Tecnoglass - Q3 2023
November 6, 2023
Transcript
Operator (participant)
Greetings, and welcome to the 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. 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, Brad Cray, Investor Relations. Thank you. You may begin.
Brad Cray (VP of Investor Relations)
Thank you for joining us for Tecnoglass's 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, José Manuel Daes, Chief Operating Officer, Christian 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 statements herein due to changes in economic, business, competitive, and/or regulatory factors and other risks and uncertainties affecting the operation of Tecnoglass's business. These risks, uncertainties, and contingencies are indicated from time to time in Tecnoglass's 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'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 will now turn the call over to José Manuel, beginning on slide number four.
José Manuel Daes (CEO)
Thank you, Brad, and thank you everyone for participating on today's call. We are pleased to report yet another quarter of strong results, underscoring the resiliency of our business in the volatile macroeconomic environment. Our revenues increased to a third quarter record of $210.7 million, marking our 12th straight quarter of entirely organic year-over-year growth. Our multifamily and commercial business was again the main driver of our top-line growth, expanding 6% year-over-year to $122.9 million, even on a tough year-over-year comp. Compared to the third quarter 2021, multifamily 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 to 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 comp 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 on 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 course since the end of the quarter. Our prudent working capital management, as well as the continued growth in our shorter cash cycle single-family residential business, drove a 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 has also given us the flexibility to capitalize on attractive and 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 CapEx 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 confident 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 to provide additional operating highlights.
Christian Daes (COO)
Thank you, José Manuel. Moving to slide number five. In October, we were pleased to announce the relocation of our global headquarters to Miami, Florida. This strategic move aligns with 95% of our revenues being sourced from the U.S., and it aligns with our long-term strategy to become an even more U.S.-centric company as we continue our 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 U.S. that will continue to fuel our growth strategy. Looking at our results during the quarter, we saw positive momentum in our multifamily commercial business as healthy bidding activity and project wins continued during the quarter. Our backlog grew 20% year-over-year to a record of $836 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 U.S.. New business wins and the resumption of projects that were previously put on hold in the planning stages 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 spot 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 1.1x over the past 11 consecutive quarters. Our strong book-to-bill of 1.3x at quarter end, and 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 showrooms expansion and recent entrance into the vinyl windows market, which represent an estimated 60% of the $26 billion architectural windows market. Moving to slide number six. The strategic entry into vinyl windows and the expansion of our showrooms should help us generate additional organic growth as we significantly expand our addressable market.
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 our customers' relationship, and streamlining our operations to generate meaningful returns for all our stakeholders. I will now turn the call over to Santiago to discuss our results and updated outlook for 2023.
Santiago Giraldo (CFO)
Thank you, Christian. Turning to slide number seven. 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 U.S., where we conduct a significant portion of our business. These factors are helping to differentiate our business despite higher interest rates and our broader macro pressures.
As we've highlighted in recent quarters, we see market share upside to our single-family revenues through our broadening dealer base, driven by the interest in our low lead times and new product introductions. We are expanding geographically throughout the highly attractive Florida market, adding showrooms in other geographies, and our new vinyl initiative provides significant avenues for revenue growth and end market diversification. To that point, on slide number eight, I would like to highlight a few key points from our recent strategic entry into vinyl windows that José 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 CapEx investments to add 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 U.S. regions, leverages our current distribution base, given that many existing dealers already sell both aluminum and vinyl windows, creates a more efficient thermal performance, aligning well with ongoing sustainability trends and increased 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 demos. This early traction with existing customers validates our strategic entry into this market. We are excited by the reception so far and for the immense 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 multifamily 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-recurring 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 compared to gross profit of $105.3 million, representing a 52.2% gross margin in the prior year quarter. The year-over-year change in gross margin mainly reflected a non-cash, 660 basis point unfavorable FX 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 at 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 and had no cash flow effect, given that both the actual inventory purchase and the subsequent sale took place in U.S. dollars. Separately, approximately 25% of our cost and expenses do get paid in the Colombian peso, so the recent currency revaluation did have an additional margin impact of 150-200 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 accounted variability 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 150-200 basis point effect from peso-denominated cost and expenses against similar to 2022 FX comparables through year-end. Therefore, we now expect gross margins will be in the range of 47%-49% for the full year 2023. Now, looking at our strong cash flow and improved leverage on slide 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 future potential 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 expense, providing us with significant financial flexibility to drive additional value in our business. This includes our recent investments to enter into 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 0.2x net debt to LTM adjusted EBITDA, down from 0.6x in the prior year quarter. As of September 30, 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, giving us significant financial flexibility to execute growth, invest in our business, and return cash to shareholders.
