Tecnoglass CFO Santiago Giraldo Discusses The Company’s Impressive Growth, Explains The Saint Gobain Deal: Exclusive Interview
Barranquilla Colombia glass manufacturer Tecnoglass (NASDAQ: TGLS) (BVC:TGLSC) has been busy the past year and a half. After posting strong growth numbers in the US, its major export market, the company purchased a large stake in Saint Gobain’s Colombia glass manufacturing facility and announced plans to build additional float glass production near its principal site in Barranquilla, on Colombia’s Atlantic Coast.
Barely a week before serving as a panellist in the upcoming Bonds, Loans & Derivatives conference in Bogotá, Tecnoglass CFO Santiago Giraldo invited Finance Colombia executive editor Loren Moss into his oceanfront offices to provide an update since their last sit-down in 2017.
Finance Colombia: Most recently Tecnoglass announced a major deal with the French-based, global glass manufacturer Saint-Gobain. Tell me about, that deal that the two companies just did and what that entails?
Santiago Giraldo: So, that was in the works for about three years. We have thought about, being fully vertically integrated for a long time, that was the only step of the supply chain where we were not participating. In other words, we would transform the glass and the aluminum, but we did not have any participation in the raw glass manufacturing business. Saint-Gobain had historically been our main supplier of clear glass since they started operating in Bogota, and we basically saw this as an opportunity to join forces with a global leader, the people who invented, raw glass, and participating in that stage where we were not present.
But that’s only the first part of the deal, right now we’re going to participate in the existing facility, which sells about 100 million USD in revenues per year and we’re going to own about 25 per cent of that. But the real reason behind this joint venture is to develop a brand-new plant right here in Barranquilla, that is going to supply basically the rest of raw glass that we don’t source already from there.
We import colored glass from the US, and by doing this we’re going to be able to source 100% of our needs from Colombia, with much lower prices; lower transportation prices because we’re not going to have to transport it from Bogota to Barranquilla, we’re going to have it next door. Lower waste, so at the end we’re going to be 25% owners of two plants, with the second one that is being built right here, and we’re going to have efficiencies (cost savings) of about 5 million dollars per year, so all-in-all it’s a win-win, Saint Gobain wants to penetrate the US market, they know that Tecnoglass has been successful at doing that and growing into the US market, so they saw it as a vehicle for them to also push product into, into the US. So, it’s a win-win, it’s exciting, something that’s been part of the strategy for a long time, so to be able to, to close that and partner up with these is, is a next step for the company and its future.
Finance Colombia: That’s amazing because I remember the first time when I interviewed probably 4 years ago, José Daes, and, and he told me that, the company’s strategic vision was to be able to go from sand all the way to the finished product and it looks like you are, are following that that vision. I know that you’ve had a busy and eventful year, aside from that announcement that was just made a month ago. Let’s talk about 2008 results, because you have really been doing well and I think it will attract the attention of more and more investors. You finished 2018 strong, what do you attribute those results to?
Santiago Giraldo: We were able to get sales up about 20%, basically all organic, and all of that growth came out of the US. The US grew 24%, Colombia basically stayed somewhat stable because as you know, Colombia continues to have some challenges as the economy ramps back up; construction activities have been quite slow so we hope that they’re going to take off, but the virtue of being diversified and doing a lot of business into the US, which is about 85% of our business nowadays helped the company quite a bit. In 2018, we went from about $315 million USD to about $371 million. So top line growth of almost 20%, but even more importantly we gained efficiency because we went from $62 million USD in EBITDA to $81 million in 2018, so EBIDTA growth of 30%. So, we’re growing top line, we’re getting more efficient. It was a record year for the company, based on the backlog we have at hand. Right now we’re expecting to again grow double digits this year, in both metrics, all organic, and a lot of that growth is expected from the US. The other thing that was exciting about 2018 was that we made a push into the residential market. Historically we had been very focused on commercial – 95/97%. Now, residential is about 10% of the business, so it’s growing because we have had a very good reception of a couple of very good high-end residential products that we introduced into the Florida market, with the expectation to grow that segment about another 30% this year to get from $40 million to about $52 million this year. So that’s a segment that, even though its only 10% of the overall business, it could become a meaningful part going forward.
