Interview: Tecnoglass Having A Record-Breaking Year Despite Pandemic & Temporary Shutdown – CFO Santiago Giraldo Explains How
Barranquilla, Colombia based Tecnoglass (NASDAQ: TGLS) had a record breaking second quarter despite the COVID-19 Coronavirus Pandemic, and their voluntary decision to shut down operations for two weeks during the worst part of the pandemic. The architectural glass and aluminum products manufacturer reported a record half billion USD backlog in orders, up 4.8% over the previous year, and record cash flow from operations of $24.3 million. 96% of the company’s revenues come from the United States, which is its primary export market, but also home to an operating subsidiary.
Finance Colombia executive editor Loren Moss was able to speak with the company’s CFO, Santiago Giraldo to understand the extraordinary first half of 2020, how it is navigating the pandemic, and what investors can expect from the joint venture with Saint Gobain, and the company’s expansion plans. A complete written transcript follows the video below.
Finance Colombia: So, anyway, congratulations, I‘m here with Santiago Giraldo, who is the Chief Financial Officer of Tecnoglass, which is the Barranquilla based manufacturer of glass and aluminum products, they’re very active with the majority of their sales and business activity taking place in the US, they’re export oriented, they trade on NASDAQ, the symbol is TGLS, so I wanted to talk to Santiago because congratulations, you guys showed surprisingly strong results for the second quarter of this year. If you could tell us a bit about how you guys achieved that.
Santiago Giraldo: Yes, we were very pleased with the results, obviously a challenging time, especially in Colombia where we had three, four weeks of less work because of the shelter-in-place order that was put in place by the Colombian government at the end of March, so this quarter in particular we had two fewer weeks of invoicing during April, and even with that, we basically were able to achieve almost as much operating margin and EBIDTA as last year with lesser revenues. The revenues are basically backlog that is in hand, so that’s just going to move over to Q3 or Q4, so in reality to us that’s just not like business that goes away; our impact has more to do with timing rather than lost revenues, which is encouraging, but, what you saw into in Q2 is that our investments in automation during last year, and also putting in place efficiencies that we worked on during the second half of 2019, are paying off.
So we were very, very pleased with the margins, with the cash flow generation of the business and, to tell you the truth, being exposed to the US market, 97% of our revenues came from the US in Q2. It helped a lot because construction was deemed as an essential business in the US and the states never stopped construction activity, That was really a huge advantage because, as you know, Colombia and LATAM as a whole continue to be challenged, and we were able to ramp up production and be ready to operate safely, but that’s not necessarily the case with our clients. Some of these job sites are just slow to ramp up and be ready to operate, so LATAM is slowly getting back to its feet, but the US never stopped and that continues to be by large our main market.
Finance Colombia: Great, and you already answered one of the questions that I had: it was that you guys have had record margins, both gross margins and operating margins, and so it sounds like those efficiencies that you put into place– I visited the factories that you have, they’re very efficient, well-run, lots of automation already in place, so it’s not like you have to play catch-up or pay off any technological debt you guys have. Ever since I’ve been aware of the company, you’ve run a very technology forward company and when it comes to automation, both in the computer and software side as well as automation in the manufacturing side as well. So you guys did close the factory down, if I remember, for a few weeks as a safety measure to protect your workforce. How, and I don’t think that— As I understand, here in Colombia, manufacturing and exports were considered essential industry, so you didn’t have to do that but you just decided to do that anyway, if I understand correctly.
Santiago Giraldo: Yes, I mean, it was the right thing to do, obviously our employees are what matters most and at that point in time it just didn’t make sense to continue operating as if nothing had happened. Obviously the priority has always been the safety of our employees and their well-being, so we took those three weeks to adapt the factory to basically work under the safest of standards. I mean, we implemented a ton of different safety measures to mitigate the risk. Luckily Barranquilla is much better now than it was a month or two months ago, where we experienced that peak; daily cases have subsided significantly, but we continue to operate as safe as we can, to us it was really not a question. Like I was saying, our work is in place. We have operational capacity, we were able to catch up with orders once we resumed in the latter part of April, so it was it was a matter of doing it right, it was a matter of investing in safety and investing in our employees and doing the right thing.
Finance Colombia: Great, that’s good to hear, and I was surprised and impressed when I saw you all take that move. Now, how has that affected– or the pandemic in general– affected the joint venture that you have with Saint-Gobain?
Santiago Giraldo: Well, we continue to move forward with all the permits; as you know, there are several things that need to happen before you can start construction, land permits, water permits, the communities, everything else, so we’re not at a standstill, we continue to move forward with everything, so we are ready to kind of break around when the time comes. From a strategic perspective, you know that what we’re doing right now is assessing with Saint-Gobain when the right time will be. What we do not want to do is go ahead and incur in a lot of costs, to import all the machinery and everything else related to the project if we see that demand is going to be slow to catch up, right?
