Interview: After Reporting Record 2022 Results Tecnoglass CFO Santiago Giraldo Explains The Company’s Growth
The challenge for a journalist when reporting on Barranquilla-based Tecnoglass (NYSE: TGLS) is not repeating the same headlines over and over “Tecnoglass reports record results.” But once again, when Tecnoglass reported full year 2022 financial results, it was another record breaking year and another record breaking fourth quarter. What many investors and customers, mostly in the US may not realize, is the immense impact the company has back in Colombia, especially in the coastal city of Barranquilla where the company was founded and maintains its principal operations.
To parse out the company’s success, and hopefully get a glimpse of what is to come for the company and its stakeholders, Loren Moss, Finance Colombia’s executive editor, traveled to the sprawling manufacturing complex of the company, near the waterfront where the Magdalena river exits into the Caribbean sea.
There, he had an in-depth conversation with Santiago Giraldo, the CFO of Tecnoglass, who has shepherded the company’s finances and investor relations through its growth from a micro-cap to a small-cap, to now, a mid-cap international company with global ambitions.
Finance Colombia: So, I’m here with Santiago Giraldo the CFO of Tecnoglass; great, to be back here and see you again. I know it’s been a busy year. I don’t want to come up here and interrupt you when you guys are busy growing and breaking records; continuing to break records. It’s amazing what you guys have done. Your results came out just last week for 2022 and it’s kind of it’s hard for me to write headlines as a journalist, because it’s like: Tecnoglass, breaks records…Tecnoglass breaks records…It is like a broken record itself because I keep saying the same thing over and over again, but that’s a good problem to have! So, give me a quick recap on 2022. I mean, you guys—I know a couple of years ago, you really entered in a strong way, the residential market, that was not something that Tecnoglass was originally built on. But that’s been a big motor for your growth. Maybe if you can unpack that little bit?
Santiago Giraldo: Absolutely, it was a record year and well beyond expectations, internal budget and everything that we had thought. And there were several factors that contributed there. You mentioned the residential segment, we basically have grown that from just $10 million dollars in 2017 to over $300 million in 2022. It’s been accelerated growth. We’re taking market share from others but also it helps that places like Florida and Texas in the southeast, tax-friendly states are seeing a lot of influx of people moving down there. So the activity behind the demographic shift that we’re seeing is playing a huge part into what we’re doing. So there’s just other secular trends, there’s demographic trends but there’s also other things that are playing a part. There’s tax incentives provided by the government for people to invest in impact resistant windows. There have been insurance incentives. For insurance companies, providing incentives to people that replace their windows to make sure that they are impact resistant as well.
So there’s been a combination of things that have helped us grow and take market share from others, we are situated in a different scenario if you will, as far as what’s taking place in the world with inflation, headwinds with supply chain disruptions, we labor constraints. As you can see here in Barranquilla, we pretty much do everything in-house, we are fully vertically integrated. And we haven’t had the same dynamics as far as labor constraints. As you know here in Colombia the unemployment rate runs above 12% and we have very little turnover. So all of those factors plus the fact that we have our good product with good quality and fast delivery times really lined up. It’s as if all the stars lined up for us and what you saw were the results as of 2022, where we were able to grow 44 percent. So there’s just not one factor that I could speak of, I mean, there are different things that basically played a huge part into what happened.
Finance Colombia: You know, it’s interesting because we saw interest, we see interest rates around the world, kind of rising. There’s been a lot of loose money policies with governments to fight the COVID pandemic. And now, we’re seeing the aftereffects of that. And the US government, of course, has raised their rates and we see as a result mortgage rates are going up. I would imagine that has—Have you seen any kind of damper effect on that because obviously mortgages rates…construction is very dependent upon them?
