Greetings, welcome to the Tecnoglass third quarter 2019 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rodny Nacier, investor relations. Thank you, sir. You may begin.
Thank you for joining us for Tecnoglass's third quarter 2019 conference call. A copy of the slide presentation to accompany the call may be obtained on the investors section of the Tecnoglass website. As speakers for today's call, our 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's 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 statement herein due to changes in economic, business, competitive, and/or regulatory factors, and other risks or uncertainties affecting the operations of Tecnoglass's business. These risks, uncertainties, and contingencies are indicated from time to time in Tecnoglass's filings with the Securities and Exchange Commission. The information discussed during the call is presented in light of such risks. Investors should keep in mind that Tecnoglass's 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'll now turn the call over to José Manuel, beginning on slide number four.
Thank you, Rodny. Thank everyone for participating in today's call. In the third quarter, we further cemented our position as a U.S.-focused growth company. We achieved another quarter of record revenue with 12% growth primarily through continued expansion in our core U.S. market, which represented 86% of total revenues. We increased U.S. sales 13%, including residential, up nearly 60%, reflecting our rapid penetration of the Florida single-family market. We also strengthened our commercial foothold in attractive regions of the country. The U.S. is expected to remain the primary driver of our growth based on an attractive mix of projects in backlog in coming quarters. Through our expanding reputation for excellence and our extensive portfolio of projects in diverse regions, we expect to continue gaining market share in the U.S., supported by further progress in our commercial business and our impressive expansion in residential.
We are forming many new customer relationships and winning bids to further diversify our geographic footprint. In Colombia, revenues were up 21% year-over-year, excluding FX. This was encouraging and better than expected. We also ended the quarter with solid levels of backlog in that region. In July, we were pleased to complete the expansion of our aluminum extrusion facility on budget and on time. This modern state-of-the-art facility is now fully operational and is helping us to more efficiently serve the incremental aluminum demand throughout our markets. We are pleased with the progress we have made on our high-return investment as we continue to scale our industry-leading margin business and gain share. Our other high-return investment to automate certain operations at our facilities remain on track to be completed by year-end.
We expect these capacity upgrades to increase the efficiency of our operations and allow us to advance our competitive position in the U.S. as we execute against our record backlog of projects. We look forward to deliver another full year of double-digit growth in revenue and adjusted EBITDA. We expect to end the year better situated than ever to continue driving stronger results. Beyond 2019, our record line of projects paired with our highly efficient, low-cost operations give us confidence in our ability to generate attractive returns for shareholders in the years to come. I will now turn the call over to Chris to provide additional details on our backlog.
Thank you, José Manuel. Moving to our backlog on slide six. As José mentioned, we continue to establish ourselves as a U.S.-centric company, we continue to generate record levels of project backlog, which stood at $532 million at the end of the third quarter. Backlog increased 5% year-over-year, primarily representing attractive project wins across more than 14 states. The Q3 backlog level represent more than 1.2 times our trailing 12-month revenue, but an even more impressive 1.5 times when taking out residential sales, which do not get captured in our backlog. We continue to see the solid levels of quoting and bidding activity as we have a strong base of activity that gives us comfort in our project pipeline through 2020. The U.S. market represents an increasing mix of our business, comprising approximately 88% of our third quarter backlog. This compares to 78% in the third quarter of 2018.
We continue to experience favorable residential and commercial construction conditions in the U.S., and we are sourcing project wins from a diverse number of regions where structural glass and curtain wall systems continue to lead the architectural glass trends. We will continue to focus on diversifying our revenue stream into attractive geographies where we have the opportunity to gain share. Our facility investments will help us capitalize on this greater demand for our products. Our target automation and optimization initiatives at our production facilities are already in the testing stage and will start operating by year-end, providing for additional efficiencies within our vertical integrated operation, mainly on labor and waste reduction. On the product side, the success of our residential offerings continues to surpass our expectations and now account for over 15% of our overall business.
We are pleased with the trajectory of our business and look forward to executing on our multi-year project pipeline while carefully pursuing additional opportunities to grow our company. Our strategic footprint, first-class product designs, and commitment to operational excellence should allow us to continue producing industry-leading margins in our business. I will now turn the call over to Santiago to discuss our financial results and market.
Thank you, Christian. Beginning with our financial highlights on slide number eight. We were pleased to improve third quarter revenues by 11.8% year-over-year to $108.5 million. Excluding the impact of unfavorable foreign currency, total revenues would have increased 13.6% compared to the prior year quarter. We accomplished this while continuing to rapidly penetrate the U.S. market, especially in residential, where our sales grew 60% compared to the prior year quarter. Lower gross margin year-over-year was primarily due to an exceptionally favorable mix of higher margin manufacturing revenues during the prior year quarter. In the third quarter of 2019, we had a more typical mix of manufacturing and service revenue, which produced a gross margin more in line with our previously communicated normalized level in the low to mid-30s range.
