be in SG&A.

Okay. Okay, good. And then I guess on the pricing side, I mean, is there any way to kind of break out what pricing contributed in the quarter? And I guess, you know, maybe from a market standpoint, kind of where your pricing is today versus peers in some of your markets?

I'll answer the first one, and I'll defer to Jose to answer the second one. For the quarter, he provided a tailwind of about 3%. based on the price increase that we took in May, which only starts flowing 60, 70 days later, so it fell into July right into the quarter. As far as the pricing dynamics in the market, I'll let Jose elaborate on that.

Raw materials have been going down finally. A few have still to, I mean, they're sustaining the prices, but let's say 60% of the materials have been going down, and obviously we have to go down with the market because everybody is reducing their prices trying to sustain the market share. we keep penetrating new markets and even though today we are part and part with everybody, we see a lot of our peers reducing their prices dramatically to get business. Nevertheless, we do the same and I believe we're going to keep growing because our product seems to have better acceptance. It looks better. It performs better. And we have very competitive pricing.

What I would add, Tim, is that our base case is not that the margins are going to drop because pricing coming down, because as Jose just elaborated, input costs have also come down quite a bit, namely aluminum coming down from $3,800 per ton to about $2,200 right now. So it's not a deterrent to margins in our case.

Okay, good. Appreciate the caller and keep the good work.

Thank you. Talk soon.

Thank you. And the next question is coming from Julio Romero from Sedoti and Company. Julio, your line is live.

Thanks. Hey, good morning. On the comment you made on gross margins about thinking about longer term upside to your normalized gross margin range, just talk about maybe what's what's driving that confidence and that upside? Is it solely the operational improvements related to automation or is there maybe a change in what you assume normalized product versus install mix is to be like?

Yeah, I think we saw upside on the operating leverage that we were able to get on the business. That accounted for about, you know, 5% of the bridge against last year. So with this level of revenues, we were able to get quite a bit of leverage. And then also the other upside was related to the FX with the dollar strengthening very rapidly over the last quarter. That remains to be seen as to what happens. That's why we are not guiding to 52.2%, but mid to high 40s, right, because we cannot count on that factor being there. We can count on the operating leverage. We can count on the efficiencies. Um, and, and obviously pricing may be, you know, a temporary effect, but as I just said to Tim, we don't, we don't bake in that margins get reduced because, uh, prices go down because the input costs are also coming down. So I would say that the biggest surprise was the amount of operating leverage that we can get on the business with this level of sales.

Gotcha. So FX pricing unclear beyond this year, but going forward beyond this year the op leverage and efficiencies are sustainable.

That's right. Operating leverage and efficiencies from prior automation initiatives.

Got it. And can you maybe talk a little more about the new garage door product that you've developed? Anything you can provide in terms of what market that's going after, the TAM? Anything you could give on that would be helpful.

Yes, this is Jose. We just launched the product like three months ago, and we have a huge backlog of doors that have been sold. It's actually a garage door only for the hurricane market. We are on the development of the same product, but for non-hurricanes. and that will be out of Florida and everywhere else. That will be launched by March next year. It has a lot of acceptance. It's a great product. We have installed, I believe, around 50 so far. It's a beautiful product. It works well. Everybody is really happy about it.

Got it. That's helpful. you know, very encouraging to see the announcement of the share repurchase program. You know, what kind of cadence maybe are you thinking about in terms of the buyback deployment?

We're going to wait and see, take a cautious approach. We haven't put in a timeline as far as when it goes, so we're going to see what the market reaction is, and we believe that the shares are certainly undervalued and is a good opportunity for the company as well as for shareholders to get cash back. So we haven't set out a specific target for any month. We'll just wait and see how it goes.

Understood. Thanks very much for taking the questions.

All right.

Take care.

Thank you. And once again, ladies and gentlemen, just a reminder that if you wish to enter the Q&A queue, please press star 1 on your phone at any time. The next question is coming from Joshua Wilson from Raymond James. Joshua, your line is live.

Good morning. Thanks for taking my questions and great quarter. Hey, Josh, how are you?

Thank you.

I'm well, thanks. Could you give us some color on what you're assuming for single family growth in the fourth quarter and maybe any early thoughts you have on what that could look like in 23?

