Tecnoglass Inc. Q3 FY2023 Earnings Call

Greetings, and welcome to Tecnoglass Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Cray, Investor Relations. Thank you. You may begin.

Thank you for joining us for Tecnoglass' Third Quarter 2023 Conference Call. A copy of the slide presentation to accompany this call may be obtained on the Investors section of the Tecnoglass website. Our speakers for today's call are Chief Executive Officer, Jose 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' 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 statements herein due to changes in economic, business, competitive and/or regulatory factors and other risks and uncertainties affecting the operation of Tecnoglass' business. These risks, uncertainties and contingencies are indicated from time to time in Tecnoglass' filings with the SEC. The information discussed during the call is presented in light of such risks. Further, investors should keep in mind that Tecnoglass' 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 will now turn the call over to Jose Manuel, beginning on Slide number 4.

Thank you, Brad, and thank you, everyone, for participating in today's call. We are pleased to report that another quarter of strong results underscoring the resiliency of our business in a volatile macroeconomic environment. Our revenues increased to our third quarter record of $210.7 million, marking our 12th straight quarter of entirely organic year-over-year growth. Our multi-family and commercial business was again the main driver of our top-line growth, expanding 6% year-over-year to $122.9 million even on tough year-over-year comparisons. Compared to the third quarter of 2021, multi-family commercial revenue increased by 70%. We continue to see healthy commercial demand from both high demand for our products and increased commercial activity in our key geographies. This drove an increase in backlog for a record of $836 million at quarter end. Sales of our highly innovative single-family residential products grew 2% year-over-year to a record of $87.8 million, as we gained market share in key geographies despite a tough comparison in the prior year period, and overall challenging macroeconomic conditions. Compared to 2021, single-family residential revenues increased 48% in the quarter. Looking at our bottom-line results, we produced an industry-leading adjusted EBITDA margin above 30%, which we attribute to our disciplined cost controls and previously implemented high return facility enhancements. Year-over-year, our margins were impacted by a non-cash effect related to the appreciation of the Colombian peso, which has partially reversed costs through the end of the quarter. Our proven working capital management, as well as the continued growth in our shorter gas cycle single-family residential business, contributed to strong third quarter cash flow from operations of $51.3 million. With the stellar cash generation, we executed approximately 40% of our $50 million share repurchase program since mid-year. This is in line with our commitment to return value to shareholders. Our strong capital position also enables us to capitalize on attractive strategic growth opportunities such as our recently announced entrance into the vinyl windows market. We expect this move to widen the reach of our innovative product portfolio and provide a high return on investment capital. We have already invested a significant portion of the anticipated capital required to add an additional $300 million in annual revenues to our business in the coming years. In summary, we are proud of our strong track record of returns and remain as strong as ever in our ability to continue delivering above-market performance while generating robust cash flow and value to our shareholders. I will now turn the call over to Chris Daes to provide additional operating highlights.

Thank you, Jose Manuel. Moving to Slide number 5. In October, we were pleased to announce our relocation of our global headquarters to Miami, Florida. This strategic move aligns with our revenues being sourced from the US and aligns with our long-term strategy to become an even more US-centric company as we continue our organic geographical penetration into this market. This move has been very well received so far by customers, employees and other stakeholders. We look forward to fostering the long-term partnerships in the US that will continue to fuel our growth strategy. Looking at our results during the quarter, we saw positive momentum in our multi-family commercial business as healthy building activity and project wins continued during the quarter. Our backlog grew 20% year-over-year to a record of $136 million. This was an acceleration in growth in the second quarter of 2023. Despite the high interest rate environment, we continue to see favorable trends in our key markets, particularly in the Southeastern US. New business wins and a resumption of projects that were previously put on hold during the pandemic are driving the acceleration of our backlog. As a reminder, approximately two-thirds of our backlog is mainly composed of medium and high-rise residential buildings, which are currently outperforming most other commercial sectors. The last one-third is related to a wide variety of commercial projects where demand remains firm. Our single-family residential growth trajectory is not fully captured in our backlog, given the shorter-term duration of projects. The strong bidding activity we are seeing also signals attractive project opportunities in the near future, helping to maintain our positive book-to-bill ratio above 1.1 times over the past 11 consecutive quarters. Our strong book-to-bill of 1.3 times at quarter end, along with our demonstrated ability to convert backlog into revenue, is contributing to our expectation for another year of double-digit growth in 2024. Our pipeline gives us visibility on projects into 2025. We also see additional avenues for growth in our single-family residential business through our showroom expansion and recent entrance into the vinyl windows market, which represents an estimated 60% of the $26 billion architectural windows market. Moving to slide number 6, the entry into vinyl windows and the expansion of our showrooms should help us generate additional organic growth as we significantly expand our addressable markets. These factors, in conjunction with our growing backlog, give us confidence in our ability to grow share. Our accomplishments during the quarter and the strategic moves we are taking reflect our commitment to value creation, strengthening customer relationships, and streamlining our operations to generate meaningful returns for all our stakeholders. I would now turn the call over to Santiago to discuss our results and updated outlook for 2023.