On slide 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 U.S. building product peers, the 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 revenue. 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 deliveries 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-$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 deliveries 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 revenue 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-$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%-49% for 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 multifamily 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.
Operator (participant)
Thank you. We will now conduct a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate 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 key. Once again, that's star one to ask a question at this time. One moment while we poll for our first question. Our first question comes from Alex Rygiel with B. Riley. Please proceed.
Alex Rygiel (Senior Managing Director)
Thank you, José and 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 residential and commercial?
José Manuel Daes (CEO)
Hello. We are looking at a very strong growth in both areas because the backlog of commercial is very high, and we know we're going to increase, not double digits, higher double digits. And then the residential, organically, because we have a new line, the vinyl line, and with the vinyl line, everything is new. We hope that in three or four years, the vinyl line is gonna be par, par with the aluminum. So we are expecting a big increase in residential and commercial.
Santiago Giraldo (CFO)
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 sure get that after the next call, obviously.
Alex Rygiel (Senior Managing Director)
Thank you. Then secondly, as it relates to the vinyl window strategy, do you expect this to be more of an R&R product or, is this, are you going after the sort of the new residential market as well? And maybe talk about the margin profile of that vinyl product versus your traditional aluminum product.
José Manuel Daes (CEO)
The margin is about the same, and the vinyl line goes everywhere that we are not today. I mean, from Tampa and Orlando North, most of the sales for residential are vinyl. 60% of the sales of window nationwide are vinyl and only 30% aluminum. So we expect a very high growth on the vinyl, and also we expect high growth on the commercial side of the aluminum.
Alex Rygiel (Senior Managing Director)
Thank you very much.
Operator (participant)
Sam, your line is live.
Sam Darkatsh (Managing Director)
Oh, hello. This is Sam Darkatsh from Raymond James. José Manuel, Chris, Santiago, how are you?
Christian Daes (COO)
Good, and you?
José Manuel Daes (CEO)
Good, thank you.
Sam Darkatsh (Managing Director)
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. Is this gonna be a four Q into one Q delay, or is it a little bit more protracted than that?
Santiago Giraldo (CFO)
I'll let José take the question as to why, and he's so much closer to the markets, and then I'll follow up with the numbers and EBITDA impact, if you like.
José Manuel Daes (CEO)
Yes, well, a lot of commercial projects are delayed. 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 valve again, and now the—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 gonna hit it really, really good next year.
Santiago Giraldo (CFO)
So I'll follow up with the numbers, Sam. Essentially, if you take $20 million-$30 million, which José is referring to, let's take the midpoint of that $25 million. The operating leverage that we get on the manufacturing revenues is equates to about $8 million-$9 million in EBITDA, given the fact that about 30%-35% of our costs and expenses are fixed costs. So if you do the math, that equates to about $8 million-$9 million that is moving into 2024. As far as the timing, I would say, but I'll let José reiterate, that that's probably revenue that will be realized in the first half of 2024. 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, you know, about $10 million 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.
Sam Darkatsh (Managing Director)
Which leads me perfectly to 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?
Santiago Giraldo (CFO)
So the implied margin range for the full year equates to 47%-49%. So depending on where you are in that new guidance, I 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 deleveraging from those revenues that are moving out a quarter or two. On a run rate basis, in for 2024, obviously, there's also moving pieces on mix and whatnot, but the normalized gross margins should continue to be kind of in the high-40s type range.
Sam Darkatsh (Managing Director)
Thank you for that. My last question, so you compete 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 RNR mix. But this quarter was the first time you didn't outcompete 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 your single family orders are looking like right now?
José Manuel Daes (CEO)
Yes, we are penetrating the market, and we have made big gains. Now, the gains cannot be 20% or 30% year per year now, but what we're seeing is that we have a steady and growing market share, at least in the Southeast. Now, we're going full speed with the Southwest, where we have made good penetration. And as we go north, where we have nothing, everything is icing on the cake.
