Tecnoglass Inc. (TGLS) Earnings Call Transcript & Summary

Good day, and welcome to the Tecnoglass Inc. First Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would like now to turn the conference over to Mr. Brad Cray, Investor Relations. Please go ahead.

Thank you for joining us for Tecnoglass' first quarter 2025 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 vary 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 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.

Thank you, Brad, and thank you, everyone, for participating on today's call. We are thrilled to report an exceptional start to 2025, with record first quarter results that demonstrate the ongoing strength of our business model. Our revenues increased by 15% year-over-year to reach a first quarter record of $222.3 million, driven entirely by robust double-digit organic growth across both our residential and multifamily commercial businesses. These outstanding results significantly outperformed broader market trends and underscore our ability to consistently gain market share, even during periods of macroeconomic uncertainty. Our single family residential revenues grew 21.6% year-over-year to a first quarter record of $88.9 million. This impressive growth reflects continued strength in our Florida operations, ongoing geographic expansion and expanded brand recognition, which continues to allow us to gain market share. Our multifamily and commercial businesses delivered double-digit percentage growth of 11.6% year-over-year to $133.4 million, reflecting continued execution of our expanding backlog. We achieved these results by significantly improving our profitability. During the quarter, we were pleased to drive gross margin expansion and adjusted EBITDA growth. The substantial improvement in most metrics reflects the benefits of a vertically integrated business model, operational efficiencies and favorable product mix. To that end, we are confident in our ability to maintain industry-leading profitability driven by several strategic initiatives. First, we have hedged a large portion of our 2025 Colombian peso exposure at premium rates, roughly 9% better than last year, which effectively offsets higher local currency employee compensation. Second, we've adjusted pricing within our single family residential segment. And third, we have adjusted certain supply chain channels in order to substantially minimize our exposure to tariffs. In April, we were pleased to complete the acquisition of certain assets of Continental Glass Systems, a premier provider of architectural glass and glazing solutions based in Florida. This strategic acquisition enhances our capabilities in several key areas. It allow us to diversify our production footprint into the United States, expands our commercial project portfolio and creates additional synergies across our operations. Continental brings approximately $30 million in annualized revenue and a substantial project backlog, which further strengthens our market position. This investment is also aligned with our broader initiatives to expand our production capabilities in the U.S. through organic and inorganic investments. Our financial position remains exceptionally strong with record cash of $157.3 million at quarter end as a result of growth in our short-term cash cycle residential business and disciplined working capital management. Our robust cash generation and resilient balance sheet continues to improve, with significant flexibility to pursue additional growth opportunities, while returning capital to shareholders. Looking ahead, we remain confident in Tecnoglass growth trajectory. While macro uncertainties still remains ahead, our record first quarter performance, a strong growth in single family residential orders year-to-date and our exceptional project backlog validate our optimism for 2025. While we are cognizant of the uncertainty related to tariffs and the potential impact on overall demand trends, we continue to see strong order traction and ongoing market share growth in many U.S. regions. These factors, coupled with yet another record backlog and our structurally competitive advantages, give us confidence in our ability to continue navigating through complex macro dynamics. I will now turn the call over to Chris to provide additional operating highlights.

Thank you, Jose Manuel. Moving to Slide #5. Our first quarter performance further validates the resilience of our business model as we navigate through a dynamic macroeconomic environment. Our single family residential business achieved outstanding results, with revenues increasing 21.6% year-over-year. These exceptional growth was primarily driven by our ability to capture additional market share and geographic expansion, particularly with further penetration in the Southeast U.S. and dealership growth. We continue to make progress with our expanding vinyl products offering, which are seeing a strong traction with customers. Additionally, we opened up a new showroom in Arizona, aligning with the introduction of our legacy light aluminum line designed from top geographies like the Southwest U.S., giving us yet another avenue for organic growth. Our multifamily and commercial business also delivered solid performance with revenues growing 11.6% year-over-year to $133.4 million. We ended the quarter with a record multiyear backlog to -- of $1.14 billion, representing approximately 2.2x our LTM multifamily and commercial revenues at quarter end. This provides us with substantial visibility into our project pipeline well into 2026. The addition of Continental Gas Systems to the Tecnoglass team further enhances our ability to address high-quality projects in high-end residential, luxury lodging and Class A office space, while allowing us to expand our manufacturing footprint. Moving to Slide #6. Our backlog has demonstrated consistent sequential growth since 2021, reflecting the strong momentum in our project pipeline and robust bidding activity. Our book-to-bill ratio remained healthy at 1.2x as of the first quarter, extending our track record of maintaining a ratio above 1.1x for 17 consecutive quarters. Historically, approximately 2/3 of our reported backlog is invoiced over the following 12 months, providing a strong visibility to 2025 and into 2026. The quality of our backlog is underpinned by several key factors. First, we have virtually no project cancellations as we typically install windows in buildings that are already well into the construction process. Second, our backlog is concentrated in projects that have demonstrated resilience to interest rate fluctuations. And third, the growing geographic diversification of our project pipeline helps to mitigate regional market risk. While external factors may cause temporary fluctuations in delivery timing, our consistently strong book-to-bill ratio reinforces our confidence in sustained revenue growth. I will now turn the call over to Santiago to discuss our financial results and outlook for 2025.