Remember that Saint-Gobain already has a plant in Colombia where we are 26% owners, that plant is operating at full capacity today, so that’s encouraging; we just want to make sure that we’re not cannibalizing if we basically open up a second plant that is not going to be at capacity at the right time, so we are assessing market conditions, we’re waiting for better visibility as to what transpires with all of this COVID situation, we want to make sure that the demand for architectural glass in the regions where we are targeting are going to continue to be there and just doing it right, I mean, we want to be sensible, we want to be responsible with this investment and make sure that at the end the return for the shareholders is going to be adequate.
Finance Colombia: You know, all countries right now I think are probably, technically in a recession, but one thing in Colombia, with most of the foreign exchange coming from petroleum, we have a depressed Peso right now. I imagine that, as an export-oriented company, that has had some benefit for you in the recent months.
Santiago Giraldo: Significant, significant benefits. I mean, as I was saying 97% of our sales in the second quarter were into the US, so imagine all of those US dollar denominated revenues against probably 40 to 45% of our local cost and expenses being in Colombian pesos, it just makes us a lot more competitive. Obviously what you want to assess is what that means for the situation of Colombia as a whole; for its economy, for inflation, for GDP growth, so you want to balance but right now a depressed peso is beneficial for our P&L, it just favors the way that our cost structure is laid out. We expect to continue growing our US dollar denominated revenues, and obviously a large part of our cost structure is going to be in Colombian pesos when we have 100% of our manufacturing capacity in Colombia.
Finance Colombia: Yes, it makes sense; and so it seems that we don’t see recuperation from the petroleum crisis or even the peso rebounding in the near future. In fact, one thing that concerns me living here in Colombia is that the government has had to take a lot of measures to not just prop up the economy but to offer humanitarian support to the citizens, and that has put a strain on government resources, and those fiscal challenges that are out there. We see that the tax revenue into the government is down as much as the petroleum royalties are down, and so because of that we probably won’t see the peso rebound very quickly, and while that’s not so good necessarily, locally from a humanitarian perspective, it probably does help Tecnoglass financially, I would imagine, if we look out over the next few quarters.
Santiago Giraldo: Yes, absolutely. I mean, for our business model it would be very beneficial. I believe markets are efficient and what we see as an FX rate today already reflects what you’re mentioning, the fiscal challenges moving forward and in lower oil prices. I do think that a large part of what’s happening with FX rates has to do with volatility, with uncertainty, with the psychology of what could happen with COVID, so I do think that if we see a vaccine, or we see a short-term resolution, or a strong move in the right direction regarding COVID, I would expect the peso to appreciate a bit, but from a structural perspective, you’re right. I mean, the physical challenges that we have, we’re going to have to have a tax reform next year without a doubt, we are going to keep the peso on a depreciated level if that’s beneficial to our business.
Finance Colombia: Now you guys also have a US subsidiary. You guys made an acquisition several quarters ago; that gives you not just…You already have had the US being your primary market, but now you guys have feet on the ground so to speak, and so how is that? How is your subsidiary there in suburban Miami performing and how is that integrated and helping you all as you continue to grow into the north American market?
Santiago Giraldo: It’s been instrumental to the story. I mean, if you look at our results over the last five, we have almost tripled our sales into the US, that is a very large market, by our calculation about $30 billion in revenues per year and we’re selling about $350 million, so we’re one half percent of the market. Obviously not necessarily everything is addressable, but the opportunity is much larger than what we have today, and if you look at the story over the last three years we have made a push into single family residential, which is growing exponentially, going from seven million (USD) in sales in 2017 to about 75 to 80 that we’re expecting for 2020, so we have grown that segment 10 times over the last three years, and in large part that is a result of having the adequate infrastructure for distribution, installation into the US, so that’s played out very well, that’s a central part of the strategy.
We want to continue diversifying from a geographical perspective, moving away from the southeast where we were concentrated and more into the northeast, the west coast, Texas, Chicago and other places so the opportunity is much larger. I think that even under a challenging scenario where you may have a contraction in construction being put in place, we have an opportunity to maintain our share and gain some. As we move forward we’ll continue to invest in that development, not only from a geographical perspective but also from an asset type perspective, diversifying into residential from commercial.
Finance Colombia: That’s good to hear. I was a commercial real estate agent in the US for some time, and you see different cycles. They do have correlation and they are tied together, but they don’t run perfectly in sync, the commercial construction industry with the residential. Residential tends to lead in some cases because you develop a residential area and then the commercial follows, then you have the office market, obviously that’s a different thing but it’s interesting because I remember thinking one time and talking to my wife and she was saying: “Let’s build a house,” and I thought to myself, “if we do, I want some of that energy efficient low-E glass that Tecnoglass makes,” but at the time I thought, “well they don’t do residential, they do commercial,” but now knowing that you now offer residential…And I think a lot of that’s just marketing to the awareness, to make sure that the market understands that the product is out there and available and its value proposition.