Sam Darkatsh (Managing Director)
So, Santiago, if you look at your orders all in single-family, what's the year-on-year growth rate right now look like?
Santiago Giraldo (CFO)
You know, since earlier in the year, we have 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 too different than what you saw in Q3, Sam. I would, I would say that it's 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 orders 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, Q2, and so on.
Sam Darkatsh (Managing Director)
Very helpful. Thank you, gentlemen.
Santiago Giraldo (CFO)
Have a good day.
José Manuel Daes (CEO)
Thank you.
Operator (participant)
Our next question comes from Tim Wojs with Baird. Please proceed.
Tim Wojs (Senior Research Analyst)
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, you know, that hit the gross margins in Q4, about $8 million-$9 million or so from the project push-outs, and then $2 million from some higher installation mix. Are those kind of the three pieces to kind of bridge that gap?
Santiago Giraldo (CFO)
Sorry, Tim, are you talking about versus the previous guidance that we gave-
Tim Wojs (Senior Research Analyst)
Correct.
Santiago Giraldo (CFO)
During Q2?
Tim Wojs (Senior Research Analyst)
Yeah.
Santiago Giraldo (CFO)
Okay.
Tim Wojs (Senior Research Analyst)
So your prior midpoint would have been $3.28, now it's $3.04. And so I just want to make sure, you know, I completely understand the moving pieces.
Santiago Giraldo (CFO)
Yeah
Tim Wojs (Senior Research Analyst)
between those items.
Santiago Giraldo (CFO)
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, right?
Tim Wojs (Senior Research Analyst)
Right.
Santiago Giraldo (CFO)
So you have to take out the below previous guidance results that was mainly resulting from that inventory markup. That 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-$13 million. And as I was just mentioning, when Sam asked the question, if you do the math on operating leverage for Q4, taking $25 million-$30 million of revenues being pushed out, you get to about $9 million of that $12 million-$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-
Tim Wojs (Senior Research Analyst)
Yeah
Santiago Giraldo (CFO)
You have to take out the Q3 mix.
Tim Wojs (Senior Research Analyst)
Yep. Yep, exactly. Okay. Okay, perfect. And then the revaluation doesn't recur, and the push-outs you should realize next year, right? So yeah, but two timing related. These are both timing related items, is what it's kind of what I'm getting at.
Christian Daes (COO)
Well, you know, since we always carry a lot of inventory, that has been our tradition. That's why during COVID, we didn't suffer to invoice, because we had all supplies in-house for three to four months. Obviously, we bought, we had inventory at COP 4,800, and the peso came down to COP 4,000, so that's 20% revaluation just then, and we're still eating some of that higher price inventory. But this is all obviously by year-end, it will all be cleaned out, and we'll be at the current rate, which hasn't moved much in the last 45 days, which is good. We actually believe that it will rebound and go back up, but so far, we will clean it up by year-end, the latest.
Santiago Giraldo (CFO)
Just to follow up, Tim, it is a timing issue. Obviously, 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. It's just revenues that are being pushed out into 2024. So it's a timing issue, as you said.
Tim Wojs (Senior Research Analyst)
Okay. Okay, very good. And then, and then just the last piece on the market. It does sound like you guys are a little bit more constructive on the market this quarter than maybe you were last quarter. Is that just because of some of the financing, you know, starting to roll through with banks, and are you actually seeing better bidding? So I'm just, I guess, you know, just kind of curious how you see the market today than maybe three months ago.
José Manuel Daes (CEO)
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 first quarter of next year and second quarter. And then, but the, you know, the pricing and, and then the, the peso revaluation, but the pricing has been steady. I don't see other than a small competition lowering the prices steeply. The biggest competitor is PGT and the subsidiaries, and they haven't done so. So we have a steady pricing. And next year, we have a lower costs in aluminum, so everything should be par again next year.
Tim Wojs (Senior Research Analyst)
Okay. Okay, sounds good. Thank you, guys.
Santiago Giraldo (CFO)
Thank you, Tim.
Operator (participant)
Our next question comes from Stanley Elliott with Stifel. Please proceed.
