Tecnoglass, Inc. (NYSE:TGLS) Q3 2022 Earnings Conference Call November 3, 2022 10:00 AM ET
Company Participants
Brad Cray – ICR
Jose Manuel – CEO & Director
Christian Daes – COO & Director
Santiago Giraldo – CFO & Head, IR
Conference Call Participants
Min Chung Cho – B. Riley Securities
Timothy Wojs – Robert W. Baird & Co.
Julio Romero – Sidoti & Company
Joshua Wilson – Raymond James & Associates
Operator
Good day, ladies and gentlemen, and welcome to the Tecnoglass 3Q 2022 Earnings Conference Call and Webcast. [Operator Instructions].
It is now my pleasure to turn the floor over to your host, Brad Cray of ICR. Sir, the floor is yours.
Brad Cray
Thank you for joining us for Tecnoglass’ Third Quarter 2022 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 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 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 #4.
Jose Manuel
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’re 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 multiyear 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 our 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 increased 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 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 another 50 million share repurchase program as an additional path 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 trajectory to generate attractive returns.
We have a highly efficient, vertically integrated, low-cost operation with an innovative portfolio and in demand products, delivers well situated to produce another year of record results.
In the event a macro pressures intensify in our industry, we believe Tecnoglass is extremely well positioned to gain market share given our advantages, 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 the record backlog.
Christian Daes
Thank you, Jose Manuel. Moving to our backlog on Slide 5. 2022 has been an exceptional year for Tecnoglass and the solid momentum has continued into October, which was our highest invoicing month 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 2/3 of our backlog is mainly composed of medium- and high-rise residential buildings while 1/3 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 terms, both 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 well aware of our challenging macro 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 decrease our installed production capacity to our 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 are world-class vertically integrated operations have room to long-term growth with both an existing and new customers. 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 improved outlook for the year.
Santiago Giraldo
Thank you, Christian. Turning to Slide number 6. 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 shorter lead times which has made Tecnoglass 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 2/3 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 7, 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 cost 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 cost at around 5% to 6% 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 9. 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 #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 onetime 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 0.4x net debt to LTM adjusted EBITDA, down from 0.9x in the third quarter of last year. As of September 30, 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 improved operating leverage on higher revenues, which have more than offset depreciation and labor and other indirect manufacturing cost.
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 million 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 leverage on higher sales, favorable pricing and FX dynamics structural advantages from our very 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.
Question-and-Answer Session
Operator
[Operator Instructions]. And the first question is coming from Alex Rygiel from B. Riley Securities.
Min Chung Cho
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?
Jose Manuel
Well, actually, no, has been increasing in every aspect of our business. I think we are more residential. We have more commercial. The only change that we are seeing is that we are penetrating new markets that’s [indiscernible] to add demand a lot today, but we believe that from January on, is going to be increasing rapidly until the end of the year. We hope that in a year or 2, we can be 50% outside of Florida.
Min Chung Cho
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?
Santiago Giraldo
No. I think it is based on the 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 cost 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.
Min Chung Cho
Okay. Perfect. And then just last question for me. Can you talk a little bit about your Multimax product, obviously, outlook for homebuilders on the new construction site 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 customer relationships, geographic expansion would be helpful.
Jose Manuel
Yes. We have nothing on the West Coast and now we landed two or three jobs. And now that we’re seeing the performance, other 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.
Operator
And the next question is coming from Tim Wojs from Baird.
Timothy Wojs
Great job. Maybe just on the guidance sequentially, just kind of making sure that nothing is 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.
Santiago Giraldo
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 scheduled 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 best case. So we are baking in a little bit of a step-down given seasonal reasons.
Timothy Wojs
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 3 to 4 quarters, just on the margins. So I guess could you just remind us your Colombian peso denominated expenses and kind of where those fall in the income statement?
Santiago Giraldo
Yes, yes, 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, will 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 will be in COGS and it will be in SG&A.
Timothy Wojs
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, maybe from a market standpoint, kind of where your pricing is today versus peers in some of your markets?
Santiago Giraldo
I’ll answer the first one, and I’ll defer to Jose to answer the second one. For the quarter, it 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.
Jose Manuel
Well, some of the raw materials have been going down finally. A few have still to — so 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 the prices, trying to sustain the market share. We keep penetrating new markets. And even though today, we are par on par 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.
Santiago Giraldo
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.
Operator
And the next question is coming from Julio Romero from Sidoti & Company.
Julio Romero
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 driving that confidence in 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…
Santiago Giraldo
I think we saw upside on the operating leverage that we were able to get on the business that accounted for about 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. And obviously, pricing may be a temporary effect. But as I just said to Tim, we don’t bake in that margins get reduced because 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.
Julio Romero
Got you. So FX pricing unclear beyond this year, but going forward beyond this year, the op leverage inefficiencies kind of are sustainable.
Santiago Giraldo
That’s right. Operating leverage and efficiencies from prior automation initiatives.
Julio Romero
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 as anything you could give on that would be helpful.
Jose Manuel
Yes. This is Jose. We just launched the product like three months ago, and we have a huge backlog of those that have been sold. And actually, the garage door only for the hurricane market, we are on the development of the same product, both for non-hurricane and that will be out of Florida and everywhere else, that will be launched by March next year. It has a lot of success. It is 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.
Julio Romero
Got it. That’s helpful. And very encouraging to see the announcement of the share repurchase program. What kind of cadence maybe are you thinking about in terms of the buyback deployment?
Santiago Giraldo
We’re going to wait and see, take a cautious approach. We have been put in a time line 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 it’s 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 going to wait and see how it goes.
Operator
[Operator Instructions]. The next question is coming from Joshua Wilson from Raymond James.
Joshua Wilson
Great quarter. 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?
Santiago Giraldo
Yes, 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.
Jose Manuel
We hope to grow by around 15% next year, 10% to 15% because of geographic growth more than the local market, more or less.
Joshua Wilson
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 with — especially as it relates to working capital impacts.
Santiago Giraldo
Yes. 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 earlier, we continue 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.
Operator
And the next question is coming from Brent Thielman from D.A. Davidson.
Unidentified Analyst
This is on for Brent. Could you — with the backlog as large as it is, could you talk about your flexibility to meet these orders for 2023? Just give us some color whether the first half will be full? And will there be some room in the second half of the year?
Christian Daes
Yes. This is Christian. — that. We — since we are putting in place good CapEx. 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 7% 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.
Unidentified Analyst
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?
Jose Manuel
Yes. Well, when the hurricane passes, it takes a bit of time between the time that the government and insurance companies and the owners then 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 already mostly sold. We believe for next year, we’re going to see a lot of movement on the West Coast of Florida.
Christian Daes
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 on how we guide because we prefer to give you good news with results and not that we fail to meet your expectancies.
Unidentified Analyst
Got it. And if I may, could I ask one more question. Could you — I know you gave some bullet points on the initiatives about efficiency, but could you walk me through if there’s any more color into what led to the 50% gross margin? And how you plan and if you plan on adding any new sort of initiatives going forward into 2023?
Santiago Giraldo
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 taken.
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 invoice 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. These 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 increase capacity, and that also includes further automation, which hopefully and should bring incremental efficiencies.
Operator
And there were no other questions from the lines. I would now like to hand the call back to Jose Manuel for closing remarks.
Jose Manuel
Okay. Thanks, everyone, for participating on today’s call. We’ll keep working towards excellence in our business. We plan to keep growing and leaving good news to our shareholders. Thank you.
Operator
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.
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