Thank you, Christian. Turning to single family residential on Slide #7. We were pleased to produce another quarter of double-digit growth in single family residential. Despite the tepid housing market, our successful market share gains through dealership growth, U.S. geographic expansion and the strong reception of our vinyl product line continues to produce meaningful contributions. Looking ahead, we remain excited about the organic growth opportunities in our single family residential business, which are driven by several factors. First, our expanding dealer network, which continues to benefit from our industry-leading 5- to 6-week lead times and innovative, high-performance products. Second, our ongoing geographic expansion through showroom openings and a ramp-up of vinyl windows, with growing traction in new markets beyond our traditional strongholds in Florida and the Southeast. And third, we expect share gains to drive the majority of growth, with longer-term fundamentals supported by strong demographic trends, including population migration trends to the Southeast U.S. Turning to the drivers of revenue on Slide #9. Total revenues for the first quarter increased 15.4% year-over-year to a first quarter record $222.3 million, with double-digit growth across both our single family residential and multifamily commercial businesses, as a result of robust demand for our best-in-class product offerings, coupled with our ability to continue taking market share in nearly all geographies where we operate. Looking at the profit drivers on Slide #10. Adjusted EBITDA for the first quarter of 2025 was $70.2 million, representing an adjusted EBITDA margin of 31.6% compared to $51 million or a 26.5% margin in the prior year quarter. First quarter gross profit was $97.5 million, representing a 43.9% gross margin compared to gross profit of $74.7 million, representing a 38.8% gross margin in the prior year quarter. The 510 basis point improvement in gross margin was primarily driven by a favorable mix of single family residential revenues, stronger retail pricing, operating leverage on year-over-year revenue growth, stable raw material costs and favorable FX dynamics. SG&A expenses were $42.5 million or 19.1% of total revenues compared to $33.6 million or 17.5% of total revenues in the prior year quarter. The increase was primarily attributable to higher transportation and commission expenses associated with our revenue growth, increased personnel expenses related to annual salary adjustments implemented at the beginning of the year and $4.7 million of tariff expenses. As Jose mentioned, we have already taken decisive measures to mitigate the impact of tariffs, which will be in full effect starting in May and June and do not expect a material impact on operating profit for the year. Turning to our view of U.S. aluminum tariff dynamics on Slide 11. We are actively addressing the industry-wide dynamics associated with aluminum tariffs through sourcing, pricing and hedges on currency. We have changed some processes within our supply chains in order to mitigate the impact of tariffs. These also include the potential to diversify certain operations into the U.S. with the recently purchased manufacturing plant from Continental. We are also evaluating potential investments to develop other manufacturing assets in the U.S. over the coming years in order to be more diversified, U.S.-centric and benefit further from logistics efficiencies and improved lead times. To that extent, and based on our expected U.S. organic geographical expansion, we are currently in the early stages of evaluating a multiyear project to develop a fully automated and vertically integrated operation in the U.S. to complement our existing manufacturing platform in Colombia. In addition to diversifying our manufacturing footprint, the project would allow us to gain logistical and lead time efficiencies in many new target markets. In addition to shifting certain supply chain channels, we have also implemented pricing adjustments effective as of May 1 to offset incremental cost. While we anticipate some temporary short-term margin pressure until these higher priced orders are invoiced, we anticipate that the full calendar year 2025 tariff impact of approximately $25 million will be largely mitigated, assuming similar volumes to what we originally projected for the year. This means that for the balance of the year, we expect our strategic actions to more than offset the impact of tariffs. Additionally, we were able to opportunistically hedge a large portion of our Colombian peso exposure above COP 4,400 per dollar, providing an additional tailwind to further offset the projected 2025 tariff impact. Now examining our strong cash flow and balance sheet on Slide 12. We generated operating cash flow of $51.2 million in the first quarter, reflecting solid profitability, effective working capital management and higher mix of single family residential revenues, which feature upfront payments and shorter sales cycles without retaining. This resulted in record quarterly free cash flow of $28.8 million. Capital expenditures were $22.4 million, which included