Thank you, Chris. Turning to Slide number 7. During the third quarter, we achieved record single-family residential revenues, which grew organically by 2.4% year-over-year and by 47.7% compared to the third quarter of 2021. Our ability to grow single-family revenues on a difficult prior year comparison, while navigating a complex macro environment is a testament to the resilience of our vertically integrated business model and strategically located operations. We are also benefiting from the favorable secular trend of population migration into the southern US, where we conduct a significant portion of our business. These factors are helping to differentiate our business despite higher interest rates and broader macro pressures. As we've highlighted in recent quarters, we see market share upside in our single-family revenues through our broadening dealer base driven by interest in our low lead times in new product introductions. We are expanding geographically throughout the highly attractive Florida market, adding showrooms in other regions, and our new vinyl initiatives provide significant avenues for revenue growth and end-market diversification. To that point, on Slide number 8, I would like to highlight a few key points from our recent strategic entry into vinyl windows that Jose Manuel and Christian touched on earlier. During the quarter, we were thrilled to announce our entry into the vinyl window market, which represents an estimated 60% of the $26 billion architectural window market and solidifies our position as an industry leader in architectural windows and glass products. We have already made a significant portion of the anticipated capital expenditures to generate an incremental $300 million in annual revenues in the coming years, providing a strong foundation to grow our vinyl presence. Our entry into the vinyl window market is expected to provide a range of benefits to Tecnoglass and our customers. This strategic move more than doubles our addressable market, makes geographical expansion easier given the end-customer preference for vinyl products in many US regions, leverages our current distribution base, aligns well with ongoing sustainability trends, and increases demand for energy-efficient products. We have the technical expertise to produce vinyl products and capture an attractive margin on incremental revenues. Production will commence in a couple of weeks for the first orders to be delivered by year-end, and we already have orders for 2024 with many other customers requesting samples and product demonstrations. This early traction with existing customers validates our strategic entry into this market. We are excited by the reception so far and the growth opportunities we see in this end market. Turning to the drivers of revenue on Slide number 10, total revenues increased 4.4% year-over-year to $210.7 million for the third quarter. This increase was led by growth in our multi-family and commercial activity, as well as growth in single-family residential revenues largely reflecting additional market share gains. Looking at the profit drivers on Slide numbers 11 and 12, adjusted EBITDA for the third quarter of 2023 was $71.3 million or 33.8% of revenues, compared to $78.5 million or 38.9% of revenues in the prior-year quarter. The change was primarily attributable to a non-cash foreign exchange impact on gross margins related to the peso as functional currency, but partially offset by lower SG&A dollars. SG&A was $29.5 million, compared to $35.2 million in the prior-year quarter, with the decrease attributable to lower shipping and commission expenses and a non-recurrent settlement charge in the third quarter of 2022, partially offset by increased corporate costs to support a larger operation. As a percentage of total revenues, SG&A for the third quarter improved 340 basis points to 14%. Third quarter gross profit was $90.5 million, representing a 43% gross margin. This compares to gross profit of $105.3 million, representing a 52.2% gross margin in the prior-year quarter. A year-over-year change in gross margin mainly reflected a non-cash 660 basis point unfavorable foreign exchange impact. This was due to the markup of inventory in our functional currency, attributable to the significant and rapid depreciation of the Colombian peso. Specifically, inventories purchased during the second quarter of 2023 and a weaker Colombian peso ran through the P&L during the third quarter of 2023, at a much stronger Colombian peso. These accounting dynamics related to the currency translation from the functional currency had no cash flow effect, given that both the actual inventory purchase and the subsequent sale took place in US dollars. Separately, approximately 25% of our costs and expenses do get paid in Colombian pesos, so the recent currency revaluation added an additional margin impact of 150 to 200 basis points year-over-year. Looking forward, the majority of the impacted inventory has been worked down and FX rates on average have partially reversed course since quarter-end. That should allow for less accounting variability