Hello, welcome to the Tecnoglass Inc. first quarter 2023 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I now would like to turn the conference over to Brad Cray, Investor Relations. Please go ahead, sir.
Thank you for joining us for Tecnoglass' first quarter 2023 conference call. A copy of the slide presentation to accompany this call may be obtained on the investor 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'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 José Manuel, beginning on slide number 4.
Thank you, Brad, and thank you everyone for participating on today's call. We are very pleased to start 2023 on solid footing with very strong year-over-year growth and record first quarter results in all our key operating metrics. This includes record revenues, gross profits, Adjusted EBITDA, free cash flow, and backlog, amongst several other metrics. Our outsized growth is driven by our structural and sustainable competitive advantages, which allow us to gain market share in different markets. Our multi-year effort to improve our operations through strategic investments in automation and capacity enhancements further boosted our bottom line. These structural improvements to our vertically integrated platform have enhanced our ability to support our ongoing growth while serving a broader market and broader product offering. We are delivering high-quality service and products to our customers with lead times well below industry average.
Our investments in our plants have bolstered our ability to meet the higher levels of demand for not only our legacy products, but also for newer products designed for other geographies and segments such as Multimax and our recently designed garage door products. In both our commercial and single-family residential business, we are still experiencing rapid growth in demand for our products, particularly in the Southeast U.S., where we enjoy the benefit of secular tailwinds. Furthermore, a strong momentum in our single-family residential business, which has a shorter cash cycle, along with our proven working capital management, collectively helped drive our 13th consecutive quarter of exceptional cash flow generation. Our ability to generate cash has strengthened our financial flexibility so that we can capture higher levels of demand and reinvest in the business through ongoing operational and capacity enhancements.
We are on track to expand our installed production capacity to an output equivalent to roughly $950 million of annual sales by the end of the second quarter of this year. Our track record of delivering strong financial results validates our growth strategy. We are committed to consistent outperformance, operational excellence, and driving value through product innovation by leveraging our vertically integrated platform. We continue to enjoy a healthy competitive advantage, which has contributed to market share gains. 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. We were very pleased with our entire team's dedication to driving exceptional results and are poised to deliver another year of record performance.
We look forward to maintaining our position as a leader in architectural glass as we deliver exceptional above-market growth, profitability, and value to our shareholders. I will now turn the call over to Chris to provide additional details on the record backlog.
Thank you, José Manuel. Moving to our backlog on slide 5. We are thrilled to report a strong start to the year for Tecnoglass. We have a solid momentum in our business even into the second quarter, reflected by record invoicing months in March and April. Our strong performance in this challenging macroeconomic environment demonstrates the resilience of our business model. Our sales reflect the continuous strong momentum in commercial demand and market share gains in single-family residential. We are delivering exceptional service, innovative product offerings, and shorter lead times. Our track record of successfully delivering on high-profile projects and maintaining consistent lead times has earned us an increasing number of opportunities across the U.S. This, along with our showroom expansions, are allowing us to further penetrate attractive geographies.
A strong demand for our multi-family residential and commercial products has resulted in accelerating backlog growth, which climbed to a record of $776 million at the end of the first quarter. Beyond our backlog, the pipeline of projects continues to be strong, providing visibility well into 2024 and starting to build into 2025. Supporting the positive momentum in commercial, we are pleased to see the ABI Index return to expansionary readings in March. As a reminder, approximately two-thirds of our backlog is mainly composed of medium and high-rise residential buildings, which are currently outperforming most of other commercial sectors. The last one-third is related to a wide variety of commercial projects where demand remains firm. Our single-family residential growth trajectory is not fully captured in our backlog, given the shorter-term spot duration of projects.
Several other important factors driving our consistent ability to produce exceptional results are strong customers relationships, strategic partnerships, and new product innovations. We were thrilled to announce our partnership with Storm Shield Windows and Doors during the first quarter to develop a new product called StormArmour that targets key geographies we operate in, where severe weather conditions such as hurricanes, torrential rains, and high winds are prominent. Product launches such as StormArmour and our existing Multimax product line should help us generate additional organic growth as we expand our addressable market through new and unique solutions. We were also excited to recently announce our strategic partnership with Wells Fargo, who will offer a variety of very competitive and affordable financing options to our customers. Partnerships such as these highlight our dedication providing value-added solutions for our customers in addition to participating in ongoing industry innovation.
