Good morning, everybody, and thank you for joining this Sidoti & Company September 2024 Small Cap Conference. My name is Julio Romero, and I'm the Building Products and Industrials Analyst here at Sidoti & Company. We're really pleased to be able to host Tecnoglass. Their ticker is TGLS. With us today is Eduardo Puche, Head of Financial Planning and Analysis for Tecnoglass. If you have any questions for the company, feel free to type those into the Q&A section at the bottom of your screen, and I'm more than happy to ask on your behalf. With that, Eduardo, thanks so much for being here. I'll let you kick it off.
Thank you, Julio. So I'm gonna take a couple of minutes to do a general overview, update a little on our current position, the state of the market, and then talk and give a little color on our growth initiatives before our Q&A. So about Tecnoglass, we're a growing, vertically integrated supplier of high-spec windows, serving primarily the U.S. market. Over 95% of our roughly $900 million of annualized revenues as of now, and clarify as of now, because that is a number that has been growing. Our 10-year CAGR is, it's, just under 20% of all organic growth. And while we've been growing, we've been managed to do that while being very profitable, with our adjusted EBITDA hovering around 30% of total revenue.
And that's in part due to the fact that we operate at a cost advantage relative to our competitors, and that's due to our very modern state-of-the-art, vertically integrated and conveniently located manufacturing facilities. So we operate five million-plus sq ft manufacturing campus out of Barranquilla, Colombia, where we coat, temper, laminate raw glass to make insulating or impact-resistant architectural glass. And we use primary aluminum and recycled aluminum to extrude our own aluminum frames, which we then assemble into high-performance architectural systems, such as windows, doors, curtain walls, and other facade elements in glass and aluminum.
Over the past five years, we've invested over $250 million to expand and/or enhance our manufacturing capacity, involving cutting-edge automated processes and internal logistics to streamline our supply chain and grow our output capacity to the range of $1.3 billion. These automation and integration improvements have driven our gross profit margins to being at a sustainable level of above 40%, compared with low 30s% just a few years back. In regards to our sales, approximately 60% of our sales go to commercial construction markets, with which we include multifamily and mixed-use developments. And those account for about two-thirds of our commercial business is somehow residential related, with the remainder being pure commercial, so retail, office space, lodging, hotels, institutional.
We've done colleges, labs, religious buildings, and some infrastructure, like train stations and cruise ports, airports, et cetera. Our customers in this sector are typically glazing contractors or general contractors, and we're mainly servicing new construction. The other 40% of our business is single-family residential, which, until recently, has been virtually entirely in Florida, and approximately 60%-65% of what we do in this market is related to repair and remodel as opposed to new construction. Although we do have some homebuilder-specific product lines, our customers are typically specialty window dealers or local window contractors who service homeowners and, to a lesser extent, home builders. Now, I'll address our current position, because of the state of the market and how we're balancing growth in what appears to be a down market with tough macroeconomics.
I think every conversation that we've had with investors lately has come to this, you know, we're outperforming market and sort of what are we doing about it? We ended this past quarter with record-breaking backlog, just shortly over $1 billion, and that has been growing quarter after quarter after quarter for a couple of years now. While there has been some softness in the revenue over the past quarters, not being quite record-breaking, we're still bringing in healthy levels of revenue with total revenues for 2024 projected to grow, albeit modestly, since we already have a couple of soft quarters behind us. More importantly, we're receiving more and more orders, which is why our backlog has been growing sequentially and our revenues are positioned to continue growing.
So, I'm gonna split this again between single family and commercial. Single family had some softness around year-end, leading to somewhat soft Q1 and Q2. But order levels have been sequentially improving since February, with record-breaking months. So first, we had $36 million, then we had $38 million, and an extreme peak in June, with nearly double that. So that was right before a Florida sales tax waiver for hurricane-proof windows expired. Obviously, not a sustainable level after that expired. June, July was much lower, but August has started picking up, and September is already back to normal. Which again, normal for us, does imply some growth in there.