in results through year-end. We expect to produce gross margins around normalized levels through the remainder of the year with no significant FX volatility, aside from the 150 to 200 basis point effect from peso-denominated costs and expenses against similar currency comparisons through year-end. Therefore, we now expect gross margins to be in the range of 47% to 49% for the full year 2023. Now, looking at our strong cash flow and improved leverage on Slide number 13, in the third quarter, we delivered exceptional cash flow generation of $51.3 million, bringing our trailing 12-month operating cash flow to a record level of $144 million. During the quarter, we had capital expenditures of $24.3 million, which included payments for previously purchased land for potential future capacity expansion. CapEx also included a significant portion of the previously disclosed investments in facilities and operational infrastructure to enter the vinyl window market. We expect strong free cash flow to continue through year-end, largely given an expected decrease in capital expenditures in the fourth quarter. Our impressive cash generation has been made possible by our careful working capital management, more favorable mix of revenues, higher profitability, and reduced interest expenses, providing us with significant financial flexibility to drive additional value in our business. This includes our recent investments to enter the highly attractive vinyl window market and share repurchases. In total, we returned $4.3 million in cash dividends and $8.9 million in share repurchases during the quarter and repurchased an additional $11.2 million of shares after the quarter ended, with approximately $30 million remaining under the current repurchase authorization as of November 6, 2023. At quarter-end, our leverage ratio remained near a record low level of 0.2 times net debt-to-LTM adjusted EBITDA, down from 0.6 times in the prior-year quarter. As of September 30th, we had a cash balance of $119 million and availability under our committed revolving credit facilities of $170 million, resulting in total liquidity of approximately $289 million, providing us with significant financial flexibility to execute growth, invest in our business, and return cash to shareholders. On Slide number 14, I would like to reiterate our success in generating strong returns for our shareholders. On average, over the past three years, our stronger profitability and meaningful step-up in cash flow generation have driven significant average returns. When comparing our ROE and ROIC metrics to those of US building product peers, their returns on reinvestments into our business, plus dividends have driven substantially higher value to our shareholders, further validating our strategic approach to driving returns. As you can see on Slide 16, the upward trajectory of our revenue and adjusted EBITDA remains positive, and there is a lot of runway for growth with the recent capacity additions and entrance into the vinyl window market to get us over $1 billion of annual revenues. We are as confident as ever in our ability to maintain our track record of exceptional growth and above-market returns. Now, moving to our outlook on Slide 17. Based on our strong results so far and the expected timing of the leverage through year-end in our residential and commercial markets, we are adjusting our outlook for revenue. We now expect full year 2023 revenue to be in the range of $835 million to $848 million. This outlook represents entirely organic growth of 17% at the midpoint. While our backlog has maintained a strong growth trajectory, the timing of leveraging for the rest of the year has been impacted by customer project delays carrying some invoicing into the first half of 2024. Accounting for the impact of unfavorable foreign currency, mainly in the third quarter, and the expectation for a higher mix of installation revenues during the fourth quarter as a result of the aforementioned order delays, we are updating our expectations for adjusted EBITDA to be in the range of $300 million to $308 million, representing a 14% growth at the midpoint of the range. As I discussed earlier, we expect gross margins to be in the range of 47% to 49% for the full year 2023. As previously discussed, cash flow from operations and free cash flow are expected to be strong for the remainder of the year, given the majority of capital expenditures related to facility automation, expansion, and vinyl-related investments having been completed. In summary, we are pleased with our results year-to-date. Our backlog of multi-family and commercial projects has accelerated, and our single-family residential expansion strategy continues to gain traction. With our latest round of facility enhancements completed and the incredible opportunity in vinyl windows, we have confidence in our ability to produce another year of double-digit revenue growth with industry-leading margins and significant cash flow generation in 2024. With that, we will be happy to answer your questions. Operator, please open the line for questions.