Santiago Giraldo: Yeah, it’s a headwind but if you look within our sales, roughly 67 to 70 percent of what we do is repair and remodeling. So we’re not relying on home builders, we’re not relying on new housing starts. For that business to grow—I mean there’s obviously some correlation but when you think about it, repair and remodeling is more countercyclical in nature. In other words, if you’re at your house and you see that mortgage rates went up to 7%, you’re not going to go buy a new house and lock yourself up for 30 years into that rate. You’re more likely going to reinvest in your own home, knowing that prices are still high and then mortgage rates are much higher than what they were a year ago. So that plays into what we do because if you’re staying in your home and you’re carrying out some of those remodelings that you pushed out for years, that includes windows.
“…we basically have grown that from just $10 million dollars in 2017 to over $300 million in 2022.
So 70 percent of our windows or of our business is related to repair and remodeling. So that places us apart. The other thing is that we’re still rather small. If you think about it, we don’t need the market to grow or the industry to grow for us to grow, right? I mean if you think about our largest competitor in the state of Florida that they sell about $100 million. Here we are, you know, just getting north of $300 million which is rapid growth but we’re still nowhere close to the larger players in the state and in the country.
So there are still market share opportunities for us to take from these guys because those guys are constrained by labor are constrained by headwinds on inflation. There’s still supply chain disruptions. So we have an opportunity to continue gaining that market share. Despite the fact that as you mentioned, there are some challenges mainly on the new home construction side, which is still not the primary source of our income.
Finance Colombia: Got it. And also, I mean, to mention the relative size of Tecnoglass, even though it’s one of the biggest companies in Colombia, I think the last time I saw the statistics you still had less than one percent market shares in the United States or something like that. So there’s so much room to grow and like you said, you don’t need—the market doesn’t have to grow for Tecnoglass to grow, you’re not even distributed in all 50 states yet.
Santiago Giraldo: That’s right. I mean that the industry as a whole is about $32 billion per year between manufacturing and installation. We ended up here s$770 million more or less. So we’re talking about, call it two percent, right? Obviously not everything is addressable because a lot of it is commoditized; its kind of like your typical big box store type project which we don’t supply. Everything that we do is built to suit, high value-added components. So that is not necessarily addressable, but by our calculation, at least $20 billion of that is addressable and another $700 million. We are still a small portion of the business like you mentioned, we are pressing throughout the US on the commercial side. We’ve been doing business throughout the US pretty much for the last 25 years, right? Obviously much stronger in the state of Florida and the southeast. So, there’s opportunities to grow the commercial side, but where the upside comes from is that we still haven’t tapped into anything outside of Florida on the residential side.
“It’s as if all the stars lined up for us and what you saw were the results as of 2022, where we were able to grow 44%”
So, that $300 million that I mentioned on that segment is strictly Florida. So what we’re doing about that is opening up showrooms throughout the US so we can leverage our cost efficient platform to manufacture in Colombia and ship everywhere else in the US, and we have a showroom that is currently open in Manhattan, New York. We have a showroom that is currently open in Charleston, South Carolina. We’re about to sign a lease in California in Los Angeles to service that market, and the idea would be to open up showrooms in Texas, Arizona, and Nevada in the rest of 2023 and into 24. Right now, we have zero revenues in those states, anything that we get from there is outside, right? So you’re going from nothing to something. And we have the same competitive advantages that we have in Florida. They also play the same way in different parts of the US. Transportation is not an issue, right? We know that there is a trade imbalance between the US and Colombia. There are a lot more containers coming in than there are going out. So going into New York and even going to California through the Panama Canal is still efficient so we can penetrate those markets just the same as we have done in Florida. So that’s what we want to do.
Finance Colombia: You mention something interesting and you talk about the trade imbalance between Colombia and the United States. I know that there’s a trade imbalance with some other countries as well, but right now, it’s recovered a little bit, but the peso last year took quite a dump. Especially, I think a lot of it was around election-related uncertainty that’s kind of, you know, built into the pricing now, but how much—in a lot of countries you know, the travel sector we follow closely and they’ve really taken a hit because of that, but I would imagine that it’s been helpful as a company that manufactures in Colombia because of labor and because of other costs, how much of a factor has the peso dollar relationship been in last year’s results?
