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Tecnoglass Inc (NASDAQ: TGLS)
Q3Â 2020 Earnings Call
Nov 6, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings. Welcome to the Tecnoglass Inc., Third Quarter 2020 Earnings Conference Call. [Operator Instructions]
At this time, I will turn the conference over to Rodny Nacier. You may now begin.
Rodny Nacier -- Investor Relations
Thank you for joining us for Tecnoglass' third 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, 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 operations 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 Jose Manuel, beginning on slide number four.
Jose M. Daes -- Chief Executive Officer and Director
Thank you, Rodny, and thank you everyone, for participating on today's call. The positive momentum in our business continued into the second half of 2020. And I could not be more thrilled with our exceptional results. Although year to day basis, we deliver record adjusted EBITDA of $72.1 million, along with a solid 500 basis point improvement in adjusted EBITDA margin year-over-year. All while retaining our entire workforce throughout the epidemic.
During the third quarter, we made tremendous progress. With many of our operating metrics, going to record levels, including gross profit, adjusted EBITDA, and operating cash flow. We are extremely proud of our team's dedication and ability to accomplish these results in this complex environment. Looking at our market, we continue to deepen our presence in the US, which represents 93% of a third quarter revenue compared to 86% just a year ago. A primary driver of our increasing U.S. presence has come from our decision scale up a regional presence. It was evasion end markets in recent years.
Resilient demand from the strong residential recovery supported by positive single family housing fundamental has contributed to our sequential revenue improvements since mid year. In our business overall, our ability to innovate, adapt and execute lead to solid growth as we continue to penetrate new customer relationships through new products and geographies. Many projects have resolved across our footprint and we have continued to see improving market conditions overall.
To that point, our backlog remains as strong as $536 million, which provides us with good visibility as a store the pipeline of projects through 2021. We're now building even into 2022. We expect our standard prices in the US to continue observing the slower recovery from pandemic related businesses disruption in Latin America. In addition to enhancing our geographic presence and product mix, we are focused on generating a strong cash flow. A strong working capital management, previous high return, automation initiatives is a careful cost management we have achieved to record cash flow quarters in a row.
Year-to-date, we have converted over 70% of adjusted EBIT that flow from operations. And we have achieved a net leverage of 1.9 times a level not seen since 2015. We are extremely excited the consortium of mostly us as European banks lenders have recognize a regular of excess as a U.S. focus company, where we chose over 90% of our revenues. This is reflected in originally about 300 million credit facility, which was the on the regional credit comparable to, or better than, maybe publicly traded U.S. companies of similar size.
Our weighted average interest rate went from a prior rate of 7.5% down to an expected rate of approximately 3.5%. This is a direct acknowledgment by our lenders have the power behind Tecnoglass low risk as strategically located vertically integrated operations. They expanded the confidence in our structure. As stated above, it is within our industry to continue producing attractive growth margins and cash flow.
Our management team is highly aligned with shareholders and our team sees the value in our company in the same light as our lenders. With the strength of our balance sheet, and greater financial flexibility, we are in a better position to execute on our growth objectives. We expect to deliver strong industry leading as we continue to reap the benefits of our previously completed automation projects.
We have a highly efficient, vertically integrated a low cost operation with a wide range portfolio and in demand products. These positions as for success as the recovery continues. For Tecnoglass in 2020 has been a milestone year on many fronts so far as we plan to continue driving additional value in our business in the years ahead.
I will now turn the call over to Chris to provide additional details on our backlog.
Christian T. Daes -- Chief Operating Officer and Director
Thank you Jose Manuel. Moving to our backlog on slide five. Our third quarter results reflect the continued recovery in the U.S. an overall pent up demand for our best-in-class architecture class products. During the third quarter, we continue to broaden our customer relationships and strengthen our presence in new markets across an increasingly diversified footprint, allowing us to achieve growth in a complex environment.
At the end of the quarter, backlog remained strong at $536 million, up 1% year-over-year with 88% of that backlog represented by our business in the U.S. It is important to reinforce several factors. Our actual commercial work, which includes all non-residential project types is approximately one-third of our backlog. The majority are roughly two-thirds of our backlog is residential related. These mainly consist of medium rise and high rise multifamily projects.
On the other hand, single family housing is under represented in our backlog. This is because of the shorter term nature of those orders. And therefore, I will point out that a significant portion of our growth trajectory is not getting fully capture in backlog like it was several years ago. These will continue to influence the relationship between backlog and forward revenue given our increasing mix of revenue from single family housing end markets.
