Tecnoglass Inc. (TGLS) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to the Tecnoglass Inc. First Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Rodny Nacier, Investor Relations. Thank you. You may begin.
Rodny Nacier: Thank you for joining us for Tecnoglass’ first quarter 2021 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, José Manuel Daes; Chief Operating Officer, Chris Daes; and Chief Financial Officer, Santiago Giraldo. I would 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.
José Manuel Daes: Thank you, Rodny and thank you everyone for participating on today’s call. We continue to advance our position as an architectural glass leader. During the first quarter of 2021, we delivered record results across nearly all of our key operating metrics. This includes total revenue, gross profit, operating profit, adjusted EBITDA, operating cash flow and backlog. Our record revenues were largely attributable to the continued positive reception of our single family residential products, allowing for additional market share gains in the U.S., which represented 91% of our first quarter revenue. On this positive activity, we increased adjusted EBITDA by an impressive 65% to $33.5 million. Our track record of delivering strong financial results demonstrates our commitment to consistent execution, operational excellence and innovation. We are achieving this by leveraging our structural and sustainable competitive advantages, expanding relationships, introducing new products and investing in high-return margin-enhancing opportunities. Already in 2021, the efficiencies in our business are delivering significant structural advantages for Tecnoglass. We have not been impacted by tight labor constraints and material availability impacting most of our industry. We are positioned really well to efficiently control our supply chain, manufacturing problems with shorter lead times and best secure customers in what we expect to be a year of significant growth in demand. Based on our success so far this year and the opportunities we see ahead, we are pleased to increase our full year revenue and adjusted EBITDA growth outlook. Santiago will discuss that in more detail later on the call. We have seen a significant demand recovery since the onset of the pandemic. We are, therefore, excited to announce today that the planned construction of our previously announced second float glass plant in our JV with Saint-Gobain is back on track. We expect to commence in doing work in the second half of 2021. This plant will be one of the most advanced and efficient glass production facilities in the world, located in close proximity to our current plant network. It will further reinforce our radically integrated platform and allow us to secure additional float glass supply to serve long-term demand.
Chris Daes: Thank you, José Manuel. Moving to our backlog on Slide 5, in the first quarter, we were true to see the positive momentum continuing our business as we report a sharp acceleration of growth. We are seeing strong demand in both residential and commercial end markets where we operate, resulting in an increase in our backlog to the core levels of $552 million at quarter end. As a reminder, our single-family residential growth trajectory is not fully captured in backlog, given shorter-term spot duration of projects. Two-thirds of our backlog is comprised of medium and high-rise residential projects as well as single-family residential already in production, while one-third is related to a wide variety of commercial projects where demand has recovered significantly. We are pleased to see several of our larger scale projects resuming activity in line with improving fundamentals and the ABI Index, which increased further into expansion territory for the second consecutive month in March. The March ABI index increased to 55.6 compared to 53.3 in February, returning to levels not seen since early 2019. During the quarter, we continued to broaden our customer base, expand our dealer network and strengthen our presence in new markets across our increasingly diversified footprint. Strength in activity continues to be led by the Southeast U.S. where we are extremely well positioned in both residential and commercial end markets. In addition to adding several new dealers in the single-family residential business, we continue to take market share in different geographies as evidenced by our record backlog. We are pleased in continued multifamily strength, the commercial recovery and the resumption of larger-scale projects. We ended the quarter with good visibility on our attractive multiyear project pipeline. In addition, we are very positive on single-family residential demand, which we expect to continue to drive the majority of our outsized growth.
Santiago Giraldo: Thank you, Christian. Encouraging trends in housing starts, low mortgage rates and the urbanization combined with our efforts to expand our customer relationships and introduce new products are all supporting the impressive growth of our single-family residential business. Single-family revenues increased over 70% year-over-year in the first quarter, now representing 22% of our U.S. revenue. Our single-family residential payers are comprised primarily of our Prestige and Elite product lines. However, our largely untapped opportunity with production in homebuilders through our Multimax product line is also an immense avenue for growth. As we’ve move through the year, we will continue to widen our dealer network for Multimax into attractive areas in Georgia, Louisiana, Texas and South Carolina. Our strong momentum has continued into the second quarter, mainly driven by new business wins and share gains. Simply put, we are winning because we are able to supply superior quality architectural glass products with much shorter lead times and attractive value, which truly differentiate us in the tight supply environment that the industry is experiencing. As an example, we recently received a call from a publicly-traded homebuilder requesting quotes on several large communities. The first question was about lead times, not prices. So to be able to deliver favorably on both is extremely promising in the current environment. Also, that was just one homebuilder and we have discussions ongoing with several others. A lot of our successful business development has been enabled by our operational stability due to both our vertically-integrated model and well-situated operations. So, let me take a moment to dive deeper into the drivers of our success and above-market growth. Looking at Slide 7, I will explain a bit more as to how Tecnoglass is becoming the architectural glass provider of choice in the U.S. Over many years of investments focused on innovation and operating efficiencies, we have created a defensible architectural glass platform in a well-situated location. This has resulted in no material pressures from raw material inflation. This is due to our vertically – integration that reaches across the entire architectural glass and window value chain providing us with significant control over a substantial portion of cost, resulting in structural advantages relative to industry peers.