Santiago Giraldo: That’s maybe the one aspect that we didn’t touch when I said earlier the stars lined up, obviously you don’t want your strategy to be predicated on what happens with the FX rates. But for us, when you’re selling 95 percent more or less, in US dollars and your cost and expenses are roughly 35-40 percent in the Colombian Peso, then anytime that the currency is devaluated and is weak, it’s a tailwind to the business, right? To the piece, a Tailwind to the P&L. So for us, what happened here over a year with the devaluation of the peso, I don’t think as a country we want to see that, obviously because of inflation and different dynamics of what’s taking place right now. But if you look at Tecnoglass, on a standalone basis it is hugely positive for the company and for P&L. We think that the currency is going to continue to be weak for the time being I think. As you mentioned some of it is related to what happened with the elections and some investors’ fears around that, I think that up until last week. I think that that was kind of coming down and the peso was revaluated again.
But aside from that, I think worldwide what you’re seeing from monetary policy, especially with the Fed continuing to raise rates and apparently, they’re not done yet, that’s keeping a lot of emerging market currencies low, and that’s going to be the case for the foreseeable future. So, that’s playing a part, it is definitely helping out and in is also helping to be able to kind of price competitively if you need to, because you know that you have that extra cushion to do that. It hasn’t come to that.
I mean we expected prices to calm down a bit because input prices have come down since the peaks of the pandemic. Aluminum was at $4,000 dollars per ton, now it is at $2,400. So those sort of things would lead you to believe…I believe that pricing is going to come down. That hasn’t happened yet. I think our competitors are still seeing a lot of inflation. Wage inflation continues to be prevalent. So we’ll see what happens with that. But so far, you know, we continue to be able to hold pricing and selling in dollars, is just a huge plus.
Finance Colombia: That’s great. Now I’m talking to you here in your new showroom, we are at your headquarters, your operational headquarters in Barranquilla, and I didn’t see this before the last time I was here. And it’s really nice because I thought I had…I mean, I’m no architect or glass expert, but I thought I had a good idea of your product line, but really, I see it’s even more expansive than I thought. And this is a great idea to be able to show it and you make sure that you have these showrooms. Now, you’re building them throughout the United States. I know that the product is very efficient when it comes to solar energy, but in all the new showrooms you mentioned, don’t forget about the Midwest as you guys grow, I’m a Midwesterner! But still, you know, as you build out this this infrastructure to be able to showcase the products and things like that, you also mentioned 44 percent growth. Now you own your own factories, you own your facilities down here, but tell me about what kind of Investments, tell me about the capital Investments that you’re making to be able to keep up and to stay ahead of demand. So that you want your backlog to grow because you get new orders, but you don’t want your backlog to grow because you’ve exceeded capacity.
Santiago Giraldo: Yes. And I think that’s been the biggest challenge when people ask: what keeps you up at night? I think (COO & co-founder) Christian has been up at night the last two years because of the need to address that growth. Because to be honest with you, not only have we benefited from all the factors that we just discussed, but there’s such a shortage of windows as with anything else right now. Obviously, the lead times have become longer, there’s such a shortage of windows, we have been getting kind of a proactive approach, but some of these potential clients that we wanted to go after, that are looking for us to be their providers. But when you have that and you have the demand in place, but you have to be able to make sure that you are able to address that demand.
And the only thing that you can do is basically invest in capex, to grow your footprint, to grow your operational capacity. And through the last two years, we have invested almost $125 million in growth capex to be able to get the factory where it is today, with the investments that we are completing right now. We are going to have operational capacity to get to $950 million, that’s going to be by April or May of this year, and we’ve been investing in land, investing in warehouse space.
We have been investing in automation. I mean, automation is a huge benefit whereas some of our lines were not automated. Now, we have four out of ten, eleven lines that are fully automated and that brings benefits from an operational capacity perspective but also It allows us to redeploy some headcount to other areas. It reduces material waste. So is what we’re doing right now and we’re having to assess what that’s going to look like essentially on a month-to-month basis because $950 million in operational capacity sounds like a lot, but if for whatever reason we are able to grow in a similar fashion as we did last year, we will be tapping against that capacity already.
