Tecnoglass CFO Santiago Giraldo Discusses The Company’s Successful Strategy & Plans For Growth
Tecnoglass (NASDAQ: TGLS) is closing 2020 as a record-breaking year for growth, even through the COVID-19 Coronavirus Pandemic, temporary plant shutdowns, and disruptions in travel and transportation. Finance Colombia reached out to Tecnoglass CFO Santiago Giraldo to recap the year for the company, and also to discuss progress with regards to its new factory on the drawing board, its joint venture with Saint Gobain, and continued expansion into the US and other markets.
One of the largest employers in Colombia, the company both sells its architectural glass & aluminum products primarily to the US, as well as trades its shares on the US based NASDAQ stock market. This provides both the stability of the US, with the cost and logistical advantages of Colombian factories and production facilities just across the Caribbean Sea.
Not only was Tecnoglass able to overcome the COVID related challenges throughout the year, it kept its employees on payroll during a temporary government mandated shutdown, and took extra steps to support the surrounding community during the pandemic. The interview video is below, and the full transcript of the conversation follows.
Finance Colombia: Thank you again for having us back here in your Barranquilla offices. Congratulations, because even though it’s been a challenging year for everybody on so many different fronts, it still has been a banner year for Tecnoglass, I think that a lot of people expected the building products industry, whether it’s focused on commercial, residential or industrial to follow a lot of other industries and have a down year but no, you guys have bucked the trend and it’s been a banner year for you.
First congratulations but tell me how the year; here we are in the fourth quarter, how things have maybe turned out with the pandemic and you guys were shut down here for two or three weeks taking into account all of that. Has this year met expectations, or has it exceeded expectations? What is your take on how this year has been so far with regards to Tecnoglass and all the challenges that you and the whole industry have faced?
Santiago Giraldo: Sure, well yes, thanks for having us again. Obviously, this year has been challenging for everybody, but if you were to ask me I think this year has met expectations and actually surpassed expectations if we were to talk about what our projection for the year was in terms of EBITDA and other metrics, we’re going to land pretty much where we were expecting to at the beginning of the year. We had less revenues in the year because you mentioned that we were shut down for three weeks and it’s obviously, hard to recover and recoup that time. But from a profitability perspective we’re going to be in line if not better than we had projected at the beginning of the year, that’s a result of many things: We invested in automation last year so that’s helping quite a bit with raw material cost, waste…head count has obviously been optimized, energy costs have gone down, so those initiatives that we invested on as far as automation goes, have played out much better than we had expected.
As a result, what we’re thinking is that we end up maybe 10% to 15% lower in sales, but if you’re to look at our adjusted EBITDA, we are going to be up 7% to 8% from 2019. You know our business is divided into really two segments: the commercial and the residential. On the commercial segment, what we are invoicing right now are projects that were booked many months ago; 12 to 18 months ago, so the effects of the pandemic are not necessarily seen today because the construction in the US kept going, right? I mean it was considered an essential business and it never stopped.
The US has been close to 90% percent of our revenues this year and we will talk about what LatAm and Colombia are doing, but the US kept going very strongly, so we were able just to execute the backlog that we had at hand. I mean, it’s not a business that you book overnight, and you expect to get business from one week to the next, right? I mean it’s something that we were already kind of booking and these buildings were well underway, so cancellations don’t take place.
By the time that we get involved these buildings are well off the ground so this year was really more of the same, just continue to execute. On the residential side it is a different story because this is much more short nature, much more a spot type of business, but that is an area that is outperforming the economy as a whole. If you look at what’s happening with home builders, low mortgage rates, low interest rates are driving pretty healthy growth on the single family residential segment, so we’re taking the opportunity to basically grow as that particular segment is growing.
So all in all, I think that we ended up much better than we could have expected from kind of everything that’s going on, and that’s related to solid execution, the fact that the US continued to push forward. LatAm on the other end has been very slow to recover. A lot of our clients are just having gotten up to par as far as being able to operate on their safety standards related to COVID, so that’s been slow. Q2 was really non-existent, that was 2% of our business. Q3, Latam was 7% of our business, so it’s trending in the right direction, but it’s still not where it was pre-COVID, so locally we’re much more exposed to the US, which is over 90% of our business and that business continues to move forward.
