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Thank you for standing by. This is the conference operator. Welcome to the Tecnoglass Inc. Second Quarter Earnings conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]
I would now like to turn the conference over to Rodny Nacier, Investor Relations. Please go ahead.
Thank you for joining us for Tecnoglass' Second Quarter 2020 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, 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' 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 Securities and Exchange Commission. 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 José Manuel, beginning on Slide #4.
Thank you, Rodny, and thank you, everyone, for participating on today's call. I am exceptionally pleased with our talented team and their unwavering commitment to excelling during this unprecedented period. This was demonstrated by our solid operating performance in the second quarter.
Our structural advantages and automation initiatives helped us to produce record gross margin, operating margin and adjusted EBITDA margin. We were especially thrilled to achieve these strong results without taking any head count reductions related to the economic impact of the COVID-19 crisis. The quarter included 2 fewer weeks of invoicing related to the previously announced downtime at our production facilities. We took proactive steps to boost production and implement the safest working conditions at the onset of the pandemic. This allowed us to quickly accelerate invoicing activity once we reopened the facilities in mid April.
The timing aligned well with our customers' delivery schedules and the pace of invoicing improved significantly as we progressed through the quarter with May and June having sequential incremental revenues. We expect to recover that deferred revenue in future quarters. In June, we hit a monthly record level of residential orders and end market which now represents 19% of our trailing 12-month U.S. revenue. Moving to, residential remains strong with low mortgage rates and improving single-family residential activity, providing a strong demand for new homeownership.
On the commercial side, despite some project delays, our backlog continues to grow to record levels, representing an encouraging long-term pipeline of activity. We remain focused on further penetrating our key U.S. markets and capturing share in additional cities with attractive commercial and residential demand profiles.
In the quarter, 97% of our revenue and 88% of backlog was in the U.S. Latin America has been slower to recover, although this market now represents a significantly lower portion of our revenue compared to a year ago. That said, we continue to expect the U.S. to be the primary driver of our growth in the quarters and years ahead.
Our strong balance sheet continues to support our growth ambitions. A strong working capital management, cost reduction initiatives and benefits from a high-return automation initiatives collectively helped us to generate the highest cash flow quarter in our history. And third, we were able to further improve our net leverage ratio to 2.2x and finished the quarter with -- at a very strong liquidity level of $136 million.
As we move into the balance of 2020, we have ample financial resources to continue executing on our growth strategy while further enhancing our position as a premier architectural glass leader in the U.S.
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 #5. Based on our sequential quarter improvement and conversations with many customers, we believe that the worst of the economic crisis should be behind us. A valuable element of our business is that we have a multiyear view of projects in our pipeline on the commercial portion of our revenues, combined with a rapidly growing residential operation.
We ended the quarter with an attractive position commercial backlog across the U.S., which grew an impressive 4.8% year-over-year to a record of $550 million. The U.S. represents 88% of our backlog compared to 84% in the second quarter of 2019. We continue to build upon our U.S. growth strategy through best-in-class products and expanding customer relationships, which supports our confidence in our U.S. market positioning.
Fortunately, most projects are still progressing according to plan, now that construction is permitted in all markets. We are working as close as ever with customers to get real-time updates on project timing to help us best manage production schedules and working capital turns.
We are getting our critical products to job sites as quickly and efficiently as possible. Bidding and quoting activity in the U.S. has stayed in line with pre-COVID levels, which marks an encouraging trend for the recovery.
In residential, which, as a reminder, is not fully captured by our backlog, we have been very pleased with our continued penetration into more single-family projects since we entered that end market in 2017. In recent months, we have taken our initial steps beyond South Florida and into other markets in Central Florida and the Panhandle. We have an exciting opportunity to replicate our U.S. playbook in residential to win new customer relationships and expand our geographic footprint over time.
Recent U.S. housing data suggests a quick recovery is taking place, which adds additional catalysts to our rapidly growing reputation in residential.