So, we have to be very vigilant. The good thing is that mainly on the commercial side, you get a lot of leeway and you get some visibility as to what things are going to look like because anything that you booked into the backlog, today tells you what the activity is going to look like 12, 18 months out. So if we can continue growing, the pipeline grows in the backlog. We know that we’re going to have our hands full down the road. And we need to invest in capacity today, and that’s the main concern, because that brings a lot of challenges, right? You’re stressing the factory, you’re becoming more complex and logistically you’re travelling to many different—more places and that creates some challenges of its own. But hey, as you said earlier, it’s a good problem to have.
Finance Colombia: Now last year, we celebrated, your jump, if you will, from NASDAQ to the New York Stock Exchange. That’s an interesting move, because NASDAQ NYSE, of course, is the granddaddy of the exchanges at least in North America, opening I think in the late 1700s, it is in many ways the most prestigious of the exchanges. NASDAQ also has matured, it used to be kind of…well there used to be like three exchanges back in the old days, you remember. But still, that was an interesting move because companies don’t necessarily need to make that move. But you guys felt the need to do that. Maybe if you can, if you can recap what was behind that decision and then it was kind of a mid-year thing. How it’s been for you so far?
“We’re not making decisions for the next quarter, or the quarter after. I mean, I think we’re making sound decisions in line with our strategy, to make sure that this company is something much larger, bigger, better in 10 years to come, not necessarily what’s happening next quarter.”
Santiago Giraldo: You mean NYSE who was the granddaddy, you said NASDAQ just to just to clarify.
Finance Colombia: Yeah, I got confused!
Santiago Giraldo: So we made the move there to get more exposure right? I mean it’s obviously a broader audience. We also wanted to get more liquidity in the stock. if you look at what’s happening with liquidity we’re trading over $10 million dollars per day, 250,000 shares more or less on a daily basis, so we wanted to get that platform to be able to get to new faces, be able to be able to tap into in into new investors. You also get what’s called a market maker, which for us is the Citadel, which makes sure that there’s always going to be kind of a buying order a selling order and that helps with liquidity so it’s been good. It’s been a good relationship; obviously nothing but good things to say about NASDAQ. We started there 10 years ago, and they provided a great platform as well. They’re obviously very—kind of tech focused and I think they’re the best at it, but we felt that this was a good fit for Tecnoglass at a good point in time when the company continues to mature and become larger. Now today we can be considered a mid-cap company. Yeah you know, starting out from a micro-cap to a small-cap, now today we’re technically a mid-cap company and we can potentially get onto new investors’ radars, so we wanted to do all of that.
Finance Colombia: That’s great, you know, I got confused because in my mind I was thinking back to…I’m old enough to remember the American Stock Exchange because there was the ASE and NYSE and then NASDAQ came in, and ASE then merged with NYSE. So it’s kind of an old timer’s thing! But anyway, speaking of new markets: So tell me I mean Tecnoglass continues to expand throughout the United States, you’ve gone from residential—or from commercial into, expanding into residential—still, keeping commercial strong, but talking about new markets: what kind of new products; whether that’s new lines of business, or new types of products or even any new geographies outside of the United States…I don’t want to kind of lead the question. Just help me understand how you’re expanding. Not just in growth, in terms of vertical silos, but horizontally in terms of the breadth of your product lineup.
Santiago Giraldo: Yeah. This is a day-to-day occurrence. Last year we…earlier last year we basically developed a product for home builders called Multimax, which is essentially a product that is not targeted to a couple of million dollar home but maybe a Tract home that could be $300-400,000 dollars; very high quality, but not the same kind of value-added components that you will require for some of these larger homes, right?, So that’s been very well received, we’re already selling to seven or eight different home builders that have nationwide reach within the US, so that’s been very well received.