“We historically have concentrated in commercial and within commercial, very focused on Florida. Now we’re looking to be much more diversified: the northeast, Chicago, Texas, the west coast and with residential. is just the tip of the iceberg so far.”
I think what’s important now is how fast can we replenish our backlog, the backlog that is being consumed, how fast our customers are going to be able to sign new contracts to go from what’s in the pipeline or what are quotations into what is in the backlog: So that’s where we are, all in all I would tell you a very positive year.
Finance Colombia: Even still I don’t know how concerned you are about the backlog, because if I remember from the last numbers it’s still over $560 million, right? So you have a very healthy backlog, so it looks like you’re going to go into 2021 in a very strong position.
Santiago Giraldo: Yes, so we reported closer to $540 million, what you don’t get to capture there is the residential backlog, because residential is so short-term that you don’t get to fully capture your next 12 months of revenues. The only thing that you could put in there are your orders that are already into production and that’s a very small amount in comparison to what we’re expecting to sell for a full year to give you some perspective. I think what is captured in the Q3 backlog related to single family residential is less than $10 million, but we’re going to do about to $75 to $80 million of revenues for the full year, so even though our backlog is $536 million as of September, which basically carries us all the way through the rest of 2020 and pretty much the majority of 2021, we should expect to see revenues coming from the single-family residential that are not captured there, so you’re right, but what we want to make sure is that 2022 starts kind of building up, because we’re going to start going through this existing backlog.
But this business you have to kind of work every day to make sure that you replenish what you’re invoicing, so in another way to put it is this is a short-term versus long-term dilemma, the short term is pretty much played out with what we have. The long term, the 2022 and on is basically what we have to work on today and that’s where we have to make sure that things continue to normalize, and conditions continue to move in the right direction.
Finance Colombia: I think though that with residential being a growth area for Tecnoglass because the company’s roots and history has been, in my understanding, largely commercial and so now that’s creating a new opportunity for you as well as you go into new markets inside of North America, inside of the US because even though you have a strong US presence, over 90% of your business is in the US and you’re not well represented into other regions in the US and so it still is a growth market for the company, right?
Santiago Giraldo: Absolutely, I mean, we look at the US as our growth market for the next five to ten years. I think all that you see here 2.7 million square feet of just PP&E, equipment that that we have basically built over time is designed to service the US, right? I mean we love to serve LatAm, we’re here in Colombia, we love to do things here, but all of this capacity is destined for the US market.
The US market is about $25 billion USD per year in sales between product sales and installation and we’re selling $350 million a year so we’re one and a half percent of the market. Not necessarily all of that market is the target market that we’re basically focused on, right? It’s not all addressable but the point is that it’s a much larger market and you said it, we historically have concentrated in commercial and within commercial, very focused on Florida. Now we’re looking to be much more diversified: the northeast, Chicago, Texas, the west coast and with residential. is just the tip of the iceberg so far. I mean if you look at our main competitor in the same market and the same product type they do about $700 million in sales on residential alone and we’re doing $5 million this year, 1/10 of what our main competitor does, so still a lot of upside. We don’t see that even on the downside case scenario, we should not be able to grow, I think it is difficult, I mean is definitely more challenging because I think a lot of people, a lot of our clients are taking a wait-and-see approach to have more visibility, but from a market size perspective the potential to continue growing is there.
Finance Colombia: I think another thing too is that even if you look at the new administration coming in that has stated a higher focus on energy efficiency, Tecnoglass has this highly energy efficient glass and these products that can help builders meet LEED certifications that can create very low emission buildings, that can reduce their footprint, so I think that creates additional opportunities for the company as well.
Santiago Giraldo: Absolutely and with the mandate from the new president-elect to spend significantly on global warming and in green buildings as a whole, this whole initiative where there’s going to be trillions of dollars being spent in going green can only favor our business. You mentioned it: a lot of what is being done right now as far as architectural glass goes is related to low emissivity glass because people want LEED certifications, they want to be green, they want to save on energy costs and that’s a lot of what we do. We bought our own glass coater to make low emissivity glass four or five years ago and that coater still has a ways to grow before it’s fully utilized, so we’re counting on this being a tailwind to our business.