We were very pleased to improve operating expense as a percentage of sales by 140 basis points to 18.6% on higher revenues and cost controls. We ended the quarter with a strong cash position of $42 million and a net leverage ratio of 2.4 times, down from 2.7 times last year. This balance sheet strength supports our growth initiatives and operational enhancements as we move forward. We spent $6.1 million on CapEx in the third quarter, with the majority geared towards the higher return capacity upgrade and automation initiatives, with most of such CapEx having already been funded ahead of its near-term completion. Looking at the drivers of revenue on slide number nine. Continued outperformance in the U.S. drove the majority of third quarter sales, with the U.S. marking its 20th straight quarter of double-digit revenue growth, increasing by 13% year-over-year to $92.8 million.
The U.S. primarily reflected stronger residential invoicing, healthy commercial construction activity, market share gains, and additional projects in new strategic geographies where we are growing our presence. In Latin America, we were pleased with better-than-expected third quarter performance in Colombia, where revenues grew 7% year-over-year and 21% excluding FX. As we mentioned last quarter, with a significant shift in our business to the U.S. during the past five years, the United States actually represents a higher percentage of Tecnoglass revenue mix as compared to most of our U.S.-based building product peers. On a trailing 12-month basis, the U.S. represented approximately 86% of our total revenues. This compares to an average of approximately 80% for our U.S.-based building products peer group. Looking at the drivers of adjusted EBITDA on slide number 10. Adjusted EBITDA increased 5.2% to $24 million from the prior year quarter, representing an adjusted EBITDA margin of 22.1%.
Gross profit increased 3% to a third quarter record of $35.7 million, representing a 33% gross margin. This compared to gross profit of $34.7 million in the prior year quarter, representing a gross margin of 35.8%. As I mentioned earlier, the difference in gross margins was primarily related to an exceptionally favorable revenue mix with a significant portion of manufacturing-related revenues in the comparable 2018 period. During the third quarter of 2019, we had a more balanced mix of manufacturing and service revenues, producing a gross margin more in line with our expectations and our normalized margin profile. Our operating expenses as a percentage of revenue improved by 140 basis points year-over-year to 18.6% in the third quarter. This reflected operating leverage on higher revenues, coupled with ongoing company-wide initiatives to improve SG&A, mainly on shipping and handling and personal cost.
Our joint venture with Saint-Gobain contributed $1.2 million to adjusted EBITDA. Looking at our continued expansion into the residential market on slide number 12. As a reminder, we refer to U.S. single-family residential as our residential business. We classify all other sales, including medium and high-rise condos, as commercial. In 2017, we entered the U.S. single-family market, and a rapid growth in this segment of our business continues to surpass our expectations. At the end of the third quarter, the U.S. single-family market represented 17% of our trailing 12-month U.S. revenues, compared to just 3% in 2017. Year-to-date, our residential sales have doubled when compared to the results for the first nine months of 2018, which is a very encouraging trend. We continue to believe that our collective efforts in residential, along with our more established commercial reputation, will allow us to continue to grow faster than the national average.
We see significant upside in the potential of our business to capture a rising share of residential and overall market share in the U.S. Moving to our high-return investments on slide number 13. In July 2019, we completed our previously announced aluminum production capacity expansion in response to strong customer demand for aluminum products. Our other high-return investments to automate key operations at several glass and aluminum facilities are on schedule to be operational by year-end. As of the end of the third quarter, we have already deployed approximately 80% of our total anticipated $20 million capital investments in these growth and efficiency initiatives. A portion of the remaining spend will be pushed into early 2020 and paid after we are able to assess the performance of the upgrades.
Our float glass joint venture with Saint-Gobain continues to reinforce our vertical integration strategy, providing us with a key supply of glass in our production process while contributing to results. Beyond the existing JV operation, the construction of the second state-of-the-art plant nearby our headquarters in Barranquilla is on track to begin by the first quarter of 2020. We are advancing as anticipated with the permits and planning stages and continue to be very encouraged by the potential efficiencies to our business over time. Moving to our 2019 outlook on slide number 15. We continue to expect strong top and bottom-line growth in full year 2019. Based on solid execution year-to-date and better end market visibility, we are raising our outlook for the full year 2019 revenues to grow to a range of $430 million-$440 million.