And we continue, we continuously invest in research and development, to make sure that we are developing products for new geographies; we mentioned earlier that we’re opening up showrooms throughout the US. Well, if you think about it, not all of those geographies require impact-resistant glass and windows,
When you’re talking about Miami it’s not the same thing as talking about selling a home in Los Angeles or selling a home in Arizona. All of those places require different products that are more specific to the conditions of those places. So for instance if you look to go into Arizona, where there’s extreme heat at some points of the year you’re going to look more for insulated glass that has some energy efficient qualities. So, there’s always product developing and you know we’re working on new technology for glass that is going to serve as solar panels for instance.
We’re working with different providers that have that technology so we can license that product and make sure that when the product becomes economically viable for mass production, kind of like the Tesla effect, that we are there. We want to make sure that we are present in that because that’s going to be a huge development. We’re working on other things that we should be announcing within the next couple of months, but it’s an ongoing process. You want to make sure that you’re up on top of what’s happening, and you’re not lagging behind.
Finance Colombia: You know, I hope to get back up here soon and talk to Christian, the co-founder and CEO of the company. You know, you guys have solar panels on everything, and I hope to talk about…Tecnoglass has a very significant social mission here, especially on the coast, here in Barranquilla which is like the industrial capital in many ways, of all of Colombia, but especially here on the coast, and there’s so much to talk about! Some of the things you’re doing here in the community as well, I hope to talk to Christian soon about that.
Is there anything that maybe you wanted to mention that I forgot to ask you? I mean there’s so much good news to cover, and it’s just good to be back up here and it’s exciting. You know, every time I get my on my phone I get my alerts and the stocks I follow, and no matter what other bad news is happening, I can count on some good news coming from TGLS.
Santiago Giraldo: I hope that continues to be the trend. I mean it’s kind of like, investors and all stakeholders tend to have short memories, right? Short term memory, so it’s like yeah you might come out with great news as we just did, but we’re already looking as to what we’re doing for the next quarter, the next year and the next decade.
That’s the good thing about Christian and (CEO) Jose. I think they’re looking for this company to be something much bigger in five, ten years out. We’re not making decisions for the next quarter, or the quarter after. I mean, I think we’re making sound decisions in line with our strategy, to make sure that this company is something much larger, bigger, better in 10 years to come, not necessarily what’s happening next quarter and how we’re going to report results.
I think that if you do that and you stick to your strategy, those things are going to come. The quarter to quarter results are going to come, so we’ll see. I mean, more to come. We continue to be bullish about the future; short-term and long-term, despite all the uncertainties in the world. Obviously from a macro perspective, there’s a lot of challenges, but we feel that we’re well positioned, we feel that we have structural advantages that will carry us through and we’re well positioned to withstand a down cycle if that was to come, so hopefully the news will continue to come. And next time you see an alert, despite what’s happening in the world you’ll get a smile on your face.
Finance Colombia: You know, you try to be as balanced as possible but it’s really always exciting to come up here, and talk to you guys, because not just what you can see in the financial results, but what you can see in the community and what you can see in the different things make it really…it’s literally fun to cover Tecnoglass, and it’s great to see the good things that you’re doing for investors, for the consumers of your product, and for the community here in Barranquilla.
Santiago Giraldo: Yeah and hopefully, do follow up with Christian, because there’s so much, so many things to tell about ESG, about what we’re doing for the community. I’m obviously not going to steal his thunder and let him talk through all of that. But it’s been nice that not only is the company doing well, but the company gives back to the community. Now we are almost 10,000 employees, you know last time we talked I think we were maybe 6,000, so we’re generating a lot of employment, good employment for the local communities, and I think that’s going to continue so far as we can continue growing. You know it’s not the point that the company is doing well, you also want to see your environment and stakeholders doing well.
Finance Colombia: Absolutely. Well, Santiago Giraldo, the CFO of Tecnoglass, always a good “parcero,” (Colombian slang for a great friend) it’s great to talk to you in in Barranquilla and continue the success that you’re having and as I’m sure you will.
Santiago Giraldo: Thank you so much and come back anytime