So, with this high level of orders, we're confident that our revenues in this sector will continue to grow healthily for the remainder of this year. And, I'll go into some of the growth initiatives that we've got going on, before, in a few moments. So commercial sales have been the ones really driving up our backlog. And what's nice about this side of the business is that unlike single-family residential market orders, which are typically shipped out as soon as possible, is that commercial sales afford us some visibility, or great visibility rather, over the next couple of quarters ahead of time. So historically, 60% of our backlog gets converted into revenue over the next 12 months, and over 90% is converted into revenue over the next 18 months.
So we have some significant momentum in our backlog and jobs to execute during the remainder of 2024. And most of the business that we'll do in 2025 is already on our books, and we're starting to build our books for 2026. You know, back to the question that we do get is, how are we growing in a apparently down market, and interest rates are weighing down demand? Because there are some affordability issues, particularly for the middle-of-the-road condos, which are, you know, one of our-- historically, have been one of our stronger, sort of end markets. And the truth is that we've been fortunate that we're very active in, probably the fastest-growing niche or maybe the only growing niche, which is, ultra-high luxury residences in Miami and South Florida.
Where unlike most places in the nation, there are dozens of high-end jobs. And these are buildings that individually can be worth $40 million-$50 million in windows alone. So, you know, we've booked a handful of those, which is almost enough to keep us busy for the next year. And additionally, we are hearing from our sales teams in the field that our customers are dusting off old projects that didn't take off and putting them back on the table. So sort of updating quotes. And this is a process that will only be accelerated if interest rates, as interest rates continue to go down because there is a sort of a general, generalized perception that there's a housing shortage.
Before opening for Q&A, I would like to comment a little on our growth potential and sort of the initiatives that we've got going on to grow from here. Which are mainly going to come from what we continue to do, what we've been doing in Florida. We're going to expand geographically. So we've had showrooms in New York and South Carolina operating for well over a year now, and those are starting to bring in some significant revenue now and healthy level of orders for the first time out of South Carolina. And we have recently opened a new showroom out of Houston, Texas, which we expect has an enormous potential because of a large, attractive market and with...
We should be able to capitalize on some of the experience that we've had in Florida to replicate the success there. And then additionally, we also launched our first vinyl product lines ever, which more than doubles our addressable market, with vinyl being the most common type of window used in the U.S., particularly as we steer out of Florida, with its impact rating requirements in hurricane-prone areas. So we have installation capacity of up to $300 million of vinyl windows, and we're still rolling out the full product suite, with which we think this should be a step change in our sales growth. That's it. So we can go to Q&A, Julio.
No, you, you covered it. We're done. No, I'm just kidding. No, great, great, great kickoff. I appreciate it. If you guys have any questions for Tecnoglass, please, please feel free to type them into the Q&A section at the bottom of the screen. Happy to ask on your behalf. So you talked about the single-family resi dynamic, right? Really helpful, the comments you gave there. You talked about the record 60% growth in the 2Q orders over the, the prior year, but you also caveated that, you know, partially driven by a Florida sales tax exemption that expired in June. So, you know, can you maybe help investors parse out, you know, what the underlying demand, you know, could be that you're seeing in Q2 there, to the extent that you can?
Yeah. So since the beginning of this year, we have sort of been redeploying our sales force to focus on the rest of Florida outside of South Florida, which is our historical stronghold. So through twenty twenty-three, over 70% of our Florida sales were coming south of West Palm Beach. And that leaves a significant area for improvement in the rest of Florida, where we have been doing business, but we're not... we don't have nearly as much of a market share as we'd like to. And we think there is, or we we've been seeing that there is a significant potential for growth there. So significant part of the, you know, what we're seeing and considering normalized, which for us does mean growing high single digits at least, hopefully.
What we're seeing is that, you know, after normalized, we did have a slow July, which, you know, everything was pulled forward into June, and August has been showing gradual progress, and we're back to normal. We're back to normal, so sort of slow growth rates already in September.