I will now turn the call over to Santiago to discuss our operations, financial results, and improved outlook for 2023.
Thank you, Cristian. Turning to slide number 6. Our exceptional performance in the first quarter reflects the ongoing strength and resilience of our business model. We had a very strong year-over-year organic growth in both our commercial and single-family residential businesses. We're executing on our growth strategy to capture demand for our innovative products and remain better positioned than ever to take advantage of the tailwinds José Manuel and Cristian highlight, given the unique benefits provided by our vertically integrated platform and deepening customer relationships across our increasingly diversified footprint. Single-family residential revenues grew organically 40% year-over-year in the first quarter, now representing 43% of our U.S. revenue. Our continued growth in single family is a direct result of our ability to deliver superior quality architectural glass products with much shorter lead times at an attractive value.
It is also important to reiterate that approximately 2/3 of our single-family residential revenues are tied to repair and remodeling demand, which has remained relatively resilient in our markets and for our products and has historically low correlation with interest and mortgage rate fluctuations. As we look ahead, we see additional market share upside to single-family R&R revenues through our expanding dealer base, geographic expansion within the Southeast and South Central U.S., the introduction of innovative new products such as those Cristian just discussed, and the opening of new showrooms in key geographies. Additionally, we continue to see favorable demographic trends of population migration into the Southern U.S., where we have significant exposure. Now on slide number 7, I would like to reiterate the important differentiating aspects driving our industry leadership and outperformance.
Our vertically integrated business model and strategically located operations are supporting our success in the ongoing tight supply and dynamic cost environment. More specifically, the differentiating factors benefiting our businesses are: number 1, previously implemented and ongoing high return investments in plant automation and capacity upgrades. Number 2, stabilizing our costs through hedging on aluminum inputs and dependable supply of raw glass through our joint venture with Saint-Gobain. Number 3, a people-focused culture to retain quality talent and achieve low turnover as an employer of choice that pays well above minimum wage. Number 4, keeping transportation costs under 5% of revenues. Number 5, a sustainable energy model, including solar power and cogeneration of power through on-site natural gas. Turning to the drivers of revenue on slide 9. Total revenues increased 50.6% year-over-year to $202.6 million for the first quarter.
This increase was driven by a significant growth in our multifamily and commercial activity, as well as a strong increase in single-family residential activity, in addition to market share gains. Of note, both single-family residential and multifamily and commercial revenues are benefiting from the positive demographic trends in our main markets that I touched on earlier. Looking at the drivers of Adjusted EBITDA on slide number 10. Adjusted EBITDA for the first quarter of 2023 nearly doubled to a first quarter record of $85.8 million, compared to $45.4 million in the prior year quarter. Adjusted EBITDA margin of 42.4% increased 860 basis points compared to the first quarter of 2022.
First quarter gross profit increased 78.6% to $107.8 million, representing a record 53.2% gross margin. This compared to gross profit of $60.3 million, representing a 44.8% gross margin in the prior year quarter. Our significant improvement in margin mainly reflected operating leverage on higher sales, favorable pricing dynamics, and greater operating efficiencies, partly due to prior automation initiatives. SG&A was $34.1 million compared to $26.4 million in the prior year quarter, with the majority of the increase attributable to higher shipping and commission expenses as a result of higher sales volume. A higher provision for bad debt expenses and incremental marketing and administrative costs associated with the expansion of our new showrooms.
As a percentage of total revenue, SG&A for the first quarter improved 280 basis points to 16.8%. Looking at our improved balance sheet and leverage on slide 11. In the first quarter, we built on our solid track record of cash flow generation with operating cash flow of $43.1 million. This has left us with significant financial flexibility to drive additional value in our business, giving us the ability to reinvest in growth CapEx into our operations in anticipation of higher levels of demand in the future. At quarter end, our leverage ratio once again improved to a new record low of 0.1x net debt to LTM Adjusted EBITDA, down from 0.6x in the prior year quarter.