Stanley Elliott (Managing Director)
Hey, good morning, everyone. Thank you all for the question. I apologize if this got asked before, I have to bounce around a little bit. Can you help us with the build on the top line, for the double-digit revenue growth into next year, for starters?
Santiago Giraldo (CFO)
Are you talking about the breakdown as to how that's composed, Stan?
Stanley Elliott (Managing Director)
Yeah. Roughly just trying to get a sense for kind of what are gonna be the main drivers to get to that.
Santiago Giraldo (CFO)
Well, if you do the math on the backlog that we reported, you know that typically that gets executed over the following 18 months, right? And that's why we wanted to highlight that graph on our latest slide, to show that the backlog is really sticky and obviously gets executed, right? So if you do the math and just take about two-thirds of that, you come up with what you know the commercial side of things should be for 2024, right? And that gives you a lot of visibility.
On the other hand, I’ll let José kind of reiterate the opportunity on the single-family residential side, but obviously, when you have this new vinyl product where we have no revenues this year, and you have these showrooms now operational for 12 months, where you also have no revenues in 2023, that provides confidence that achieving double-digit growth next year is very doable. I don’t know, José, if you want to add to that.
José Manuel Daes (CEO)
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 are very happy with our product, with our service, with the relationship. Let me give you an example. Somebody in Orlando, I mean, one of our clients, buys around $500,000 a month in aluminum, and he buys around $1 million a month from vinyl suppliers. So we're ready, and he wants to turn everything to one vendor. And like him, there are many, 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're not selling to anybody now. So let's say Jacksonville, Tallahassee, Panama City, that's only in Florida.
Now with the vinyl, we can penetrate New York, New Jersey, Carolina, Texas, all the states. We see, I mean, everybody's really excited about our vinyl line because we never had vinyl.
Stanley Elliott (Managing Director)
Perfect. And then kind of pivoting back to the inventory piece, understanding it's not cash, did something happen, you know, from the beginning of August to now, to where you had to have the revaluation? I'm just curious, you know, since most of it sounds like most of the cost of goods there were purchased in the second quarter.
Santiago Giraldo (CFO)
No, nothing happened then. We ended up having more inventory that flew through the Q3 than originally expected. And again, this is more a function of the functional currency. So I'll give you, you know, the exact numbers. When we bought the inventory, the peso was at about 4,700 per dollar. But when you cost it out, 30, 45, and even, you know, 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%-20%, just by function 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 kind of worked out, and, and Q4 should have very little of that.
Stanley Elliott (Managing Director)
And then lastly, nice to see the repurchase activity. You—what are the plans for completing that? And then should we think about potentially, pardon me, the board upsizing that at some point, given where the share price is today?
Santiago Giraldo (CFO)
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 it 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.
Stanley Elliott (Managing Director)
Perfect. Thanks so much.
Santiago Giraldo (CFO)
Thank you.
Operator (participant)
Our next question comes from Julio Romero with Sidoti. Please proceed. Julio, your line is live.
Julio Romero (Equity Analyst)
Hey, hey, good morning. Thanks. Hey, hey, good morning. I guess my first question is just for José Manuel. You know, on the order delays, what are your customers saying in terms of maybe why the banks stopped lending and why the financing dried up for a little bit? And are those project delays, you know, at least partially driven by customer hesitation, customers reworking projects or changing their project scope at all?
José Manuel Daes (CEO)
No, Julio, actually, the main reason for the delays is that they increased the percentage, the banks increased the percentage that they have to have on their contract in order to release the money. Before 2008 was 20%-30%, after 2008, it was 50%, and now they're asking for 60%-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 too, that the numbers meet the demand and the payment for interest. So, all that has been clear to most of the projects. Thank God, we haven't had any cancellation. We had postponement, and everything looks good. And like I said, for next year, both sides are gonna be moving.
Julio Romero (Equity Analyst)
That's good color there. I appreciate it there. So it sounds like higher lending standards from the banks. I guess just really what I'm trying to get at is, are the higher rates and higher hurdle rates, I guess, 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.