Right now we are expecting to again grow double digits this year, in both metrics, all organic, and a lot of that growth is expected from the US.
It was an exciting year, completing the joint venture, continue growing our presence into the US which is a $30 billion market per year and we only sell $300 million into that market, so just 1%, there’s a lot of upside to be captured still, things are going well, and we’re foreseeing this year to end up at about $415 – $420 million, so another 12% of growth, with an EBITDA of about $90 to $95 million, so from $80 to $90 or so, we’re excited about the, immediate future.
Finance Colombia: Going into residential, obviously that’s, not your book of sales, it’s not where you’ve traditionally been focused, but I think that even in the traditional markets as, architects, builders move more towards LEED certification you have energy efficient glass, that has to continue to be a growth market for you as well.
Santiago Giraldo: That’s absolutely right, and part of the growth into the US is the Northeast states, some of the midwestern states where there are extreme temperatures, so we are able to sell our low emissivity glass. As you said people are looking to get LEED certification, so there are secular trends that are helping our business grow above the rate commercial construction is growing. Because there is a trend of construction being made out of glass, as opposed to heavy cement structures, even with commercial construction, there are secular trends that are acting as tail winds for our business, and on the residential side we were just not present, and there’s a huge market into Florida where we can capture incremental business.
Finance Colombia: You made an acquisition in Florida, tell me about that company Tecnoglass purchased.
Santiago Giraldo: Yes, GM&P, we purchased them over two years ago, basically they are an installer of our products, historically they were our largest customer because we would sell our product that we manufacture here in Colombia and they would install it.
So we basically decided to integrate that to be completely vertically integrated toward the client, to be able to deliver all the way out to the project itself, so we were able to complete that, we control the process, we control the warranty claims because it’s us installing our own products, and we see it as a platform of growth, as opposed to growing manufacturing capacity into the US and taking away from the advantages that we have for being a low-cost provider and having Colombian labor and some other advantages. We can set up different branches of GM&P in the US and help that push our products into the different regions.
We are doing projects in New York, in Boston, in Baltimore, in Washington, so there are opportunities. We have done things in Ohio, we have done things in Tennessee, we are looking to do some things in Seattle, Southern California, Houston, so there is just a lot of work.
Finance Colombia: That was going to my next question, Florida is a big state, but it’s less than 10%. It’s obviously a natural market for Tecnoglass but it is less than 10% of the population and you haven’t mentioned the Northeast and Midwest. I am from Ohio and we are at 40 degrees Celsius in the summer and minus 20 degrees Celsius, not too often but sometimes, in the winter, and so that energy efficiency, adds up, as well as other different factors like the tinting and the emissivity, those kinds of qualities. Is there a strategy in place to diversify within the rest of the US and to other major markets?
Santiago Giraldo: We are looking to make a connection in Canada to penetrate that market. For the last 5 years since becoming public, we have focused in the US; Florida because Florida; we have been doing business for over 20 years, that’s kind of our natural territory. But over the last 5 years, we have been able to develop business from Texas, Chicago, the West Coast, the Northeast, heavily populated areas that are closer to the ports, because we have a large transportation advantage when we travel in through the ports. There’s a trade imbalance between the US and Colombia so there’s a lot of container ships coming in full, and a lot of them are going back empty, so we get very competitive rates going back into the US. When we go into the Midwest, in places where we have to connect by land transportation, we take away a little bit of the margin advantage that we have, especially on the labor cost, because we actually get better rates transporting into coastal cities than a lot of companies do from the Midwest or other parts of the country into the coastal cities, because land transportation in the US is more expensive than sea transportation.