As of March 31st, we had a cash balance of $128.5 million and availability under our committed revolving credit facilities of $170 million, resulting in total liquidity of approximately $300 million. Turning to our structurally improved margins and cash generation on slide number 12. The significant improvements in our gross margin are mainly attributable to the themes that we've highlighted in recent calls. Namely, the structural and sustainable operational improvements related to automation initiatives and our shift in business strategy to further penetrate into the more profitable single-family residential end market, where we do not carry out lower margin installation work. Additionally, our operating leverage on higher revenues has more than offset depreciation, labor, and other indirect manufacturing costs, further bolstering our profitability.
Taking these factors into account, we now expect our gross margin to normalize in the 50% range for the full year 2023 based on our current expected mix of commercial versus residential revenue. Our impressive cash generation has benefited from our careful working capital management, reduced interest expense, and a more favorable mix of revenues, providing us with financial flexibility to drive additional shareholder value through the 20% increase to our dividend in March, as well as the funding of our investments to increase production capacity by over 35% by the end of the second quarter of 2023.
Which are being financed entirely by our operating cash flow generation. While we continue to anticipate strong cash flow for the full year 2023, cash flow from operations is expected to trend down in the second and third quarters of 2023, given the timing of 2022 income tax payments in the U.S. and Colombia. Now, on slide 13, I would like to highlight our strong returns. Since becoming a public company, Tecnoglass has been focused on making accretive investments with a returns-oriented mindset. This is evident in the value we have created for our shareholders through our ROE and ROIC. As evidenced by the chart on this slide, the stronger profitability and meaningful step-up in cash flow has driven significant average returns over the past three years.
When comparing our ROE and ROIC metrics to those U.S. building product peers, the returns of our investment into our business have driven substantially higher value to our shareholders, further validating our strategic approach to driving returns. As you can see on slide 15, the upward trajectory of our revenue and Adjusted EBITDA remains positive, and there is a lot of runway for growth with the additional capacity slated to come online by the end of the second quarter. We are as confident as ever in our ability to achieve many years of exceptional growth. Moving to our outlook on slide 16. Based on our strong results in the first quarter and positive momentum into the second quarter, including record invoicing months in March and April, we are increasing our full year 2023 outlook for revenues and Adjusted EBITDA growth.
We now expect full year 2023 revenues to be in the range of $810 million-$850 million. This outlook represents an organic growth of 16% at the midpoint. Based on this sales outlook, our anticipated mix of revenues, and our expectations for costs and expenses, we expect full year Adjusted EBITDA to be in the range of $315 million-$335 million, representing a 23% growth at the midpoint of the range. We expect gross margins to be in the 50% range for 2023, mainly attributable to strong operating leverage on higher sales, structural advantages from our vertically integrated operations, and favorable pricing and revenue mix. In closing, we are very pleased with the momentum in our business.
Our high return investments, vertically integrated low cost operations, growing portfolio of best-in-class products, and conservative balance sheet positions Tecnoglass well to deliver another year of above-market growth in 2023, while maintaining our industry-leading margins and superb operating cash flow generation. With that, we will be happy to answer your questions. Operator, please open the floor for questions.
Yes. Thank you. At this time, we will begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster. The first question comes from Julio Romero with Sidoti & Company.
Thanks. Hey, good morning, José, Manuel, Christian, Santiago. I wanted to start on the, on the sales growth in the first quarter. You know, really solid on the commercial construction side. Christian, you talked about the project pipeline and the backlog starting to go out to even 2025. If you could just talk about what type of projects are driving the commercial demand, maybe what geographies in the commercial side are driving the orders.
Hi, Julio. José here. We have a lot of high rises and mid rises in Miami, very Broward and Palm Beach County, also in the Tampa area, they are booming. It's unbelievable the amount of people moving to Florida. We see a strong growth in that sector. Also, New York is picking up, Boston is picking up, especially universities and new construction in New York for residential. We believe 2024 is gonna be a stronger year for commercial, and even our pipeline goes to 2025.