Okay. No, that's helpful 'cause it, it's, it's a hard question to answer, right? But just to try to think about it as a thought exercise, I think is good. And you talked about you, you're confident that revenues in the single-family resi for the remaining two quarters, will continue to kind of grow healthily. I don't know if you meant revenues or on order.
I mean, we did have a very high peak in June, and not all of that is being delivered in July and August.
Right.
So some of those deliveries will stretch out. And, you know, in addition to our spot sales, we will have a very strong second half on the single-family residential, definitely. You know, it's also... We had been having a very strong level of orders since April, really. We've been breaking records since April, so we've got a lot coming up... for the second half.
Gotcha. And, you know, you talked about that, you know, a lot of investors ask, you know, how are you growing? And you talked about the niche space that you're in, that is one of the, you know, areas of growth within residential, the ultra-high luxury kind of condo market. Yeah, how do you view the interest rate environment as impacting single-family residential?
I think there's a general feeling that there is a demand for homes, but affordability has been an issue. So some of that, I guess, our customers haven't stopped building just because, you know, they have their overhead and they will continue, but they've been sort of taking their time and not rushing. And, you know, they're starting to get the feeling that with interest rates coming down, it should significantly accelerate demand, which we'll have to see what happens.
Yeah, and I would imagine that ultra-high luxury condo, a lot of those purchases are maybe cash instead of...
Right. That sector particularly is not sensitive to interest rate. I mean, a lot of what is happening is wealthy individuals placing their cash in Florida real estate. So, right, not for that sector. I was referring more to our middle-of-the-road condos, which historically have been sort of the meat and potatoes of our business.
Yep, and then as you expand, as you deploy the sales force, kind of above Palm Beach, you know, through the other regions of Florida, does that, does that mix, the meat and potatoes mix, start to make up a bigger portion, I guess?
So that effort is mostly on the single-family residential side. You know, outside of Florida, we've been doing commercial jobs throughout the entire country. Florida, you know, it's always been stronger for us just because we're better known there, and we have the relationships with major players. Not necessarily seeing a shift there. Now, as we continue to grow, if we go forward, you know, if we're looking several years down, there's no reason why our geographic expansion shouldn't continue, and that half of our revenues come from states other than Florida. So definitely we're gonna see some shifts going forward, but those will take some time.
Yeah. And you mentioned on the showroom side, you know, you're currently seeing some revenue for New York and South Carolina, not yet for Houston, is that correct? And the other showrooms that you have.
So the Houston is still pretty new. And so the way these showrooms were initially conceived, they were meant for single-family residential, and we've been seeing a lot of traction for commercial business out of those showrooms. So it's really been mixed what they've been bringing in. But yeah, so New York is already bringing in, I don't know, over $30 million, and, you know, year to date, it's been over $30 million in orders. Not quite revenue. Revenue is lagging a bit behind. Absolutely. It's still up there. And South Carolina has already got several million in orders. Houston, it's still the early days, so we still need to. We're probably going to be complementing our Texas approach with another showroom to serve the Dallas area.
No concrete plans on that one, but definitely in our shortlist.
Gotcha. And then as investors think about that number, the thirty million sounds exciting, but as you said, it's a mix of single-family and commercial. It's not just, even though they were conceived with single family in mind.
Yeah.
Yeah.
So a part of the reason why single family outside of Florida has been taking some time is that we didn't have the right products for these markets. Our products designed for Florida are very aluminum heavy, in the sense that impact resistance is important. And even when impact resistant rating isn't necessary, people are used to sort of stylistically, sort of the architect preference. There are softer features that are different in Florida from elsewhere. So windows in Florida tend to be bulky on the aluminum heavy, which makes them both expensive and makes it a challenge to achieve the better thermal performance that is seen up north. And then there's also the aesthetics of it. So we've been rolling out a new product line. It's still not fully out.
We have some products already out, and this is a light aluminum. It's meant to look higher end and better suit the aesthetic preferences, particularly of the Northeast, where impact rating, impact resistance is not really in the minds of consumers. But the aesthetics are always, and then there's also the thermal performance.
I'm sorry. Did you say that was... that new product line is light aluminum?