So we have focused historically in coastal cities and there’s just plenty of work to be had there. We are doing projects in New York, in Boston, in Baltimore, in Washington, so there are opportunities. We have done things in Ohio, we have done things in Tennessee, we are looking to do some things in Seattle, Southern California, Houston, so there is just a lot of work. So far we haven’t focused too much on other places outside of LATAM and, and the US.
We did set up a branch in Italy to partner up with an installer that already knows Europe and has some contacts and some networking capacities there. Europe’s been, just kind of sluggish, it hasn’t turned a corner, but we’re ready. The idea was to be ready and be cognizant of any opportunities that could come out of there. There are a handful of very strong competitors in Italy and Spain, so it would be hard to compete, but we’re certainly better equipped as far as the cost structure goes. We could be competitive in penetrating that market as well, but for now the strategy is just to continue full speed into the US.
Finance Colombia: How have the capital markets treated Tecnoglass recently? I mean, you have demonstrated success, you’re obviously listed in the US and then here in Colombia on the BVC. Has raising capital, or strengthening those links with, specifically institutional investors, coverage from the analyst community, is Tecnoglass still kind of a best kept secret or are you starting to gain traction and get more attention from the investment community?
Santiago Giraldo: I feel that the business model is more mature than the stock itself, and the company’s trajectory in the stock market. We are still a very young company in the stock market, it’s only been 5 years, but we have done a couple of things. Significantly, we have since been able to go out and place incremental stock, just last month we placed about $40 million dollars which is what we needed to complete the joint venture with Saint-Gobain. And that’s given us added liquidity, it’s given us the type of institutional investors that are long and, and that will support the stock, that are going to value the growth trajectory and profile of the company, so we think that was a key first step.
…things are going well, and we’re foreseeing this year to end up at about $415 – $420 million, so another 12% of growth, with an EBITDA of about $90 to $95 million, so from $80 to $90 or so, we’re excited about the, immediate future.
On the asset side, with this re-IPO we were able to get three more analysts covering the stock, good banks to have, ample presence in the US, with a, with a strong platform, so we think that’s going to help us out as well. On the debt side, two and a half years ago, we issued a bond in the US, so we’re one of the few Latin American companies that has access to the capital markets on both the equity and the debt side. We already have established those avenues, and for a company that is growing and as dynamic as this is, it’s definitely a great advantage to have that pocket of capital available to us, if need be. I think there is clearly room to continue growing for the overall investor community, to be fully aware of what an investment opportunity this is.
I think the numbers speak for themselves with the growth trajectory, but I think there is still some lack of knowledge, or lack of understanding of the business model. Or the fact that we are a Colombian company is going to prevent a lot of people in the US from investing because they only invest in US equities or what not. So I think Tecnoglass is a niche company, it’s probably not for everyone, but those that are looking for a growth story with a sustainable business model should definitely be interested in us.
Finance Colombia: Absolutely, and, and I think you’ve touched on something that, that can be frustrating because Tecnoglass is obviously an established, successful company, and people look at Colombia, and it’s the third largest economy in Latin America, even though the first two are Mexico and Brazil, which Mexico has I think 140 million people, Brazil 175 million people, Colombia with only 46 or 47 million people is still number 3, and people don’t realize that it’s diverse, they have a lot of things going on besides just petroleum. Colombia is now member of the OECD. Colombia has free trade agreements with the US, and I think it has to be frustrating that a lot of times Colombia, Colombian companies, or investment destinations are overlooked by the investment community, whether that’s institutional or even retail.
Santiago Giraldo: Yeah, and I think that the country is misunderstood. I think that you have still the perception from a lot of people that Colombia is not a safe place, or it’s unstable. Um, but if you look at our economy and our democracy it’s probably as stable as they come, in Latin America.
So, for emerging market investors this should definitely be a place to look at. Unfortunately, there are still a lot of people that misunderstand the story, or don’t care to understand it as much. But I think we are going in the right direction. I think the fiscal discipline that the government is showing, all the right things that are being done, are eventually going to get us there. The other thing is that, to tell you the truth there are large corporates in Colombia. Then you go to middle-market sized companies that are not going to have access to capital in the capital markets. So, really, I think Tecnoglass is on the verge of getting to be a large corporate, once you start pushing $500 million dollars or so.