Thank you. Our first question comes from Alex Rygiel with B. Riley. Please proceed.

Thank you, Jose, Christian. Very nice quarter. A few questions here. As it relates to 2024, I understand you’re guiding towards double-digit growth. Can you be a little bit more specific here, is this revenue or EPS or both? And how do you look at the growth rates within a residential and commercial?

Hello. We are looking at very strong growth in both areas, because the backlog of commercial is very high and we know we're going to increase low double-digits to higher double-digits. And then there is the ratio organically, because we have a new line, the vinyl line, and with the vinyl line everything is new. We hope that three or four years, the vinyl line is going to be on par with the aluminum. So we are expecting a big increase in residential and commercial.

Alex, just as a follow-up, the projection is for top-line revenue. We haven't drilled down to get to the EPS level, but you’ll be sure you will get that after the next call, obviously.

Thank you. And then, secondly, as it relates to the vinyl window strategy, do you expect this to be more of an R&R product or are you going after the new residential market as well? And maybe talk about the margin profile of that vinyl product versus your traditional aluminum product?

The margin is about the same and the vinyl line goes everywhere that we are not today. I mean, from Tampa, in Orlando North, most of the sales for residential are vinyl. 60% of the sales of windows nationwide are vinyl and only 30% aluminum. So we expect very high growth on the vinyl and also we expect high growth on the commercial side of the aluminum.

Thank you very much.

Hello. This is Sam Darkatsh from Raymond James. Jose, Manuel, Chris, Santiago. How are you?

Good and you?

Good. Thank you.

I'm well, thank you. So, a couple two, three questions if I could. First, the customer project delays that you cited, Santiago. Can you put a little more color on this in terms of quantification in sales? What the fourth quarter EBITDA impact of that delay or those delays might be? And also give a little bit of color as to why this is going to be a 4Q into 1Q delay? Or is it a little bit more protracted than that?

I’ll let Jose take the questions on why, and he's so much closer to the market, and then I'll follow up with the numbers and EBITDA impact if you like.

Yes, well. A lot of commercial projects, I believe around $10 million a month got delayed, and the main reason was because the banks for three to four months were not lending. Somehow, they opened the vault again and now all the projects are going, and we still have the same backlog and more, and we keep getting lots of work on the pipeline. I mean, I believe commercial is going to hit it really, really good next year.

So I'll follow up with the numbers then. Essentially, if you take $20 million to $30 million, which Jose is referring to, let's take the midpoint of that $25 million, the operating leverage that we get on the manufacturing revenues equates to about $8 million to $9 million in EBITDA, given the fact that about 30% to 35% of our costs and expenses are fixed costs. So if you do the math, that equates to about $8 million to $9 million that is moving into ‘24. As far as the timing, I would say, but I'll let Jose reiterate that it's probably revenue that will be realized in the first half of ‘24. And then, as you heard on the call, some of that revenue is being replaced by some installation revenue that carries a much lower margin. So when you're having about $10 million more of installation in the mix, the impact to EBITDA is about $3 million on that. But the brunt of the effect is coming from the operating leverage that we're not seeing based on those revenues moving into 2024.

Which leads me perfectly into my next question. Thank you, Santiago. There's a lot of moving parts in gross margin right now. And you gave some color around expectations for normalization in the fourth quarter. Can you be a bit more specific though in terms of what you think the actual gross margin might be since the implied guidance range is really wide?

So the implied margin range for the full year equates to 47 to 49%. So, depending on where you are in that new guidance, that would say that Q4 would be about 45%. So sequentially better than Q3. But the run rate would continue to be high 40s going forward; it’s just that Q4 is impacted by the leveraging from those revenues that are moving out a quarter or two. On a run rate basis for ‘24, obviously, there's also moving pieces on mix and whatnot, but the normalized gross margins should continue to be kind of in the high 40 type range.