Before I hand the call over to Santiago, I want to make sure that all of our team members know how proud we are of their contribution. While the downtime of facility impacted our regular cadence of invoice for the quarter, we were extremely pleased to demonstrate our commitment to protecting the well-being of our employees, customers and partners.
The workplace protection that we implemented included reconfiguration of processes to incorporate social distancing and other best practices while maximizing productivity. With most of our vertically integrated operations colocated within the same campus, we were able to adapt quickly and efficiently. While market uncertainties understandably persist today, we believe we have addressed many factors under our control to continue safely growing with our customers and delivering additional value creation to our all stakeholders as the national and local economies recover.
I will now turn the call over to Santiago to discuss our financial results and outlook.
Thank you, Christian. Beginning with our capital resources on Slide #7. A key priority for us during the quarter was to reinforce our balance sheet strength for continued success. We made great progress on that front. We generated record cash flow from operations of approximately $24.3 million. This was in excess of adjusted EBITDA, reflecting aggressive cash management, such as tight cost controls, working capital improvements and automation benefits. With the recent completion of a significant phase of growth investments, CapEx was largely limited to maintenance spend. These collective actions helped improve our total liquidity to $136 million as of June 30, representing an over 40% increase compared to $95 million at the end of March.
We further deleveraged our business to end the second quarter at a comfortable level of 2.2x net debt to adjusted EBITDA, with no significant maturities until 2022.
From a capital allocation perspective, we remain prudent in our approach with our near-term focus on balance sheet strength and returning a portion of capital to shareholders through our dividend.
Looking at the drivers of revenue on Slide #8. The month of April represented the majority of lower revenues for the quarter, primarily due to the 2 non-invoicing weeks during the first half of the month. As we have discussed on today's call, we experienced a significant demand recovery that drove sequential monthly revenue improvement as the quarter progressed. This sequential revenue improvement was mainly in the U.S., which represented 97% of revenues for the quarter, with revenues from Latin America being slow to recover as construction sites continued to prepare for safe operations.
U.S. revenues for the quarter were $79.1 million compared to $99.3 million in the prior year quarter. It's important to remember that a majority of the revenue not invoiced during the quarter represents active projects in backlog, which we expect to deliver in future quarters. Adjusting for those 2 non-invoicing weeks, our U.S. revenue was down in the high single-digit percent range, which we believe was more reflective of our market environment.
Additionally, in the prior year, the second quarter of 2019 represented our highest revenue quarter on record, which provided for a difficult year-over-year comparison. In June and July, our U.S. revenue was down a more modest mid-single digits, helped in part by residential. So we feel good about the direction of our U.S. business into the third quarter.
In Colombia and other Latin American countries, the steep decline in revenue was a function of significant business disruptions. We experienced delayed activity with many customers that have been slow to adapt to the extensive preparations required at job sites to adhere to varying COVID-19 guidelines. Revenues in Latin America remain in the early stages of recovery.
Looking at the drivers of adjusted EBITDA on Slide #9. We focus our efforts on operational excellence to achieve record margins in gross profit, operating income and adjusted EBITDA for the quarter. We improved adjusted EBITDA as a percent of sales by an impressive 580 basis points to 28.4% compared to 22.6% in the prior year quarter. In dollars, adjusted EBITDA was $23.3 million compared to $25.8 million, with lower revenues mostly offset by a 470 basis point improvement in gross margin to 38.8% and a $4 million reduction in SG&A.
The improvement in gross margin primarily reflected lower raw material costs attributable to lower aluminum prices, lower direct labor and material waste from our automation initiatives, a strong dollar and favorable mix of revenue during the quarter. We expect continued year-over-year margin improvement for the rest of the year, given some sustainable benefits related to our automation investments and weak local currency for the rest of the year.