Operator: Thank you. Our first questions come from the line of Brent Thielman with D.A. Davidson. Please proceed with your questions.
Brent Thielman: Thank you. Congratulations on a really strong start to the year.
Santiago Giraldo: Thanks, Brent.
Brent Thielman: Yes. I guess, maybe I will pick on the margin outlook. Obviously, you have taken it up, but you had really extraordinary margins this quarter and what tends to be a little seasonally slower quarter, it doesn’t look like anything sort of transitory in terms of benefits. So, just wanted to get your views on why you couldn’t repeat the sort of gross margin performance going forward, Santiago?
Santiago Giraldo: Okay. So, a couple of things there. First one is the mix of business, Brent. We did expect the installation segment to have lower revenues within the first half of the year. We are raising our gross margin outlook to mid to high-30s from the mid-30s that we had previously. So I do think that going forward, our gross margin is going to be higher. Based on mix, we just don’t know that it’s going to be 40%, 41% like we saw this year. But other than that, from an input perspective, raw materials should not be a headwind. As we mentioned during the call, we are hedged on a large portion of aluminum. Through the joint venture, we have a stable supply of glass. So, we are not seeing inflationary pressures that would have caused the gross margins to come down. It’s going to be more a mix type of question as to whether manufacturing continues to grow at this pace. But if we do continue to grow into manufacturing as opposed to installation, the expectation is for them to move higher. So, the mid to high-30s comment was associated with what we are seeing based on input costs and based on the revenue mix that we are expecting going forward for the rest of the year.
Brent Thielman: Okay. And when would you expect the capacity from the new float glass plant to become available to you just given the fresh time lines you guys provided today?
Santiago Giraldo: Well, the expectation is for that to break ground in the first half of next year, and it is expected to be completed by the end of 2024. But that being said, that’s a separate business because that’s the rolled glass manufacturing. We, on our end, have a lot of excess capacity right now. We are roughly at 65% installed capacity to grow on the transformation of glass, right? So, that’s not going to be a constraint if we continue to grow at this pace. The Saint-Gobain joint venture plant will add to the rolled glass manufacturing, which is a separate business, right. That’s just going to provide incremental rolled glass to us to transform and make windows. But for the time being, we are set to grow well beyond where we are.
Brent Thielman: Yes. Okay. And then just my last question. I mean, Southeast still appears to be a pretty important driver for you. I guess, just wondering if you are starting to see some expansion or growth into some other regions of the U.S., what you are seeing around the country?
José Manuel Daes: We have been growing in the commercial, in New York, Boston, Washington, Illinois, I mean, Chicago area and Texas. And some a little bit, we are doing some businesses in California. In the residential side, we are first filling up our orders from the mid-Florida up, and we are going to start growing west to all the Gulf Coast, which is hurricane-proof. And also of the Northeast, all the way to Virginia, which is also hurricane related. But we are starting to doing that. I mean right now, we are mostly in residential. We are just in Florida.
Brent Thielman: Yes. Okay. Great. Well, congrats again. Thanks for taking the questions.
José Manuel Daes: Thanks Brent.
Operator: Thank you. Our next questions come from the line of Tim Wojs with Baird. Please proceed with your questions.
Tim Wojs: Hi guys. Good morning, nice job.
Santiago Giraldo: Good morning Tim.
Tim Wojs: Maybe my first question is just about visibility as you kind of look at the second half maybe relative to where you were a few months ago. Obviously, you have seen a lot of backlog growth and I think one of the kind of question marks last quarter was just if some of the projects would hit in the second half versus kind of 2022. So, could you just kind of give us a little bit of an update on maybe some of the visibility there? And is the guidance range basically better visibility into Q2 or are you actually seeing better visibility in the back half?
José Manuel Daes: Well, the backlog started to grow again and it’s going to keep growing, we see because there is a lot of quoting right now. I mean, we are quoting hundreds of millions of dollars in jobs, new jobs that are going to break ground within the next 6 months to a year. The quality process is way before the job starts and way, way before we actually ship. So, we believe – I mean, 2022 is going to be an unbelievable year. We have a gap from last year that we didn’t do any commercial new jobs. I mean, we didn’t land in any commercial new jobs. So, the first 6 months to 9 months are going to be really soft in installation and commercial jobs. But then the third quarter 2022 and 2023 are going to be unbelievable because the strength of the market locally, especially in Florida, it’s – I mean, everything that people put out for sale is selling. So, all the buildings eventually are going to break ground and they are going to go up, and we are going to do the windows.