Finance Colombia: You just mentioned something right there and that is that you continue to make capital investment, you continue in growth mode, you just purchased land for the new factory that you guys have planned, so tell me a little bit…I know that you guys have Vidrio Andino, I think that is the joint venture that you have with Saint Gobain. Tell me what this new partnership will allow you to do and my understanding is that you already have a broad product lineup between glass itself and the aluminum products that go along with glass but you’re going to be more vertically integrated. My understanding with this factory is it will allow you to be in a much better position when it comes to quality control, but when it comes to really being able to control everything from the sand to the finished product. What’s the plan there in the in the rationale behind the new investment?
Santiago Giraldo: So it’s been a long-term strategy of the company to be fully vertically integrated. So we started out in assembling windows, over time we developed a glass transformation operation, subsequently we developed an aluminum transformation operation, we bought our own installer in the US, we bought our own distributor. The one thing that was missing was the first stage of the supply chain which was basically being able to transform sand into glass. That’s a whole different business that we don’t want to operate but we were able to participate there with this joint venture with Saint Gobain, which is a worldwide leader in this specific manufacturing piece so it’s encouraging to see that somebody like Saint Gobain, which is a $50 billion dollar per year company was interested in joining forces with Tecnoglass. It tells a lot about what they think about our trajectory, about our company and doing that has two different benefits, one for Tecnoglass on a standalone basis and one for the joint venture, right? So if we start with the Tecnoglass story on a standalone basis it’s going have multiple advantages, it’s going to give us a long-term supply, a stable supply which obviously with everything going on with trade is very important to have secure suppliers that are going to allow you not to have interruptions on your supply chain.
With this second factory in Colombia we’re going to be able to source 100% of our glass needs from Colombia, from our joint venture factories. Right now we only source probably 40% to 50% of what we need out of the existing factory. With the second one given the fact that the first one is already at full capacity, we’re going to be able to source everything, we’re going to be able to have stable pricing over years and we’re going to be able to save money because 30% or so of the cost of the glass that we purchased from Saint Gobain in Bogota is related to transportation.
So by having a factory next door, right off the bat you’re shaving off 30% of that cost and with the second plan being built out we’re going to be able to source more jumbo-sized sheets of glass, which carry a much more efficient coefficient basically because you’re able to utilize more of the glass and you don’t waste as much. So in other words when you cut the glass sheets not as much goes to waste.
So we’re able to save on both of those fronts, on the Joint Venture side we’re going to benefit because what Saint Gobain is looking to do is basically grow their presence into the US which is a geographical segment where they have not been able to penetrate the markets as much as many other areas throughout the world. What they see in Tecnoglass is basically the ability to push their products through transformed glass that we that we make, right? If you can basically sell raw glass into the market let’s join forces with somebody that has a growth trajectory and just push it to them so they can transform it and sell the end product into the US market.
So right now we’re going to be able to join forces with a global leader that’s going to probably establish their own sales force and we’re going to be able to market together to grow the piece of the pie that we have there, so we see it as a win-win. We’re in the in the process of completing permits and both parties are basically assessing what things look like out there from a demand perspective. I mean obviously, we were ready to go and if it had not been for Covid, I think we will be one or two quarters removed from breaking ground and have already started building this second facility, but it doesn’t make sense doing it at any cost. You have to assess conditions, you have to analyze what demand looks like and that’s what we’re doing so hopefully, you know, we’ll be able to get more clarity and better visibility on things and move forward.
Finance Colombia: I think that’s an important point because a lot of times people hear, “okay, Saint Gobain is going to joint venture with Tecnoglass” and people in the US or people in the investment community might go “well Saint Gobain is helping Tecnoglass,” but no, Tecnoglass is helping Saint Gobain as much if not more. I mean we don’t want to make that judgment but it still is a win-win situation because both sides are gaining something there that they maybe don’t have and so it makes sense. It really isn’t a big brother-little brother thing, it is kind of mutual, a real synergy and a project that brings equal companies together on an equal footing.
Santiago Giraldo: Absolutely, this is a true joint venture. I don’t think a company of this magnitude is going to do things just to do somebody a favor, right? They have to do their own analysis and understand what value add comes out of it for them. So yes, I think they’re going to benefit. The other thing is that the existing factory is at full capacity as I was mentioning. They service Ecuador, they service Colombia, they service whatever is being done in Venezuela, but they’re at full capacity right now, and they they see an opportunity to service the Caribbean, to service the Central American region, obviously to penetrate the US market, so they see this an opportunity to grow. And the fact that we’re going to be joining forces with them allows them to have some security that some of that production is going to be sold, because we’re going to enter into an off-take agreement that guarantees that the JV and the new factory specifically is going to have the required returns. It’s a win-win and obviously they have a lot of know-how, they have a long-term trajectory and just being associated with a global leader can only help the brand.