And then my last - Thank you for that. And my last question, so you competed obviously against PGT in the southeast and in Florida, and it's not a perfect comparable because they've got different lead times and a different vinyl mix and a different builder versus R&R mix. But this quarter, it was the first time you didn't outperform them in Florida in single-family. Could you give some color as to what you're seeing in the Florida market from a market share standpoint? And what are your single-family orders looking like right now?

Yes, we are penetrating the market, and we have made big gains. Now the gains cannot be 20% or 30% year over year now, but what we're seeing is that we are steadily growing the market share, at least in the Southeast. Now we're going full speed with the Southwest where we have made good penetration. As we go north, where we have nothing, everything is actually going to take.

So, if you look at your orders all in, in single-family, what's the year-on-year growth rate right now look like? Since earlier in the year, we had said that on a quarterly basis, the residential revenues were going to be somewhat stable throughout the year, and you saw that in Q3, as well. So based on what we have today, I would not expect anything different than what you saw in Q3, Sam. I would say that they're going to be somewhat stable with a pickup more into 2024 once some of the vinyl product is actually already getting invoiced. As you heard earlier, that is already in production, probably starting next week with the first order delivered by year-end. So you don't get to capture necessarily the benefit of that in Q4. But you will start capturing that in Q1 and Q2 and so on.

Okay. Very helpful. Thank you, gentlemen.

Have a good day.

Thank you.

Hey guys. Good morning. Maybe just to make sure I'm totally clear on the EBITDA guide. So, I think the midpoint of your prior guide versus the midpoint of this guide is maybe about $24 million lower. So you've got about $14 million from the revaluation that hit the gross margins in Q4 about $8 million to $9 million or so from the project push-outs, and then a couple of million dollars from some higher installation. So those are kind of three pieces to bridge that gap.

Are you talking about versus the previous guidance that we gave during Q2?

Yeah, so your prior midpoint would have been 328. Now, it's 304. And so I just want to make sure I understand the moving pieces between those items.

Yeah. So, not all of it is from Q4 obviously, because the Q3 results came below that guidance that we gave after Q2, as well. So you have to take out the below previous guidance that sold mainly resulting from that inventory markup, which is non-cash, right? So, if you take out the effect of that, the actual difference between the new guidance and the previous guidance is about $12 million or $13 million. And as I was just mentioning, when Sam asked the question, if you do the math on an operating leverage for Q4, taking $25 million to $30 million of revenues being pushed out, you get to about $9 million of that $12 million to $13 million. And then the remaining is more related to mix than anything else, because some of that revenue - if you look at the revenue, the revenue is not coming down as much as the EBITDA, right? But that's because some revenue from mix, some revenue from installation is actually going to hit Q4. So it's essentially about $9 million from operating leverage and $3 million from mix. If you do the math, the midpoint now is 63; the previous midpoint was about 75 for Q4, right? I mean, I think you're looking at it for the full second half of the year, which you have to check out the Q3 mix.

Yes, exactly. Okay. Okay, perfect. And then, these are both timing-related items is what I'm getting at.

Well, since we always carry a lot of inventory. That has been our tradition. That's why during COVID we were softer to invoice, because we had all supplies in-house for three to four months. Obviously, we purchased inventory at 4,800 pesos, and the peso came down to 4,000. So that’s a 20% revaluation, and we're still eating some of that higher-price inventory. But this is all obviously going to be cleaned out by year-end at the latest.

Yes, just to follow up, Tim. It is a timing issue, obviously, and we wanted to highlight that the inventory effect is completely non-cash because you purchase the inventories in dollars and you sell them in dollars. It’s just a function of the functional currency being the Colombian peso, right? So those inventories that were purchased during Q2 are essentially all having been sold already, right? So you shouldn't have any more of that in Q4. And the impact on the operating leverage is a timing issue, as well, because those are projects that are up and going already. They're not getting cancellations; they're just revenues that are being pushed out into ‘24. So it's a timing issue, as you said.