We anticipate the majority of revenue growth to come from the U.S., helped partly by innovative new products, project types, geographic expansion, and single-family residential. As explained on prior calls, the implied year-over-year % growth in the first half is higher compared to the back half year-over-year growth based on the anticipated timing of invoicing in 2019 compared to 2018. Based on our increased sales outlook and anticipated mix of revenues, we are raising our full-year adjusted EBITDA outlook to be in the range of $93 million-$97 million. This outlook assumes favorable operating leverage on higher revenues and a higher mix of sales from manufacturing operations compared to the prior year. Additionally, the outlook incorporates our unchanged share of adjusted EBITDA from the Saint-Gobain joint venture, which began contributing to our results in the second quarter of 2019, as contemplated in our original outlook.
Furthermore, we expect lower SG&A as a percentage of sales based on incremental revenues and ongoing cost control efforts. We are extremely confident in our ability to achieve our growth objectives for 2019. As we build on our competitive advantages, we plan to continue gaining market share and advancing further as a leading U.S.-focused producer of high-quality glass products. We thank you for your continued support of Tecnoglass. We will be happy to answer your questions. Operator, please open the line for questions.
Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Mike Shlisky with Dougherty. Please proceed with your question.
Good morning, guys.
Morning, Mike.
Good morning. Why don't I touch first on the Saint-Gobain JV. In your slides, you mentioned that it was about $1.2 million of adjusted EBITDA in the quarter. This is your first quarter of ownership that you had it for the full quarter, I think. Maybe tell us, I know there is a new facility coming online eventually, but for the next bunch of quarters, is that the right runway to think for the EBITDA contribution?
Yes. It will be between $1.2 million to $1.5 million on a quarterly basis, which is what is expected going forward.
Okay, great. Then turning to what's in the backlog today, first of all, great job getting it up 5% over the prior year. I guess my question is, based upon what you know what's in the backlog today, the mix between res and non-res, et cetera, is there anything that would have us believe that the margins you've got the last couple of quarters won't continue into most of 2020 at this point? Is there some change in the mix or something that could be either up or down next year on the EBITDA margin?
No. I think based on the mix, the gross margin that could be expected is really in line with what we saw this quarter and in previous quarters. However, we do expect to get operating leverage on SG&A moving forward, as you saw in this period.
Okay. I also wanted to ask about the employment situation in the Barranquilla area. I know you've had some growth and some good backlog. You've always mentioned there's been some low costs. Because of all the growth, have you had any issues finding people and find them at the correct wages to build this backlog going forward?
Unemployment is back up in Colombia. We have more unemployment now. We used to have 8.5%-9%, and now it's up to 10.5%. We are not finding any troubles finding the right people. With all the automation that is taking place, it's not going to be necessary.
Got it. I just want to squeeze one more in here. This one is for Santiago. You brought down leverage year-over-year. Could you remind us if you've got any kind of targeted range for your leverage going forward?
Yes. At the beginning of the year, we had indicated we wanted to end up at 2.5x. Being under that is certainly nice. My idea would be to continue that trend and hopefully over the next few quarters, get it down to 2x. We don't have a necessary guidance for leverage, my expectation would be to end up where we are or a little lower by the end of the year.
Okay, guys. Great. Well, thanks so much. I appreciate it.
Thanks, Mike. Talk soon.
Thank you.
Thank you. Our next question comes from Josh Wilson with Raymond James. Please proceed with your question.
Good morning, and thanks for taking my questions.
Good morning, Josh.
Good morning.
First, a little clarity on the gross margin outlook. Based on your backlog and also the new automation equipment, just to clarify what you think gross margin's shaping up like for 2020?
What you saw this quarter is really in line with the recent performance. Once we are able to assess the impacts from the automation on direct labor, we could gain a bit of leverage or a bit of operating leverage on that. Once we have a couple of months under our belt, the automation is due to start this month. Once we have a couple of months, we'll be in a better position to tell you exactly what that's going to look like. Our base case is that we are able to get to a 33% level. If we have what we expect as far as efficiencies on the labor side, we should be able to increase that, I would say 50 basis points.
We'll have a better idea once we have operated a couple of months and in line with the timing when we will provide guidance for 2020.
Got it. Inventory was better than I expected. Was that just a timing issue, or are you making further gains in working capital?
I think it's both. It's efficiency, it's streamlining the process, making large efforts to manage working capital, which has been a big focus for the company this year. Inventory days came down nicely, if you compare versus last year. DSOs are stable, and that's the next point of focus. Hopefully we'll be able to improve that trend as well.
Good. I've been getting more questions around the Miami market. Could you give us your latest thoughts on how that market's looking and what your exposure is there?
Yeah. José can better answer that. José?
What was the question again, please?