José Manuel Daes (CEO)
The demand in South Florida. The demand from Tampa and Orlando down, it's unbelievable, still high. The cancellations has been, or the postponement by clients have been on the lower end, and we don't serve that much of that market. But to my surprise, now, when I ask the developers, why, who are they selling to? Who is the largest buyer? It's Mexico and Brazil. So that's good. There's a lot of Mexicans coming here than before traveled to Texas, Arizona, and California. And on the other hand, I learned from the tract home builders, the production homes, that they, half of their sales are 100% cash. A lot of people retiring in Florida have the cash, and they don't wanna take 8% interest rate. So the demand keeps going up, I mean, steady on going up.
Also, you know what is surprising? Anything above $3.5 million is what is selling the most. That's good. I mean, a lot of windows in those buildings.
Julio Romero (Equity Analyst)
Great. Great. Good color there. And then just last one for me is just on SG&A. Santiago, you mentioned SG&A was low to lower shipping and commission expenses. Is that kind of a one-off thing? And, you know, how do you expect SG&A to trend in the fourth quarter?
Santiago Giraldo (CFO)
That was part of it, and then we made the comparison to non-recurring settlement charge in the Q3 of 2022 volume. 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 installation, right? So the expectation would be that as 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.
Julio Romero (Equity Analyst)
Makes sense. I'll pass it on. Thanks very much.
Santiago Giraldo (CFO)
All right. Thanks, William.
Operator (participant)
Our next question comes from Jean Ramirez with D.A. Davidson. Please proceed.
Jean Ramirez (Senior Research Associate in Infrastructure Services and Products)
Hi, thank you for your time. You mentioned that over the 18-month period, for backlogs, two-thirds is commercial. Can we ask 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, you know, throughout 2024?
Santiago Giraldo (CFO)
Just to kind of clarify something. Two-thirds of the backlog is related to multifamily and not single-family residential nor vinyl. Everything that you see we collected in the backlog is strictly on the commercial side, with two-thirds of that being multifamily, right? So that's the way to look at it. So to your second question, no, no vinyl is included in that backlog, and for that matter, no single-family residential revenues are included in the backlog, because that is, you know, very quick and is very spot in nature. So you get an order, and it's out the door in four or 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.
Sorry, and you had a follow-up to that. Could you repeat?
Jean Ramirez (Senior Research Associate in Infrastructure Services and Products)
Yeah, I was. First of all, thank you for the clarification. I was just focusing on, you know, on the single-family residential product. And I know you already mentioned that it's not in there, but what sort of expectations in terms of growth do you have, you know, for Q4 and into the first half? I just kind of wanna get a sense of, you know, what you're seeing and sort of what you, what are you expecting in the first half of 2024.
Santiago Giraldo (CFO)
Well, we wouldn't wanna go into too many details in 2024 until we're able to formally complete our budgeting process. So you'll hear much more details after the Q4 call. As far as the Q4 projection for residential, as I was saying earlier, we're expecting that to be, you know, kind of flattish sequentially. So for modeling purposes, again, if you look at the previous quarters, they're being kind of stable quarter-over-quarter, and that's what we would be expecting in Q4 as well. Again, you know, these vinyl-related revenues are not really gonna start hitting the P&L until the first quarter, second quarter of next year. So you don't have the benefit of that in 2023. So we're still, you know, just projecting that based on current orders to be stable sequentially.
Jean Ramirez (Senior Research Associate in Infrastructure Services and Products)
Got it. If I could just ask one more. Are you continuing to see any price, any pressure in the residential?
Santiago Giraldo (CFO)
I'll let José take that.
José Manuel Daes (CEO)
No, we haven't seen. Like I said before, the pricing has been steady. Only there is a couple of minor vendors that have to reduce their prices by 5%-10% in order to get any work. Otherwise, they will go to PGT or us.
Jean Ramirez (Senior Research Associate in Infrastructure Services and Products)
All right. Thank you. Well, I appreciate the time.
Santiago Giraldo (CFO)
Thanks.
Operator (participant)
Thank you. At this time, I would like to turn the call back over to José Manuel for closing remarks.
José Manuel Daes (CEO)
Thanks, everyone, for participating on today's call. We are very, very excited. We cannot tell you enough about the future of the company. Our sales are increasing by the day for next year, and we hope to give you much better results. Thank you.
Operator (participant)
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.