Okay. Okay. Very good. And then just the last piece on the market, it does sound like you guys are a little more constructive on the market this quarter than maybe you were last quarter. Is that just because of some of the financing starting to roll through at banks? And are you actually seeing better bidding? So I guess, just kind of curious how you see the market today than maybe three months ago?

The prices have been good for us. The problem that we had last quarter was less invoicing because of the $30 million I mentioned postponed to the first quarter of next year and second quarter. But the pricing has remained steady. I don't see other than a small competition lowering the prices, simply the biggest comparison is PGT and their subsidiaries; they haven't done so. So we have steady pricing, and next year, we have a lower cost in aluminum as well. Everything should return to par next year.

Okay. Okay. Sounds good. Thank you, guys.

Thank you, Tim.

Our next question comes from Stanley Elliott with Stifel. Please proceed.

Hey, good morning everyone. Thank you all for the question. I apologize if it’s got asked before; I have to bounce around a little bit. Could you help us with the build on the top-line for the double-digit revenue growth into next year for starters?

Are you talking about the breakdown as to how that’s composed, Stan?

Yeah, roughly just trying to get a sense for kind of what are going to be the main drivers to get to that?

Well, if you use the math on the backlog that we reported, that typically gets executed over the following 18 months, right? And that's what we wanted to highlight that graph on our latest slide to show that the backlog is really sticky and obviously it gets executed, right? So, if you do the math and just take about two-thirds of that, you come up with what the commercial side of things should be for 2024, right? And that gives you a lot of visibility. And on the other hand, I’ll let Jose reiterate the opportunity on the single-family residential side. But obviously, when you have these new vinyl products, we have no revenues this year and you have these showrooms now operational for 12 months where you also have no revenues in ’23. That provides confidence that achieving double-digit growth next year is very doable. I don't know, Jose, if you want to add to that?

Yes. Well, like I said before, anything that we get next year for vinyl is new. I mean, we have a lot of people lined up, and they're very happy with our product, our service, and our relationship. Let me give you an example. Somebody in Orlando, one of our clients, buys around $500,000 a month in aluminum, then he buys around $1 million a month from vinyl suppliers. So he's ready; he wants to turn everything to one vendor. And like him, there are many, many clients that we actually have today that buy very little from us. Now, on the other hand, we have nobody north of Orlando, we are not selling to anybody now. So let's say in Jacksonville, Tallahassee, Panama City, that's only in Florida. And now, with the vinyl, we compete in New York, New Jersey, Carolina, Texas, all these places. And we see, everyone is really excited about our vinyl line, because we never had vinyl.

Perfect. And then, kind of pivoting back to the inventory piece understanding it’s not cash. Did something happen from the beginning of August to now, to where you had to have the revaluation? I am just curious, since most of the cost of goods were purchased in the second quarter.

No, nothing happened then. We ended up having more inventory that blew through Q3 than originally expected. And again, this is more a function of the functional currency. So I'll give you the exact numbers; when we buy the inventory, the peso was at about 4,700 per dollar. But when you cost it out, 30, 45, and even 60, 75 days later, the average for the quarter was 4,000. So, all of a sudden, you have a non-cash impact of 15% to 20% just by functioning of running more dollars through the P&L because the dollar weakened during that period. But it was more a function of dimensioning how much inventory was going to impact Q3, and ended up being more than we had expected. But as we said on the call, it’s essentially all worked out in Q4, and should have very little of that.

And then, lastly, nice to see the repurchase activity. What are the plans for completing that? And should we think about potentially the Board upsizing that at some point given where the share price is today?

Yeah, we certainly feel that there's an opportunity there, and we still have 60% of that original approval available to us. So to the extent that we continue to see opportunities to execute, we will. As we said, our cash flow generation, the way that we're projecting now that a lot of the CapEx is out of the way, should be very strong. And we certainly think that this is a good way to return cash to shareholders, especially at today’s prices.

Perfect. Thanks so much.

Thank you.

Our next question comes from Julio Romero with Sidoti. Please proceed.