mostly scheduled payments on previous investments. As with previous years, our cash flow is seasonal, and we expect cash flow from operations to decrease sequentially in the second quarter of the year to account for the annual timing of income tax payments and a higher use of cash to address working capital needs due to expected sequential quarterly growth. As an offset, we expect capital expenditures to drop significantly throughout 2025, driving strong free cash flow through year-end. Our balance sheet remains exceptionally strong with a record cash position of $157.3 million as of March 31, 2025, resulting in a new record net cash position. This represents a significant increase from our cash position at the end of 2024 and underscores our ability to generate substantial free cash flow. At quarter end, we had total liquidity of approximately $330 million, including $170 million of availability on the revolving credit facilities. This strong liquidity position, combined with a robust cash flow generation, provides us with ample financial flexibility to pursue our growth initiatives, invest in operational enhancements and maintain our commitment to shareholder returns. On Slide 13, we highlight our ability to generate returns significantly above the broader industry. Over the past 3 years, our strategic investments and operational initiatives have consistently yielded superior returns for our shareholders. This outperformance reflects the strength of our business model, our unwavering focus on operational excellence and our disciplined approach to capital allocation. Now moving to our outlook on Slide 15. Based on our performance through the first quarter of 2025, and now incorporating our acquisition of Continental, we are raising the low end of our previously provided full year 2025 outlook for revenues, which we now expect to be in the range of $960 million to $1.02 billion, representing growth of approximately 11% at the midpoint of the range. Additionally, we are updating our adjusted EBITDA outlook to a range of $305 million to $330 million. The high end of our outlook assumes favorable moves in interest rates benefiting mortgage rates, high single-digit growth in our legacy residential revenues and vinyl revenues reaching approximately $25 million. The high end also assumes improved activity in short-term commercial projects and gross margins in the mid- to high 40 percentage range, supported by favorable foreign exchange rates with the Colombian peso at or above COP 4,200. The low end of our range reflects a more conservative approach to volume growth beyond Q2 for residential invoicing, while also accounting for the potential headwinds from broader implementation of aluminum tariffs impacting construction spending, higher interest rates and a stronger Colombian peso. Under this low-end scenario, we assume more modest growth in legacy residential revenues, vinyl revenues of approximately $10 million to $15 million and gross margins at the low 40% range. The guidance midpoint implies modest adjusted EBITDA margin improvement year-over-year based on various factors. Favorable drivers include higher revenue; our pricing adjustments starting with order placed from May 1 forward, which translate into revenue starting in the mid to end of June; FX hedges; and operational leverage. We anticipate these positive actions to more than offset increased installation mix tied to high-end condo activity in Florida, the 9% salary increases in Colombia and tariff impacts. Continental Glass System is expected to contribute roughly breakeven adjusted EBITDA this year as we integrate the acquisition. We are now projecting capital expenditures to be in the range of $45 million to $55 million, which includes the tail end of previous investments, maintenance CapEx and further investments in efficiency initiatives as well as our new Miami flagship showroom and executive offices. Working capital should continue to be a source of cash as we expand our single family residential revenues, so this will be partially offset by longer cash conversion cycles in our commercial and multifamily business. In conclusion, our first quarter 2025 performance demonstrate our exceptional market position and operational excellence as we continue to outpace broader industry trends. Years of investments in vertically integrated operations, our industry-leading margins and robust backlog all contribute to creating a defensible position for Tecnoglass in the architectural glass industry. We entered the remainder of 2025 with tremendous momentum across our business. The strategic acquisition of certain assets of Continental Glass Systems further strengthens our competitive advantages and diversifies our manufacturing footprint. Our strategic execution, operational efficiencies and effective management of dynamic elements, such as tariffs, position us to continue delivering above-market growth and returns for our shareholders. We remain confident in our ability to extend our track record of exceptional performance through 2025 and beyond. With that, we will be happy to answer your questions. Operator, please open the line for questions.