Finance Colombia: Coming over here today, we passed by the large new monument that the company donated to the city of Barranquilla. It’s the largest city on the Atlantic, Cartagena is probably more famous with people who don’t know Colombia well, but this is really the industrial heart of Colombia. It also has an advantageous location on the port, it’s a city that’s on the move, there’s a new convention center there’s a new Malecon which is like a waterfront park, I see that there are new sports arenas in the works. You guys are a big supporter I think of Junior which is the soccer team in the national league here and the company does a lot of things very quietly as far as supporting the community and supporting local citizens beyond your employees.
I know it’s something that the Daes family is really focused on and being a philanthropic type of company. It is front and center to what we want to do. It’s not “let’s get richer and make more profit” where, the surrounding areas are not thriving and having a better time or even just barely surviving.
You were able to keep everybody fully employed and taken care of during the pandemic, which is great to see, but you guys have quietly done a lot of things here in the community as far as families. And I know you don’t do it for publicity, you don’t do it for marketing that’s why I want to bring it up, because I know that you wouldn’t bring it up on your own, but I think that it’s important that people understand the social component. It’s not a company that goes out there and goes “look at us we’re do-gooders” but the company aside from the environmental impact, the positive environmental impact that you have, I want you to at least speak briefly on some of the things that you’ve done this year to have a positive impact in this challenging time where a lot of people on the coast between Santa Marta and Cartagena—and this is still a tourism-driven region where a lot of people have been impacted—but you guys really stepped up and went above and beyond expectations as far as helping support, not just a local economy but local families in need.
Santiago Giraldo: Absolutely, I mean these are unprecedented times, I think a lot of people are having a really hard time and for us to be in the position where we’re having really a record year…is a privilege. It could have been that we were in a totally different industry targeting a different market and that would not be the case, so I think we were very lucky to be where we are. But even before COVID I think this is part of the DNA of the company, this is something where we feel that giving back to the community is obviously the right thing.
I think this is probably the largest if not, probably top two or three employers in the region is something that makes you proud and I know it’s something that the Daes family is really focused on and being a philanthropic type of company. It is front and center to what we want to do. It’s not “let’s get richer and make more profit” where, the surrounding areas are not thriving and having a better time or even just barely surviving.
I think we want to promote sustainability; we want to promote growth. Barranquilla is one of the places really in Colombia and LatAm that over the last couple of years has had a lot of success growing sustainable strategies. I think the public investment is showing. You can definitely see a change in the city, and being one of the largest companies in the city puts you in a position to help out. Tecnoglass is very recognized around here and I think it’s just the right thing to help out, to help promote wellness, to do what we can.
Obviously this year, there was more hardship than many others so yes I think it’s at the at the front and center, at the heart of the of the strategy, of the DNA of the company. Just having a sustainable and responsible strategy makes sense. At the end of the day we want everybody around us our employees and all our of our stakeholders to do well. So to the point that we can continue doing that and I know the Daes family will want to continue contributing as much as possible, that’s what you should see from Tecnoglass going forward. And like you said, it’s not something that you do for publicity, you just want the people to be better off and (these are) the people that we can help, not necessarily try to be out there on the press showing off these results for different purposes, right?
Finance Colombia: You guys have several thousand employees, more or less right?
Santiago Giraldo: Five Thousand.
Finance Colombia: Yes, about 5,000, one of the largest employers in Colombia. And especially if you take out things like retail or grocery store chains or something like that, certainly in the top ten if not the top five largest employers in certainly one of the largest industries. And it’s fascinating because Colombia is changing now, but outside of the textile industry, it hasn’t really been an export-oriented economy that’s changed in the last couple decades and it’s good to see that Tecnoglass is really a leader in that. It’s on NASDAQ, it’s TGLS, it’s a company that we follow and that is really impressive and so I thank you for your time.
Santiago Giraldo: Yes, absolutely, thank you, more to come.