The reduction in SG&A was primarily driven by less variable costs related to shipping, travel and commissions, given lower revenues in the quarter. We continue to monitor areas where we can limit costs, but we are encouraged by improvements in our markets over the past couple of months. We believe that our lean, highly efficient and vertically integrated operations leave us in a great place to maintain our industry-leading margins as we look to capitalize on the recovery. Looking at the activity in our markets on Slide #11. Consistent with our revenue trend and recent improvement in the Architectural Billing Index, we believe that the worst of the pandemic-related economic impacts are behind us. U.S. activity is normalizing as many economies continue to reopen and customers pick up the pace on projects. The COVID-19 outbreak in Florida has not had an adverse impact on our major projects in that market.
On the residential side, we are seeing promising trends that indicate that the rebound taking place has a long runway, increasing housing starts and a strong order growth reported by many large public homebuilders continue to provide evidence that the new residential demand is strong.
As José mentioned earlier, in June, we reached a monthly record for residential orders. We typically see our residential orders translating to invoicing over a 60- to 90-day period. Residential now represents 19% of our U.S. revenue and is likely to remain the fastest-growing portion of our business.
Moving to our outlook on Slide #13. We are encouraged by our pace of activity into the month of July. We are working closely with our customers to service existing projects, and we are gaining share as opportunities arise to outperform in all markets. Based on our current momentum and invoicing schedule, we expect sequential monthly revenue to grow as we move through the third quarter. We expect the U.S. to represent a significant majority of our revenues through the year, with growth led by single-family residential sales.
Our exceptional gross margin performance in the second quarter included returns on automation initiatives, which are contributing to results as planned. During the quarter, we also benefited from favorable timing of input costs and manufacturing versus installation revenue.
As our markets stabilize, we expect gross margin to trend back towards a normalized level in the low to mid-30s range. This normalized margin is unchanged from our previously communicated range that had already factored in the benefits from automation initiatives.
In summary, we are positioned to successfully navigate the current environment with our structural advantages, strong liquidity position and industry-leading margins. As we execute our strategy during this unprecedented period, we will maintain our focus on safely serving customers, aggressively managing costs, strengthening our balance sheet and generating returns for our shareholders.
With that, we will be happy to answer your questions. Operator, please open the line for questions.
[Operator Instructions] Our first question comes from Mike Shlisky of Colliers Securities.
So it looks like a lot of your EBITDA margin in the quarter, a lot of the growth was due to implementation of automation. Do you have any way to quantify how much that might have been in the quarter? And I appreciate your gross margin comments, Santiago, but can you comment on how sustainable are these EBITDA margin levels going forward?
Yes. Thanks, Mike. There's a few moving pieces here. Obviously, the mix of our revenues plays a part. But we -- as we had indicated before, we felt that being able to achieve at least 150 basis points of higher year-over-year margin was certainly attainable. Based on what we're seeing with the automation, I think we can estimate that at least 200 basis points versus the gross margin that we ended up with at 2019 is probably a reasonable run rate to go with. There are, of course, other moving pieces depending on, as I was explaining, depending on how the mix of the revenues come in place. But assuming stable mix, I think 200 basis points could make sense year-over-year going forward.
I also want to ask about your expansion into Central Florida and the Panhandle. I guess I was kind of curious what the next area you might go into after that and the timing of that. I'm kind of curious whether -- if you're seeing some rapid growth in some of the housing market here, would it make sense to accelerate your plan to expand your residential footprint, given the fact that there could be an opportunity to gain some share as that market comes back here?
We are expanding, as a logistical team, we can't afford to do it. The housing market, the residential has a totally different outlook than the commercial as many small orders and in many different places, the delivery and the logistics to take that to the place and on time is totally different. So we are expanding geographically as much as we can and as fast as we can. We are now up to Pensacola, and we're planning to move all the way to Houston and between the -- here till the end of the year and next year. And also moving along the East Coast line, we are now up to Jacksonville in very small places. And we plan to move all the way to the Carolina. We are deciding project for those areas that we are getting all the logistical together to be able to do it properly because if you get it to a market and you start failing, it's better not to do it than to do it.