Yeah, I'll take the first one. We're assuming slightly higher revenues from what you saw in Q3. So you can kind of bake into what that equates for growth. Obviously, you're comparing it against a higher comparable last year. As far as what the new year will look like, I'll let Jose take that to provide more color.

We hope to grow by around 15% next year, 10% to 15% because geographic growth more than the local market, more or less.

Great. And then as we think about your CapEx outlook and free cash flow for this year, can you give us an update on the cadence of the CapEx spending and what the cash flow generation could look like, especially as it relates to working capital impacts?

Yeah, I would expect a similar quarter to Q3. Obviously, with the rapid growth, as you see in the cash flow, we did have a usage of working capital, but nevertheless, we were able to generate quite a bit of cash flow from operations, and in line with what we discussed previously, Earlier, we continued to invest on growth capex to get to about $950 million in sales by 2023, or operating capacity of $950 million in sales. So I would expect Q4 to be kind of similar to what you saw on Q3. And next year, once we fine-tune our projections, we'll provide better guidance on that. Great. Good luck with the next quarter. All right. Take care.

thank you and the next question is coming from brent thielman from d.a davidson brent your line is live hi this is jarvis from brent how are you hey how are you um could you uh with the backlog as large as it is um could you talk about your flexibility to meet these orders for 2023 um just giving us some color whether you know the first half will be full and will there be some room in the second half of that year?

Yeah, this is Christian. Since we are putting in place good topics, we expect to have incremental capacity beginning in January. In March, we'll add some more. By June, we will have 50% to 60% more capacity in laminated glass and 150% more capacity in insulated glass. So we really believe that we could even go beyond... a 30% growth without any problem for next year if we can sell that much. It looks like we're going to be able to sell, but we don't want to jump into any early conclusions. Many things are going on on the market, interest, financing, and all that, so we want to be cautious about it, but we're putting in place enough capacity so we can continue to grow at a good percentage rate in the following years.

Thank you. And just could you talk a little bit about the implications of the Hurricane Ian on the fourth quarter and whether that creates replacement demand this quarter or going beyond 4Q 2022.

The hurricane? Yes. Well, you know, when the hurricane passes, it takes a bit of time between the time that the government and the insurance companies and the owners get together to how they're going to go about the replacement of the houses and the windows and whatever. We believe this quarter is not going to see any of that. We believe all that is for next year. So this quarter is is already mostly sold. We believe for next year we're going to see a lot of movement on the west coast of Florida.

Like we said in the press release, October was the best selling month of the year. November and December orders are already in. We know that we're going to have a good quarter And as usual, we want to be cautious how we guide because we prefer to give you good news with results and not that we fail to meet your expectations.

Got it. And if I may, could I ask one more question? Could you, I know you've given some bullet points on the initiatives about efficiency, but could you walk me through, you know, if there's any more color into what led to the 50% gross margin and, you know, and how you plan and if you plan on adding any new sort of initiatives going forward into 2023?

Yes. So just to bridge gross margin,

leverage and getting to this level of sales versus what you saw last year added quite a bit to that. But not only we have that kind of sort of permanent reason, but there's also a couple of the reasons that I mentioned earlier. For instance, the dollar strengthened against the peso at a very rapid pace this quarter. So you had about 300 basis points of positive effect on gross margin. And we obviously don't know what's going to come out of that, but the expectation is that the peso will continue to be weak with the Fed taking the actions that it is taking. And on top of that, we had about 300 basis points of pricing effect that we discussed earlier. for the pricing increase that we took in May that starts flowing through orders and invoicing in the Q3 of this year. As far as initiatives, yes, as Christian laid out, we are continuing to kind of upgrade and automate the facility. This next couple of months will add to have capacity north of 800 million, and as he laid out, We'll continue to do so until June of 2023 to get to increased capacity, and that also includes further automation, which hopefully should bring incremental efficiencies.

Great. Thank you. I appreciate that so much.

Thank you. Thank you. There were no other questions from the lines. I would now like to hand the call back to Jose Manuel for closing remarks.

Okay, thanks everyone for participating on today's call. We'll keep working towards excellence in our business. We plan to keep growing and giving good news to our shareholders. Thank you.

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