Hey, good morning. Thanks. Hey. Hey, good morning. I guess, my first question is just for Jose Manuel. On the order delays, what are your customers saying in terms of maybe why the banks stopped lending and why the financing dried out for a little bit? And are those project delays, at least partially driven by customer hesitation, customers reworking projects or changing their projects? Help at all.

No. Julio, actually the main reason for the delay is that they increased the percentage. The banks increased the percentage that they have to have under contract in order to release the money; before 2008, it was 20% to 30%, after 2008, it was 50%. And now, they're asking for 60% to 75%. So, all the projects that are ongoing today are going. That's on the commercial side for condominiums. Now, on apartments, which are for rental, since the interest rate went up, they are more careful to ensure the numbers meet the demand and the payment for interest. So, all that has been clear to most of the projects. We haven't had any cancellations; we had postponements, and everything looks good. And like I said, for next year, both sides are going to be moving.

That's good color there. I appreciate it. And so it sounds like higher lending standards from the banks. And I guess, just really what I'm trying to get at is, are the customers - are the higher rates and higher hurdle rates causing customers to have any sort of hesitation? Or any sort of second thoughts or reworking or anything of that nature in terms of their projects? You mentioned no cancellations, which is good, but just a little more color on the demand front if I could?

The demand in South Florida or, refreshing, the demand from Tampa, Orlando down, is still high. The cancellations have been or postponed by clients, but they have been on the lower end, and we don't serve that much of that market. But to my surprise, when I ask the developers who they are selling to? Who is the largest buyer? It’s Mexico and Brazil. So that's good; there is a lot of Mexicans coming here, and before, they used to travel to Texas, and now it's in California. And on the other hand, I've learned from the track homebuilders that the production homes they have are selling at a 100% cash. A lot of people retiring in Florida have the cash and don't want to take an 8% interest. So, they might keep up; I mean, a steady going up. Also, you know, what's surprising is anything above $3.5 million is what is selling the most. Now that's good; I mean, a lot of windows in those buildings.

Great, great. Great color there. And then, just last one for me is just on SG&A. Santiago, you mentioned SG&A was lower due to lower shipping and commission expenses. Is that kind of a one-off thing? How do you expect SG&A to trend in the fourth quarter?

That was part of it, and then we made the comparison to a non-recurrent settlement charge in the Q3 of 2022, Julio. So, you have to also incorporate that in there. And obviously, with more installation, the flip side of the lower gross margin is that you don't have transportation costs on installations, right? So, the expectation would be that SG&A for next quarter is much more in line with Q3. So, we'll be able to offset some of the variables that are impacting gross margin by having lower SG&A. But for modeling purposes, it would be similar to Q3 as for what Q4 should be.

Makes sense. I'll pass it on. Thanks very much.

All right. Thanks, Julio.

All right. Thank you for your time. You mentioned that over the 18-month period for backlog, two-thirds is commercial. Can we - how much of the remaining is vinyl? And in terms of the cadence of growth, what does the step-up look like in Q4 and throughout 2024?

Just to clarify, two-thirds of the backlog is related to multi-family and not single-family residential nor vinyl. Everything that you see reflected in the backlog is strictly on the commercial side with two-thirds of that being multi-family. So that's the way to look at it. So to your second question, no vinyl is included in that backlog and for that matter, no single-family residential revenues are included in the backlog because that is very quick and spot in nature. So you get an order and it's out there, out the door in four to five weeks. So a lot of it gets worked intra-quarter. So all of what you see from a backlog perspective is related to the commercial segment.

Got it. And if I could just ask one more. Are you continuing to see any pricing pressure in the residential?

I’ll let Jose take that.

No, we haven't seen. Like I said before, the pricing has been steady. Only there are a couple of minor vendors that had to reduce the prices by 5% to 10% in order to get an invoice. Otherwise, they will go completely zero.

Got it. Thank you. Well, I appreciate the time.

Thanks.

At this time, I would like to turn the call back to Jose Manuel for closing remarks.

Thanks everyone for participating in today's call. We are very, very excited. We cannot tell you enough about the future of the company. Our sales are increasing day by day for next year, and we hope to provide you much better results. Thank you.

Thank you, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.