Sure. That makes sense. Maybe one last one for me. Santiago, can you give us any sense of the progress or the kind of status that you have on how the refinancing or renegotiating your debt that's due in 2022? Any thoughts there on savings of interest costs or other parts of that process at this point?
Absolutely, Mike. We've been working on that since the beginning of the year, exploring our different options. Clearly, there was a period of time where there was so much volatility that nothing really could be expected for certain. The good thing is that we're now seeing that those options that we were evaluating are opening up again. And depending on market conditions, we certainly think that what we do going forward will carry interest savings for the company. So we're well ahead. We're working with different parties to be able to do that. We haven't decided what the structure will be. But in any event, each one of the different alternatives that we have in place will be at a lower cost than we currently have. So from an interest perspective and an EPS perspective, that would be a tailwind probably next year and going forward.
Our next question comes from Josh Wilson of Raymond James.
Congrats on the quarter. Can you talk about the improvement you're seeing in quoting and bidding as it relates to the different geographic regions in the U.S.?
Yes. So we saw a lot of stop quoting, especially all around the country, even in South America because of COVID in the months of March, April, May. June was a lot better and July was great because everybody that was delayed, the quoting and the job came back. And we're now back to, I believe, around 90% of where we were. There are some areas where I don't see any improvement like in hotels. Hotels are being delayed, and I don't know for how long. The large condominiums in South Florida are also delayed. But the rest, I mean, the small condominiums, rentals, even office buildings and mixed-use buildings, are all in place. And New York and Boston area were doing really good. They were closing a lot of projects. So I believe the U.S. is a very resilient country, and we're going to make it soon. I mean, sooner than later, everything is going to go back to normal.
Got it. And on that topic, as it relates to some of the more infamously impacted categories, what are you hearing from your customers in terms of their outlook for office and multifamily?
Well, in multifamily here in South Florida, we depend a lot on the people from outside of Florida. We are seeing a lot of the New York, Boston and even Canada, people coming and buying. So that's why a few of the buildings are being built. And we are still not seeing any influx from Latin America, which is one of the largest markets. Brazil, Colombia, Venezuela and then Russia. So we have to wait for that. As soon as that reopens, I believe we're going to have a multitude of buildings going up because the orders are ready, the developers are ready, the GCs are ready. It's just a matter of getting the people coming here.
Got it. And then Santiago, can you give us a sense of what you think CapEx will be for the year?
Very minimal, Josh. As we had indicated before, the growth CapEx and the automation initiatives have been fully completed. They're fully operational now. So for the rest of the year, it would be mainly maintenance CapEx, perhaps a couple of million dollars, but not much more than that. And that's in line basically with what we had expected for the year. The good thing is that we had already completed our investments. So we're not really having to delay anything with the completion of this phase. We're pretty much set as far as our installed capacity goes for the next few years. So my expectation is that the rest of the way, we'll just stick to mainly maintenance CapEx.
Our next question comes from Tim Wojs of Baird.
Nice job on the profitability. My first question, Santiago, is just really like a clarification. The 200 basis points of kind of gross margin going forward, is that kind of a go-forward comment, just given the strength year-to-date? Or is that kind of what you would expect for the full year?
No. I think that for the next couple of quarters, we can get a couple of hundred basis points over what we ended up 2019 with. So if we ended up with 31.5%, I think, low to mid-30s is the new norm, basically. I think getting to the mid-30s is achievable. But as I was -- as I was saying earlier, there is a few moving pieces here. Obviously, we can't control raw aluminum prices. In the Q -- in the last Q, they were as low as $1,400 per ton, they're back to $1,700. Going forward, we expect to have a little bit more of installation revenues versus manufacturing revenues. So there's a few moving pieces, but there's also some structural things that are going to be in place. And I think that gets us to the 150 to 200 level, which would equate to 34%, 34.5% as opposed to a 32% or so that we ended up in 2019 with.