Okay. Got it. That's, that's very helpful. Then I just wanted to turn to the cash flow in the quarter. you know, really solid cash flow for the first quarter, but you talked about cash flow trending down, in the second and third quarters. Any sense of how much the tax payment impact should be? Do you still expect positive cash flow from operations on an absolute basis?
Yes, absolutely positive cash flow from operations, Julio. The thing is that in both Colombia and the US, the timing of payments are April and July, and not so much in Q1. There's a seasonal component to it. It's not gonna be a drop where we're gonna be anywhere near not generating, you know, positive cash flow. I would estimate that the downtick may be $10 million-$15 million for the quarter. Nothing dramatic.
Got it. That's really helpful. Then, you know, this is the highest cash balance, it might be in company history for you guys. Does that sway you to be more aggressive with debt reduction or maybe building out capacity a little earlier than usual?
The build-out of the capacity is gonna be determined by the pipeline. As you just heard José, the pipeline continues to be strong, and you can see how the backlog is growing. Throughout the year, we're certainly gonna make decisions as to whether more capacities is needed down the road. As we have mentioned, by the end of the quarter, we'll be north of 950, but if the pipeline continues to grow at this pace, I'm sure there's gonna be more investments coming down the road. Debt repayment is also an option. We just increased our dividend. We're assessing all different avenues to return capital to shareholders and to reinvest in the business to continue supporting our growth.
That's helpful. Thanks very much. I'll pass it on.
Thanks.
Thank you. The next question comes from Brent Thielman with the D.A. Davidson.
Thanks. Good morning. Congrats on a really great quarter and outlook. Santiago, I guess just thanks for the update on the gross margin. Sounds like you think it's gonna normalize in the 50% range this year. Just wanted to get your thoughts on kind of the appropriate long-term gross margin range for the company, at least for us to think about. You know, I guess looking beyond this year, obviously very high level of what we're gonna see here in 2023.
Yeah. Good morning, Brent. What's going to be driving gross margins upwards, beyond the level that we have guided to is going to be the operating leverage. We were able to gain about 300 basis points of operating leverage on a gross margin perspective, quarter-over-quarter. That continues to be a tailwind to gross margins. Some of it is coming from pricing, but obviously we adjusted pricing in Q2 of last year. From a comparable basis, that will not continue to be the case going forward. Anything above what we're doing is going to come from operating leverage and further automation. I think over time, we can still gain maybe another 100, 150 basis points depending on the level of operating leverage that we can get.
We've been pleasantly surprised over the last couple of quarters, obviously. More, more to come, but the expectation is that we'll be able to sustain what we've been doing and depending on operating leverage, hopefully gaining a little bit more.
Okay. Really, really helpful. I was wondering if you could talk a little more about the Wells Fargo partnership? It seems really interesting. Obviously early to talk about financial implications, but maybe you could help us think about how this expands your total addressable market, you know, from where you are, I guess previously, to what this opens it up to for you going forward?
Yeah, absolutely. We were very exciting to sign that agreement with them. A very large financial partner that has a presence nationwide, which bodes very well with our expansion strategy into different markets. We think it's certainly gonna help sales over time. We have already signed, you know, several dealers into the program in these early stages. Clearly, we feel that it's gonna help out end clients to finance windows at very low finance rates. Even in an environment where interest rates are high, we're being able to provide very competitive rates for end clients. I think over time, it's gonna be, you know, quite a bit of a tailwind to revenues once it gets going.
It's as you mentioned, it's clearly in the early stages still, but the early signs are encouraging.
Really interesting. Lastly, I was just, you know, looking at the map on slide 6. I mean, Florida has been obviously a huge driver for your single-family business, but I guess I wanted to get your maybe an update just on your progress in Texas, which seems like just sort of the next great opportunity for you and some of the inroads you're gaining there.
Yeah. We have already a partner in Texas, in Houston. We're working on opening also in 3 other cities, Austin, San Antonio, and Dallas. By the end of the year, we have a full line of dealers and distributors in Texas. We're also working in South Carolina, North Carolina, and all the way up to New York. We're very enthusiastic about our new lines going to other states.