The Miami market, how you see it from here?
No, the Miami. Listen, the market in Florida for high-rise and mid-rise is picking up again a lot. We see a lot of quoting, and we have a very large backlog for 2021. 2020 is already sold, and it looks good, decent, not the best year like 2012, 2013, but the rentals and the hotels and the office space is picking up greatly, and we plan to grow again in Florida at least 20% to 30% for 2021.
Got it. Good luck with the next quarter.
Thanks, Josh.
Thank you.
Thank you. The next question comes from Zane Karimi with D.A. Davidson. Please proceed with your question.
Good morning, gentlemen, and thank you for the time.
Good morning.
Good morning. Thank you.
First off, I noticed that Colombian sales grew for the first time in a while. Congrats there. Do you expect that to recover going forward? Are you deliberately managing kind of how large that gets for you, given the margin difference between there and the U.S.?
Unfortunately, since we had a lot of devaluation of the peso, it also made us look like Colombian sales were coming down. They did not go down that much, the 20% devaluation really made it look that way. The good news is, we are closing a lot of new deals in Colombia that are for the next 3 to 6 months at delivery. Demand is looking as strong as it has never looked in the last 12 months.
Just to add to that point, on our new guidance, we're not baking in any growth from Colombia Q4. Anything that we see, and which we're already seeing, could be an upside. I think we'll be better able to assess 2020 when we have a couple of months of growth under our belt, not just this quarter, to see if we have established trend. Again, I think once we announce guidance for 2020, we can give you a lot more color, but certainly things are picking up and looking better than they were in the last 12 months.
Yes, Colombia is looking a lot better now. We are closing a lot more jobs. Also the Caribbean is looking better for us. We used to not have a strong sales force in the Caribbean, relying on our distributors in Florida. Lately, in the last six months, we hired a couple of persons to visit all the islands, and the results have been great. It's not a huge market, but it's a market that is developing, and it's becoming a decent market to explore.
Thank you. When does the new aluminum production capacity become incremental to results, and how should we think about contributions moving forward?
Well, it's now functional. We believe that beginning in January, because we were not taking any more orders as we were sold out, but we have some good commitments that we're going to start to see beginning in January for the incremental of the aluminum. Also, we have some good news in that respect as we had closed for the 2019 year, the prices of aluminum at $2,100 a ton in the futures. We were now able to buy for 2020 at $1,900 a ton, which we're going to see an incremental of gross profit margin on that cent. It's looking very good.
Thank you. Any expectations on year-end cash flow, and can we expect some working capital release here at the end of the year?
Yes. There's actually a little bit of seasonality to cash flow because we have some tax and interest payments on the first and third quarters of the year. The expectation would be for Q4 to be another quarter of positive working capital and cash flow from operations. The expectation would be for us to end up higher than you saw year to date.
Yeah. Thank you.
Thank you.
Thank you.
Thank you. Our next question comes from Alex Rygiel with FBR & Company. Please proceed with your question.
Thank you. Good morning, gentlemen. Very nice quarter.
Thanks, Alex. How are you?
Thank you.
Doing well. A couple of quick questions here. The residential business is doing fantastic. Congratulations on that. Can you update us on sort of where you stand with regards to manufacturing capacity, what geographies you're selling it in? I suspect it's still primarily Florida, but what your plans are for expanding that residential business in 2020. Clearly 60% growth year-over-year is a level that's probably unsustainable long term. How should we think about growth in that business as we look out into 2020 and beyond?
Hello. This is José. We are expanding geographically. We are mostly selling in South Florida, meaning Palm Beach, Fort Lauderdale, and Miami, and Dade County, Broward and Palm Beach. Now we're expanding geographically to the West Coast, Naples, Sarasota. Now we're going a little bit up to Tampa, and moving for next year to the Panhandle and also in the northeast coast up to Jacksonville. We expect 20% growth for next year, at least. That's very conservative because the more up you move, the more clients and the new clients you get, and our product, people are really happy with it. It's the best product in the market, we believe. Also we have the biggest portfolio of products of any company. So dealers don't have to shop around from one to the next to the other one in order to fulfill all their needs.
That's excellent. Then as it relates to product price mix as it related to EBITDA declined $3 million in the quarter. Santiago, can you explain that a little bit?
No, the mix was basically in line with what is normal. Last year, during the third quarter, we had an abnormally high mix of revenue coming from manufacturing as opposed to servicing. If you look at the gross margin profile over the last few quarters, you more or less end up in low to mid-30s, which is where we are right now. In reality, like we were saying, the gross margin really is going to be a function of mix because, on pricing, we're not seeing a whole lot of headwinds. To the contrary, if anything, we should be seeing tailwinds moving forward. It's more a function of mix rather than pricing, Alex.