[Operator Instructions] Our first question today comes from Tim Wojs of Baird.

Maybe just first questions, kind of higher level. As you look at the architectural glass industry in the U.S., is it possible to kind of understand how much of the industry is imported to the U.S. from places like China and Europe? And I'm just trying to understand if that kind of expands your opportunities potentially on kind of the West and the East Coast, particularly in the commercial business.

We don't -- this is Christian. We don't have the number, but all our raw materials are from the U.S., so an advantage to everybody else. And we don't sell that much in architectural glass as we sell in windows. So our sales in the -- on the glass side is very small anyways. But we are concentrating on the window itself.

Just as a follow-up, Tim. If you recall, last quarter call, we talk about how the U.S. supply is roughly 45% of its internal aluminum needs. So to that extent, even U.S. manufacturers are importing a vast portion of the raw material. So we're definitely seeing this as an opportunity going forward.

Okay. I mean, I guess, when I said architectural glass, I guess, I meant like curtain walls and windows, too. But I mean, like, as you're thinking about big cities on the East Coast and the West Coast, I mean, is a lot of your competition in those areas imports today?

Not today. I mean, I think we would be one of the most important importers of windows, I believe. And our competition is mostly local.

This is Jose. We have -- a lot of people in the curtain wall business importing from China, but they are now assembling in Mexico. They're doing the aluminum and the glass from China, and they assemble in Tijuana, I believe. But there are subject to the aluminum tariffs, like everybody else.

Okay, okay. And I guess, on the residential growth, I mean, any color on kind of -- when you look at that 22% growth, how much of that was kind of your legacy Florida business and maybe how much of that was kind of outside of Florida? And then it looks like the vinyl expectation on the high end of the guide came down. Any reason for that?

I'll take the first one, Tim. If you look at the legacy business, we did roughly $73 million in the first quarter of last year, right? So that -- we probably grew there about 25% -- I'm sorry, about 15% and then the rest came from other places, which are starting to pick up. Obviously, on a percentage basis, that's much higher on a lower base. But those places are starting to contribute more meaningfully than the legacy Florida business, which we're expecting to grow for the full year between mid- to high single digits. And I'll let Jose take the vinyl question.

Vinyl has been a challenge because we got into the business that we didn't know. And as usual, we start slow and we are learning, and we don't have a complete line. We're developing the last 3 or 4 products. And by the end of the year, we're going to be ready. I think that line is going to catapult next year's sales. But this year, we can go in month by month. Obviously, not on the range that we expected because as I said we didn't know the business well.

Okay. And then the last thing, just on Continental, I guess. What does it -- I mean, what is it bringing you that you didn't have before? I guess, how are you going to kind of leverage the U.S. manufacturing with Colombia? And then you said breakeven EBITDA margins this year, Santiago. Like what would be a longer-term target for the margins of that asset acquisition?

Well, let me explain. Number one, we didn't have any manufacturing facility in the U.S. With Continental, we have the capability of doing around $10 million a month in manufacturing. And we plan to start developing the manufacturing in the U.S. We will bring the aluminum and the glass and assemble it here. And eventually, like we said, we're going to do a complete line in the U.S. within the next 5 to 7 years. And Continental brings a couple of things that we didn't have before, which are: number one, the replace and remodel in the condominiums is getting very big in Florida because of the new law, instead of 40 years, it's in 20 years now, I believe. So every condominium has to upgrade, and the insurances are making them change all the windows. And they have a good remodel and replace market, and that's what we plan to do with them also.

And on the second part, Tim, the go-forward expectation is that, that integration to the overall EBITDA margin profile for the group, as you read on the press release, we're expecting to get synergies from this, as we're expecting to manufacture more out of Colombia to supply them. So even if at inception this is going to be a lower EBITDA margin because of SG&A, as we grow that operation, we're expecting that to align with overall margins for the group.

Our next question comes from Julio Romero of Sidoti & Company.

Congratulations on the acquisition. So the last deal you guys did was for GM&P, the glazer in Florida in 2017, and that was done for a very specific reason. It was a mousetrap of sorts to accelerate U.S. market penetration in the U.S. Can you maybe compare that deal, which didn't have manufacturing to this one? Kind of compare the thought process because -- and also talk about the trade-off between this dilution to your return metrics with acquired growth, but that the trade-off is a longer-term strategic benefits.

Well, this one, like I said in the answer before, mostly is the replace and remodel of condominiums. And also they have manufacturing facilities that we need to start working here in the U.S. And it's a very, very good acquisition for a very low price.