Okay, great. Thanks for taking the questions. I'll pass it on.
Thanks, Brad.
Thank you. Once again, please press star then one if you would like to ask a question. The next question comes from Alex Rygiel with B. Riley.
Thank you very much. Understanding that a very large portion of your residential business is in the R&R. Looking at the other segment as it relates to penetrating into national home builders, can you talk about some of the successes there and directionally, how that has grown over the last couple of quarters?
Yes. We have four national builders that are buying and increasing their buying from us on a steady basis. They have found that we have a much better array of products. The performance of our windows is really good for them and their clients. We keep gaining little by little in that sector. We are just now south of Orlando, and we are developing products to go up north to where there is no hurricane impact windows. We're working on that, and we believe that's gonna be a change for the company with the home builders.
Just to add to that, Alex, just to give you some perspective. Q1, we were able to drive Multimax sales above $20 million for the quarter, which is a step up versus what we were doing. I think with the incremental capacity that we have in place and that we have increased over the last few months, that's only gonna help out even more. Because now we can allocate capacity to both the legacy products as well as the Multimax line.
That's great. Any update on the Saint-Gobain glass plant and timing?
I'll let Chris take that.
Well, we're still waiting on Saint-Gobain to make a decision when to start building. You have to remember that we're only 20 some percent of the company, and they have guarantee us because we have it in writing. We have a contract with them that if the place is not built by next year, we will get prices like if the plant was already built next door. We're not really in a hurry to see it being built. Obviously, it would be a lot better to have it closer to our plant, things are okay like they are today.
That's great. Thank you very much. Nice quarter.
Thanks, Alex.
Thank you.
Thank you. The next question comes from Tim Wojs with Baird.
Hey, guys. Good, nice work.
Good morning, Tim.
Maybe just a modeling question, Santiago. Just if I take your Adjusted EBITDA number for the first quarter and just kind of annualize it, you know, I get to a number that's kind of above your guidance. I'm just trying to kind of understand what the puts and takes to that might be for the rest of the year.
If you take the same kind of EBITDA that we did in Q1 throughout the year, you get to the higher end of the guidance. The big if is what happens with kinda like the single-family orders in the second half of the year. We already know that Q2 is coming strong, basically, and we said that April was a record invoicing month. We already have the orders that will be invoiced over the, over the course of Q2. The question comes as to what happens in Q3 and Q4. What we're baking in is essentially just kind of stable EBITDA for Q2 and Q3 against Q1, and then a seasonal step down in Q4. That's how you get to about $335.
Okay. Okay, good. Just from a capacity perspective, will adding the automation, you know, by the end of the second quarter, I mean, would that translate into more shipments in the back half of the year? Do you think the revenue kind of trends similarly to what the EBITDA is trending?
Well, the capacity will be there to even increase our sales above $950 million if we need to. It all depends on how much we can sell. My brother here, José, he's saying that he's gonna sell all of it. We're hopeful that we will fill capacity again.
Okay, good.
From a modeling perspective, Tim, again, Q2 and Q3, we're our base case is that there is a step up from Q1 in revenues, in top line, and then a seasonal step down in Q4. Again, if resi outperforms our base case, then there's definitely upside on both metrics, top line and Adjusted EBITDA.
The resi base case is flat for the year?
Flat versus Q1?
Yeah, I guess flat versus Q1 or what is the base case for resi this year, I guess?
No, it's higher than Q1. Remember that Q1 is a shorter quarter in the sense that we have two weeks in January where there's scheduled maintenance and pretty much shut down, right? There is a step up in the base case in Q2 and in Q3, and again, trending down seasonally in Q4.
Okay. Okay, good. Keep up the good work, guys. Thank you.
Thanks, Tim.
Thank you. This concludes the question and answer session. I would like to return the call to José Manuel Daes for any closing comments.
Thank you everyone for participating on today's call. Keep tight. We'll keep working hard to give you great news to all our shareholders. Thank you.
Thank you. The conference has now concluded. Thank you for attending today's presentation. Menards Financial Lines.