I imagine that for your sales and marketing that’s also a new challenge, because you have to go after the architects and the builders and the developers and that’s a new audience that you’re opening up to, because if the commercial developers know about Tecnoglass, and you guys have so many trophy properties in the US that you’ve done and here in Latin America, to be able to reach out to those residential developers and architects and builders as well to let them know about that.
You guys have put out a lot of positive information, I had a chance to go over your results, you guys paid a dividend at the end of July. Is there anything that either I have forgotten to ask you or anything new that you want to add? I want to be sure not to leave anything out. There’s a lot of news, it’s been an eventful year for everyone, but at least fortunately for Tecnoglass a lot of the news that has come out has been very positive, and so I wanted to give you a chance to address anything that maybe I have forgotten to ask.
Santiago Giraldo: No, I think you have. I think our story and our business model is somewhat different than what you see with a lot of other industries out there, we have a backlog in hand that is getting executed, so for us the next 12 to 18 months is pretty much played out on the commercial side and on the residential side, we’ve seen sequential growth month over month since this whole COVID situation started, so that looks to be promising.
We are very positive and if you look at what’s taking place in the US, housing is one of the bright spots. I mean, we have all-time low mortgage rates, zero percent rates by the fed, and there’s just a ton of money that has been put into the system, so I think we’re more positive than kind of like the broader community, I believe that we’re going to go to a new normality, I think your economies are not going to shut back down again, I think we’re going to have to learn to live with this in the meantime until a vaccine is found, but i think that’s going to get us ready to kind of fully utilize what we have built. I mean, we’ve invested quite a bit in automation and capacity and being ready for a much bigger picture, so I think once we get over this hurdle, we’ll be ready to continue the story.
Finance Colombia: One last thing I want to ask you about, and I don’t want to put you on the spot because I’ve noticed, because I’ve followed the company closely, and I’m here in Colombia, and Tecnoglass has not made any noise about it, they haven’t put out press releases, they haven’t said anything about it but you guys during the pandemic and when everything was strictly shut down here in Colombia, I noticed that the leadership of Tecnoglass, the Daes brothers and you, all of you, all who are leaders in the company, really went out and on your own and very quietly did a lot of things to support not just your employees but then also the larger, the wider community there in Barranquilla and Atlantico, to help people. I saw some things that you guys did that got very little coverage and I think that’s because you guys didn’t want coverage, and so I don’t want to embarrass you, but I do want to point out that you guys really went above and beyond and weren’t doing it for marketing reasons, but you guys really have a social “aporte,” like we say in Spanish, but you guys really went out and did some things in the community to help out, and I wanted if you could, to tell us a little bit about that because that’s important.
Santiago Giraldo: Yes, and you know what? This is not something new. I mean, to you following the company, you know how invested the Daes family and Tecnoglass through its foundation, how supportive they’ve been over the years, not only in Barranquilla but its surroundings, so this is part of the DNA, really. This is part of our business model or our sustainability efforts, we’ve created the foundation for that purpose, so it couldn’t have been any different this time around; I mean, this is as dire as it’s gotten, as much of…you know how much the community would need our support, so it’s not something that you want to go out and ask for a trophy for, it’s part of what we do and it couldn’t have been any different.
I think those companies, those entrepreneurs and the people that ended up in the better end of this whole mess are the ones called to help out, so it’s not something that you do for marketing purposes, it’s something that you do because you truly believe in the support that the community needs. Tecnoglass wouldn’t be the same without this community, we owe who we are to our employees, there’s 5,000 families that the company provides for and that help us get where we are, so it’s not a marketing stunt. It’s just part of the stories, is part of the DNA, is part of what the Daes family has been for a long time, is part of our foundation, so I don’t think it’s something that is necessarily tied to COVID, is more of the long-term story of the company, so you know it was our call to go out and try to contribute as much as we can.
Finance Colombia: I’ve been really impressed and I wanted to bring that up because you guys don’t bring it up on your own, you guys quietly just go out there and do what you think is right, but I think that it deserves attention because you’re doing it for the right reasons. I know you’re busy, a CFO of a publicly traded company. I thank you for your time, it’s always good to hear from you and hopefully once we are able to travel safely again we can do a next interview in person, so Santiago Giraldo, CFO of Tecnoglass, trades on NASDAQ, TGLS. Thanks again for your time.
Santiago Giraldo: Thanks, Loren, we’ll talk soon.