It is lighter aluminum. I mean, the frames aren't as big. It's more glass and then thin frames.
Gotcha. Oh, okay. That's helpful. But-
That, that's a very non-architect description of what-
Yeah. That's... I'm not an architect. It's okay, but good segue into vinyl, right? Which I wanted to talk about, too. You know, last year you announced the launch of your vinyl window product line, you know, expected to double your TAM. And you've talked about how you're aiming to ramp vinyl sales to, you know, roughly $300 million by 2027 or so. Can you maybe help us think about what the bridge to 2027 looks like? You know, does it look similar to the aluminum single-family ramp in the U.S. when you initially rolled that out, several years ago?
Yeah. So it has been taking us some time to ramp that up, although we're already getting attractive level of orders. And the thing is, we haven't completed the full product suite, meaning we've had the windows, and we've had some doors more recently, but we need the full product suite. Think of it, you know, if you're redoing a house, you want to have the living room and the kitchen, and, you know, the bedrooms have the same kind of windows, and we haven't had the full product suite out. So we have been rolling those out gradually throughout the year. We think once we have the full suite, which should be out shortly, that'll drive a step up change in the speed at which we've been able to accelerate those sales. So definitely, I mean, aluminum...
Vinyl is a market that is, I guess, technically three times as large, but then we're not participating in the whole of the vinyl sector, since everything we're doing is made to measure. So we're not, it's still going to be relatively higher-end vinyl. But it's still a much larger market than aluminum, and we only need, you know, a fraction of the success that we had on the aluminum, and then this will go up.
Yeah. And, you know, one question we often get a lot is, you know, how. You know, any color as to how folks should look at, you know, the vinyl, you know, revenue ramp in twenty five? You know, how that can look like.
It's gonna be sequential. We have talked about our sort of first milestone to reach that sort of 60 million of annualized revenue, which is the point at which vinyl begins to be accretive. Initially, it's gonna be a drag on our margin, just because we-- until we generate that sort of leverage from the vinyl. That really requires us to be doing $4 million-$5 million of invoicing per month, which we're not far from reaching. We're not there yet, but you know, a few months out, definitely, if not more than a few quarters, we'll definitely already be at the point where vinyl is going to be margin accretive because of the added scale.
Yep. No, that makes sense. No, I appreciate that. But can maybe we can talk about a little bit about the backlog. You know, you talked about it crossed over $1 billion last quarter, record backlog here. You know, how has conversion been looking, and do you think the backlog growth would and could continue?
Yeah. So there was an unusual aspect here, and it's that since June was a record-breaking month for single-family residential with a tax holiday, it's. You know, typically, our backlog only has 5-6 weeks' worth of residential invoicing, which are our average lead times. But because June was such a strong month, this probably has, I don't know, somewhere in the $20-$40 million additional single-family residential sales, as opposed to the, you know, habitual 45-6 weeks, which is in the $50 million range. So this quarter was, yeah, considerably above that. But other than that, the growth we're having is mostly, again, single-family or ultra-high luxury residences in Florida.
And the price tag on these jobs is so big that just, you know, we've added a handful, and that makes a big change. What that does mean for backlog conversion is that the time, the execution timelines are probably going to be stretched out a little more just because these are very large jobs that get executed over a couple of years. So we can see... We probably should expect our backlog conversion rate to sort of stretch out, as we execute on these very large jobs.
Yeah. You know, something to note as well is that current orders have been diversifying beyond Florida and into Texas, California, and up the East Coast. Can you talk about the work to grow the customer base and how you're thinking about further geographic expansion?
Yeah, yeah. There, there's a couple of things. So we've since always been sort of gradually expanding the reach of our commercial jobs, just by building relationships with our customers. We'll do a job with them in Florida, and then they like how we perform, and then they'll invite us to participate in a job that they do in a different state. And then when other players there see what we have done there, then we get invited. So that's sort of how we've historically grown or done business on the commercial side outside of Florida. And just for reference, we've done business in over twenty states on the commercial side. Now, Florida has just been booming.