Barranquilla: Location, Location, Location
Finance Colombia: I agree, and not just Colombia but even more specifically here in Barranquilla, which is a large industrial city, it’s one of the most important cities in Colombia, and I think that outside of Colombia, you go anywhere in the world and people have heard of Bogota, they’ve heard of Medellin, but they don’t realize the industrial base, that is here. You look at the advantages of Tecnoglass here, located on a major port right on the water, where you can export things, you get the advantage of transportation, the cost of shipping—and it is expensive to ship things within Colombia, especially within the mountainous regions and the Andes region, but here on the coast you have got great infrastructure, it’s really well set up for export.
I think people are seeing that there are some valid reasons to bet on Barranquilla.
It has always been puzzling to me why the city or this region doesn’t get more notice from the business community in general. Cartagena is an hour away, and they’re famous as a tourism destination, but people don’t realize Barranquilla is even bigger, and has a larger economy, but again everywhere in the world people have heard of Cartagena, but only people who are really maybe in the business community, and in specific sectors know about Barranquilla. They seem to be missing out.
Santiago Giraldo: Yeah, I think historically companies have been keener to set up shop in Bogota, in Medellin, just because of larger population bases. But, over the last 5 or 10 years I would argue that Barranquilla has been the most, dynamic city in Colombia with the development that is taking place, the growth, some companies basically wanting to relocate here if they are in the export/import business, so having been here or having been familiar with the city over the last decade I can tell you that, it is much more dynamic as far as growth goes, and improvement, but you’re absolutely right. The industry here lagged for a long time, so I think it is going to be a while before you get a significant number of companies and industries getting to that growth phase, where it’s going to start catching the eye of some people. There is a handful of, I would tell you 5 to 10 kind of large companies here in the city but that still compares to many more in Bogota or Medellin. I think we have a ways to go but I think people are seeing that there are some valid reasons to bet on Barranquilla.
Finance Colombia: Especially for export and for international commerce, because you don’t have to load cargo onto the internal highway infrastructure. You have the road infrastructure here, you have the ports, you can get things out to the rest of the world or bring things in from the rest of the world easily.
You are going to present; we are both going to be at the Bonds and Loans conference that’s coming up. Can you tell me what you’re going to be talking about?
Santiago Giraldo: Yes, I’m going to be on a panel that will be talking about high yield issues which I think is relevant for Andean-type companies that are not yet at the investment-grade level. I think from our own experience, and the issue two and a half years ago, there are some investors that really would like to see more paper come out of Colombia, because the companies that do issue, a lot of them issue locally, or the ones that are larger are not going to be in that high yield space. I think it is a good panel to give the audience an understanding of the pros and cons, what to be mindful of, what we think is important ahead of thinking about this option, so it should be interesting. I think it’s relevant for Colombia and the Andean region as a whole, so we’ll see. I think the CEO from Avianca is going to be there, somebody from Moody’s, myself, someone from debt, someone from capital markets, so it’ll be a good, rounded-out panel.
Finance Colombia: They always do a good job at the GFC conferences.
Santiago Giraldo: They do, it’s been growing, I don’t know how many years they’ve put it together now, but it’s been certainly well attended.
Finance Colombia: We have participated ever since, I won’t say the first one, but, but ever since our first year, 4 or 5 years ago.
Santiago Giraldo: I think it’s the best event that there is in Colombia as far as that goes.
Finance Colombia: Absolutely.
Santiago Giraldo: It’s well attended, they get interest from all over the place, so, they have the right people there, they have the people that count, and the people from both the debt and the stock markets. Yep, yep, and that brings the quality, when you see some good speakers there, and they make for a good agenda, you know it makes up for a successful, recurring business.
Finance Colombia: Yeah, they’re even starting a project finance series coming up soon, and they’ll have some more information about that, they haven’t done it in the past. I