Okay. That's fair. And then on the back half, do you think on a year-over-year basis, your mix of installation versus manufacturing will be more normalized? Or do you think it will still skew towards manufacturing?
I think it will be more normalized during the first couple of quarters of this year. GM&P was completing a few large projects. Based on our backlog schedule, they're due to ramp up Q3 and Q4. So we should have less of a tailwind related to mix for the next couple of quarters. And that's why you will expect to be able to reach 38%, 38.5% gross margins, partly because of that. So we're kind of normalizing for mix and trying to understand the other moving pieces, like I was saying, such as raw aluminum prices and others. But in any event, like I was saying, because of the automation and the tailwinds on labor cost and whatnot, we should be able to get to the mid-30s.
Okay. That's clear. And then just on the residential business, is there any way to frame what those June orders look like and kind of the view now what the second half in residential could be and how that business can actually perform on a full year basis in 2020? AI mean, can we be flat to up there this year now?
Well, the residential is not so predictable because it's a day-by-day operations. I mean we have like maybe 2 months in orders already because that's the time when we get the order that we deliver around 6 to 8 weeks at the most. So after that, it depends on how the market performs and how we perform. I mean, July was a great month. August has started really good, but we have to wait and see. Now if you ask me what I believe, I believe we're going to keep growing. We're gaining market share from the-not-so-good producers. There is a lot of them in the market, and we have the best window, I believe, for the residential market with the higher pressures, better finishes, range of finishes in the paint and the glass. And we are gaining. We're gaining market day by day. And we're gaining new dealers and new distributors. So if you ask me, I believe, we're going to keep growing. There's no reason not to.
Okay. That's great. And then I'm going to squeeze one more in. Just -- are you guys seeing any sort of pressure on lead times or labor productivity? My guess is you're not, but I just want to make sure.
No. We're not. We're not. We're doing really good in all. I mean the surgery that the COO, Christian Daes, did of the company with the automation and efficiencies and expenses costs, I mean, pick out a lot of things that were not useful. And he put the resources in the right places, has worked marvelous for the margin, for the EBITDA and for the efficiency of the company.
Our next question comes from Will Jellison of D.A. Davidson.
So it looks like you guys had a pretty favorable benefit from reductions in selling, general and administrative expense. I'm wondering, is that something that was related to COVID, stay-at-home work orders and if that can be expected to continue for the rest of the year?
So basically, you have a portion of that, that are related to variable costs, mainly shipping and handling and commissions. So with the cadence of revenues trending up, you would expect that to inch up as well. Although there are some COVID-related expenses related to traveling, for instance, that are not there and will not be there until things kind of get to some type of normality. That being said, as José was mentioning, there was a lot of restructuring that was done at the company. So some of this is actually just related to restructuring and seeking efficiencies and whatnot. But the majority of this would be -- or I would say, probably 60%, 70% of this will be related to variable costs. So we would expect under a more normalized revenue quarters and full monthly invoicing for nominal SG&A to return to a more normalized level.
Okay. Great. That's helpful. And then my last question, I'd like to pivot. Do you have any updates on the new float glass facility that you had put on hold last quarter?
Yes, we do. We do. We -- due to COVID, we put the project on hold. We got together with Saint-Gobain and there was not a hint to start an investment of that venture. We are now reassessing the necessity to do it. I mean we believe we should do it. Last month, for example, was the first month that the float that we do have actually [ brought out ] with them was sold out. So that means that the demand is there again. And with the increase in sales that we plan to make in the next 2 years, that means that the float plant will go ahead. We are looking at the numbers now. And I believe by the end of the year, we will have an answer of when will it start. I believe, it should be by January next year or March. We will decide that between now and the end of the year.
This concludes the question-and-answer session. I would like to turn the conference back over to José Manuel for any closing remarks.
Thank you, everyone, for participating in today's call. We will keep having great news for you. I believe our company is poised to give better results, keep cutting extra costs, making better margins. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.