So, you know, a few years back, if we had spoken, we were all focused about diversifying out of Florida, but then, Florida has just been doing so much better than... You know, we couldn't not take that opportunity. On the single-family residential, the story is different. That's because these are small size jobs, so we'd need a significant volume for the logistics to make sense. So we're currently only offering single-family residential out of the New York showroom, out of the South Carolina, and then out of the Texas showroom. You know, the logistics don't make sense for us to do single-family residential throughout, whereas with commercial, that's not an issue just because a single job will justify the logistics.
Yep, no, that makes sense, so one of the things that I think is important that you guys highlight in the investor decks that you guys have is the return on equity and the return on invested capital, which for Tecnoglass is about three times and two times the building product sector average, respectively. What's driven your ability to maintain that edge, and how do you allocate investments to maintain it?
Yeah, yeah, definitely. We're, we're very disciplined about investing in high return initiatives, which a lot of them come by the way of automating our existing facilities. So, so, you know, an example of what we do is typically we operate 12 glass lines, out of which 4 have been automated. There are still 8 that are operating manually. And when we automate one of these lines, it's about a $10 million investment. It takes 9 months or so to get it up and running, and it doubles the output of that capacity using a very similar footprint, so not quite the same footprint, but similar. And that will reduce headcount to 40% of the original headcount.
And that's how that's part of what's been driving our margin increases and why the returns are so high. Even with you know expansion capacities, like the new vinyl product line, again, once we're at that sort of sixty million annualized first milestone that we're not too far from reaching in the next few months. That'll pay back itself. Yeah, typically paybacks are usually always less than two years, and it's just you know we've been growing organically. It's also why you know we haven't been able, or it hasn't made sense for us to go out and buy capacity, sort of like a M&A, because we're just doing it so much better when we do it organically and do the work ourselves that it doesn't make sense for us.
Yeah, absolutely. You cited a record low leverage ratio in the 2Q release. You know, given that, can you maybe just talk about uses of cash going forward?
Yeah. So we do have we're probably going to end up the year in a net cash position or very close to that. So repaying that might not make sense at this point, particularly because we did hedge our interest rates before the interest rates went up. So we're you know not. That doesn't make too much sense. We have had some buybacks. We did some earlier, and those have been sort of not too much going on, but with those. And then we were always considering whether it makes sense to increase our dividends. As I mentioned, M&A is not a likely candidate now. That being said, and there isn't too much detail I can go into, we are undergoing a strategic review.
So we might have some changes there, but then that's sort of all I can say about that.
I appreciate even that comment, I'll take it. So for investors with an ESG focus, you know, earlier this summer, you announced achieving carbon neutrality for twenty twenty-three and twenty twenty-two as well. Can you maybe talk about some of the sustainability efforts you've gone through to achieve that?
Yeah. Yeah, definitely. Our sort of business, we're offsetting the carbon emissions for our facilities, but if you think the life cycle of our products, they are beneficial from an environmental and a social point of view, in the sense that these are impact-resistant windows that are meant to endure storms and last longer, so have a longer life cycle than, and then also provide additional security. We have thermally insulated windows with thermal performance. Some of them have been used on LEED certified buildings. So our product contributes to that ESG. Then our product, our production process is not a very polluting one in the sense it's really mechanical assembly more than anything, and we are offsetting particularly the greenhouse gas emissions with those.
Okay. Excellent. Could you maybe sum up the Tecnoglass value proposition for investors and tell us where the business is heading over the next, I don't know, five years or so?
Yeah. So this is a business that has been growing. We're still a relatively small player in the business, in the industry. Our profit margins are roughly double that of our competitors. And, you know, we have several strategic competitive advantages related to the location where we operate. And we consistently look out for having the right quality of our product, having timely deliveries with short lead times. And we're basically in a position where we have a small market share, we have a cost advantage, and, we're, you know, very profitable, so we expect to continue to take share from market. So yeah.
Excellent. Well, Eduardo, thank you so much for being here, and thank you to the Tecnoglass team for attending.
Thank you, Julio.