Very helpful. Thank you.
Thanks, Alex. Talk to you.
Thank you. Our next question comes from the line of Julio Romero with Sidoti & Company. Please proceed with your question.
Hi. Good morning, everyone.
Hey, Julio, how are you?
Good. Some of the forward indicators we've been looking at, such as the ABI, been showing some moderation in the Northeastern U.S., which is where I know you were making some inroads earlier in the year. Can you just talk about what you're seeing on the ground from your GC customers, especially from that geographic perspective?
Yes, Julio. Basically, if you look at the composition of the backlog, it's actually shifting to other places like we've been talking in the last couple of calls. Starting out with a lower base, when you're growing from a small base, actually, on a comparable basis, it looks very strong. It's encouraging to know that the backlog is growing outside of Florida, which has been the company strategy in the last couple of years. From a bidding perspective and quoting perspective, we continue to see strong activity, in the main markets that we're targeting. I don't know if it's necessarily a function of the overall market expanding or it's a function of market share gains. Activity, as we see it, continue to look strong.
Got it. On that point, the U.S. is making up 86% of sales on trailing 12 months. Given that backlog mix is continuing to trend that way, do you see the U.S. making up maybe 90%+ of sales in 2021? Is that a fair way to think about your mixes going forward?
If you look at it as of September, it was 88% already. What's going to take place here is that if Colombia and LatAm continue the upward trend, they might catch up a little bit and eat some of that percentage. With the status quo, if the U.S. continues to grow the way it has been, it wouldn't be unreasonable to get there. We're already at 88% from a backlog standpoint.
Got it. Just last one for me is, can you maybe talk about some of those company-wide initiatives you're doing to temper your operating expenses? I think, in your prepared remarks, you mentioned some shipping and handling and personnel costs, if you could elaborate on those initiatives at all. Thank you.
Well, yes. A lot of our automation is coming in at this time, and we hope to bring down our costs significantly in the near future. We just don't want to make it into the calculations yet, because we don't know if everything that they are telling us that these new lines will do. If they can perform 70% of what they say they can do, this is going to be a game changer for Tecnoglass. We're expecting that, and we're also revising every expense in the company to have a lot of savings. Actually, we will begin to see the results for the fourth quarter and first quarter of next year. We are really enthusiastic about the future.
Got it. Thanks very much. Best of luck in Q4.
Thanks, Julio. Talk soon.
Thank you. The next question is from Zane Karimi with D.A. Davidson. Please proceed with your question.
A quick follow-up for you guys. As you guys are continuing to successfully penetrate the new regions of U.S. markets and aggressively growing in resi in Florida, in particular, what is the competitive response right now? Are they responding with more competitive pricing to try and get their traditional business back?
Yes, they are aggressively reducing prices, but not everything is an issue of pricing. Especially, for example, in the residential, the most important is the quality of the window, the on-time deliveries, and the reliability of service. We've been learning a lot about that because it's a new business for us, and we have developed a new software for quoting and delivering on time, in five weeks, and people are very happy with it. Now, in the other regions, it's even less important, the price, because the buildings are worth $400 million, $500 million, and the windows might be $10 million, $8 million, $20 million. If the building is late two, three, five months because of deliveries, then the cost of the window is irrelevant compared to a reliable supplier. To penetrate, we reduce our margins.
Now that we get repeated business, we're doing much better in the margins, and people are learning that we are reliable and that we deliver a good product. We think we're going to grow a lot in those areas.
Thank you. Then in terms of backlog growth, are there new markets or regions in the U.S. driving that, areas that you hadn't historically served that you're now penetrating?
Well, no. We are increasing our backlog in N.Y., Boston, Washington, Chicago, and Texas, mainly. We have a couple of jobs, small jobs in California, and we see a lot of quoting in California now that people are getting to know us, and we are reliable. It's an experience in every market because when they don't know you, when you're far away, and they haven't had any experience, normally, even if you're lower, they tend not to give you business because of the reliability. Now we have broken that hurdle, and people see that we work, that we deliver, that the product is good. We're getting repeated business and larger buildings and larger projects. We expect California to start growing for 2021, not for next year. Whatever we have now for next year is already done. What we are quoting now and closing is for 2021.
Great. Thank you, gentlemen.
Thank you.
Thank you. It appears we have no further questions at this time. I'd like to pass the floor back over to José Manuel for concluding comments.
Well, thank you all for participating on today's call. We strive to be the best in the market. We hope to keep growing the company in a stable way, saving on SG&A and increasing the margins. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.