And as a follow-up, in line with the last answer, Julio, we're not expecting this to be dilutive. I mean, we're expecting to get synergies and operating leverage based on the higher output of manufacturing in Colombia to supply Continental. So at the end, we're seeing this as an asset that will be integrated to the group and not the impact of margins in any way.

Okay. That's helpful. And you talked about evaluating a multiyear project to build a plant in the U.S. Can you maybe dive into that a bit? And how big of a facility are you considering? And what are the key factors you're weighing and considering that growth initiatives?

We're going to start by the beginning, which is establish a foundry here where we can produce our billets. The second phase would involve -- obviously, this is going to be done in 5 to 7 years. The second phase will involve establishing an extrusion facility, a glass facility, everything state of the art with the technology that we now have and know to be the most efficient window plant in the U.S. We plan to -- we are looking into different options. And instead of buying people the same at 12x and 10x EBITDA, we're planning on spending the money wisely on building a good facility in the future -- in the near future.

In the near future. Sounds good. Go ahead.

As a follow-up, Julio, obviously, this is undergoing a feasibility analysis. And from a return on invested capital, as Christian was mentioning, these will bring much higher yields than doing straight up M&A. Obviously, you have to evaluate this over a longer time period and is subject to free cash flow and whatnot, but that's the intention.

[Operator Instructions] Our next question comes from Brent Thielman of D.A. Davidson.

Congratulations as well. I had another question just on the thought process of developing the line in the U.S. over the next kind of 5 to 7 years. And it may be early, but I'll ask anyway. Are you envisioning something as large as what you have in place today? Or is the vision that this is something simply complementary to what you're already doing in Colombia?

It would be complementary. We will start by the foundry. We're going to produce enough billets. I mean, we are thinking of getting 100% of our billets from our plant in the U.S. in the near future. Then we're going to establish 1 or 2 presses -- extrusion presses. Then we want to do a glass sorting system and then do the window plant. And it's all going to help us in the growth and also in the ability to deliver within 24 hours when we have an emergency, a broken piece of glass or a replacement or anything of that nature. And we -- I like to dream big, and I hope that we can build a factory that in the future could be 30% to 40% of our invoicing in 5 years and not of what we do today but the increased growth.

No. I was just going to follow up. In terms of, obviously, financial metrics, it's way too early. But keep in mind that we're thinking about something that is highly automated, so not a detriment to margins and brings more logistical and lead time advantages.

Very good. Appreciate that. And then, I mean, look, the backlog continues to look great. Could you talk about what's happened since the end of the quarter? Could you talk about order trends in commercial since then or the tone of customers? Are they more hesitant? Or is it just business as usual?

The business is booming. I mean, for us, we are selling and closing a lot of deals in Florida, outside of Florida, in the East Coast, in the center, South, Central U.S.A., in Texas and also on the West Coast. So we have a good foothold now in Hawaii, and we're getting a low request from California. And we're opening offices there to -- and the amount of backlog is going to keep growing, at least, That's what we see.

And Brent, I don't know if you were just asking about commercial, but residential orders are up 17% year-over-year. So we're expecting that trend to continue through Q2 and potentially starting in Q3.

Yes. Appreciate that, Santiago. Yes, I was talking commercial. Maybe just one more on the commercial side as well. Is -- are the -- is the backlog and are the incoming orders becoming more diversified from a geographic perspective relative to a year or 2 ago? I know Florida has been phenomenal for you in the last few years, but you talked about a lot of different regions here. Is there more geographic diversity to the things you're seeing coming in orders now?

Both, both. We're growing in Florida, and we're going out -- for example, we didn't have anything in Tampa. And now in Tampa, we have a few works in Tampa, I mean, more than 10 in Jacksonville, in the Panhandle, in Palm Beach. We didn't have much in Palm Beach. Now Palm Beach is moving, and we're getting a lot of work. But also outside of Florida, we're getting lots of work in Washington, in New York, in Boston, in Maryland. I mean, we're growing even in the Carolina. We have 2 or 3 jobs now in Carolina that e never had anything. And now even Nashville, which is moving, we're getting close to closing a few deals in Nashville, too.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jose Manuel Daes for any closing remarks. Sir?

Thanks, everyone, for participating on today's call. We are very enthusiastic about what we're doing. I believe the company is going to keep growing in the next 3 years, at least. And our foothold should grow West of Florida. And thanks again, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.