Santiago Giraldo: Just to add to that, Tim, to address your question, the way that we projected the rest of the year was basically with the schedule of commercial projects that we had. But as José was saying, since there was some activity that was pushed out at the end of last year, you obviously have a temporary air pocket that moves into 2022, right? So the expectation is that the commercial segment does better in the first half of the year rather than the second half, but that’s going to be more than compensated from the activity into the single-family residential. So, that’s really how we projected the rest of the year. Now if the single-family resi continues to grow as it is, and we have more visibility as we move along into the year, then we will probably be confident to end up at the higher end of the range, if not higher.
Tim Wojs: Okay. That’s helpful. And then on the residential business, you are obviously taking share. Are there any things that you are doing just to make sure that once some of your competitors’ lead times normalize that you are still, that the OEM that there is kind of new contractors are going to turn to?
José Manuel Daes: After we delivered to a client and they see the difference in not only lead times. I mean, our product is a much, much better product in every aspect, in the finish of the aluminum, in the quality of the design, in the pressures that it withstands, in the water, in the ease of installation. So after we land the client, we rarely lose them. That’s why we don’t need to buy anybody to grow. We grow organically because our clients stay with us forever.
Tim Wojs: Okay. So, it sounds like pretty satisfied – after you get enough customers. And then I guess, the last question I have got is just how should we think about free cash flow through the year, Santiago?
Santiago Giraldo: I think we are going to continue growing on what you saw. First Q was exceptional from a free cash flow perspective. Depending on working capital the rest of the year, my estimate is that we continue to grow, maybe not at $30 million of operating cash flow per quarter. But certainly, we are going to continue to generate free cash flow of each subsequent quarter, the rest of the year, Tim. It’s just going to be a function of what working capital looks like and how we end up growing, especially on the single-family resi. April and May were outstanding, right. I mean, April and what we have for May so far. So, it’s all going to depend on that. But even with that projected growth, we are definitely expecting robust free cash flow each subsequent quarter and the rest of the year.
Tim Wojs: Okay. Great. Thanks for the time.
Santiago Giraldo: Thanks Tim.
José Manuel Daes: Thank you.
Operator: Thank you. Our next questions come from the line of Alex Rygiel with B. Riley. Please proceed with your questions.
Alex Rygiel: Thank you, José Manuel and Chris fantastic quarter. Congratulations.
Santiago Giraldo: Thank you.
Alex Rygiel: A couple of quick questions here. First, can you expand a little bit more upon sort of your interest in M&A over the next kind of 12 months to 24 months?
José Manuel Daes: Well, normally, we do not have anything in the line of M&A. But since our growth has been so fantastic organically, we – there are some markets that we are not in, and it’s difficult to get in from rock. We are looking into some opportunities with products that we at the moment do not serve. But actually, as of this moment, for example, we have nothing secure. But we are looking. We are always open to look for opportunities. And I believe since we need to grow geographically and in our product line in the next – I mean, we were talking 24 months here. I believe maybe 1 or 2 good opportunities will arise.
Alex Rygiel: That’s very helpful. And Santiago, thank you very much for the guidance, super helpful. One additional challenge that we have is seasonality. Last year wasn’t really normal. And seasonality from a demand standpoint, especially on the residential side and even on the commercial side, this year does not seem normal. Can you help us to sort of understand a little bit about where you are thinking for revenues sort of in 2Q relative to 1Q? And then are we still looking at sort of the third quarter being the peak for the year?
Santiago Giraldo: This year is a little bit different, right, because last year, because obvious reasons, there was some backlog that was not booked. And therefore, 12 months later, you don’t get the benefit of invoicing that backlog, right? So, that’s what we are talking about, the second half of the year having a temporary air pocket that moves into ‘22, right. Because you just don’t put things into backlog and invoicing right away. So, this year is just a little bit different. And the way that we model this out is that first half of the year is going to be stronger than the second half on the commercial side. But if things continue to go the way they are on the resi side, the resi side is going to more than compensate that temporary air pocket, right. So all-in-all, to answer your question, we are not expecting seasonality this year. We think that all quarters should basically be around the same. It’s just going to be a different mix of commercial versus residential that you have historically seen.
Alex Rygiel: Very helpful. Thank you very much.
Santiago Giraldo: Thank you, Alex.
Operator: Thank you. There are no further questions at this time. I would like to turn the call back over to José Manuel Daes for any closing remarks.
José Manuel Daes: Well, thanks, everyone, for participating on today’s call. We will keep you posted. We are doing really good that we believe the future is even brighter for Tecnoglass. Looking ahead, we are confident that we have a really good position to deliver above-market growth in the U.S. with sustained operating leverage to support our industry leading margins and a strong free cash flow. That should lead to exceptional shareholders’ returns in the years ahead. We appreciate your continued interest and support. Thank you.
Operator: Thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines at this time. Have a great day.