Our U.S. expansion continues to drive high margins in our business as we operate across an increasing number of highly attractive and resilient markets. This includes the Gulf Coast, an area that we most certainly gain increasing appreciation for the protection that our impact resistant windows provide after experiencing a record number of Hurricane landfalls this year.
Today, we have had no material project cancellations in our backlog even during this pandemic. That said the rapid execution of backlog invoicing during the third quarter was faster than the replacement rate. This created a temporary air pocket before our pipeline of pent-up demand start to repopulate backlog. We are having many conversations with customers and borrowing activity remains very active. The ABI continue to grease off its low point earlier this year. The September ABI improved to 47 from just for 40 last month, reaching seven month high since the pandemic began.
As given more exciting point, the ABI's multifamily sub-index increased to 54 in September, which supports the favorable trends that we are seeing in the two-thirds of our backlog, which is starting to multifamily residential. Most of the positive trend occurred in the southeast where we enjoy our strongest markets positions. Additionally, recent data from Ivy's wars, yes, that U.S. glass and glazing contractual industry revenue is expected to increase at an annualized rate of 2% over the next five years to $14 billion following a decrease of 14% in 2020.
For Tecnoglass, the majority of our world market growth in recent years reflects our effort to use established position in the southeast to expand into other U.S. markets, through our enduring commitment to innovation, reputation, quality and service. This effort continues, we are confident in our ability to further grow our business through a combination of underline market improvements and discipline market share gains. Beyond our regular success in executing our projects in backlog, another important drive in of the Tecnoglass story is a rapid expansion into the U.S. housing market, which I will detail further on slide six.
Our single family residential operation is exceeding our expectations since we entered this market several years ago. Today, this business accounts for nearly a fifth of our US revenue compared to only 3% in 2017. And as we look at the current environment, single family macroeconomic tailwinds are exceptionally strong, evidence by double-digit housing start and existing home sales grow in recent months, lower supply and interest rate near all time lows. These sets a sturdy foundation for continue share gains through new products and solid execution.
Last quarter, we discuss additional steps that we have taken in recent months to expand our single-family business beyond South Florida into other market in Central Florida and the Florida Panhandle. This expansion is on track and clearly benefiting our results as we experienced single-family revenue growth of 20% sequentially since quarter to 2020. Additionally, an increase in single-family product mix provides us with greater manufacturing revenue which bodes well for our margins and cash flow as this business carries a lot shorter cash cycle.
As an important point, our single-family portfolio of mainly integrated system windows, are best suited for hurricane prone coastal markets. We have largely grown by selling our products to contractors who primarily do renovation of grades or build high-end custom homes in Florida. New single family residential construction, particularly with a large scale production builders has been largely on top for us.
Therefore, we are very excited to have recently introduced a new product line called multi-max. That includes several models for homebuilders. These should help us generate additional organic growth by significantly expanding our addressable markets to a wider target market. We are pleased with this strengthening our business and remain poised to capitalize on a strengthening recovery in the U.S.
I will now turn the call over to Santiago to discuss our financial results and outlook.
Santiago Giraldo -- Chief Financial Officer
Thank you, Christian. I will start by discussing our financial highlights for the quarter on slide number eight. As Christian mentioned we are extremely pleased with our outstanding results during the third quarter of 2020. We improve many metrics to the highest levels in our company's history. These include record gross profit, adjusted EBITDA, and operating cash flow, driven by the focus execution of our team to unlock value to our vertically integrated structural advantages.\
Looking at our top line, U.S. revenues for the quarter were $95.7 million, or 93% of our revenue, compared to $92.8 million or 86% of our revenues in the prior year quarter. These represented a 3.1% increase year-over-year in 21% sequential growth compared to the second quarter, reflecting a strong us recovery. Growth in our single-family residential business outpaced growth in the rest of our business. We were pleased to see supportive conditions in all of our end markets.
Our strong performance in the U.S. has been the primary driver of our results, and help early upset delayed activity and many customer job sites in Colombia and other Latin American markets, which still remain in the early stages of recovery due to the pandemic. Looking at the drivers of adjusted EBITDA on slide number nine. We continue to generate benefits from our prior high return initiatives to improve our cost structure and increase efficiencies.
Adjusted EBITDA in the quarter increased to $28.5 million, compared to $24 million in the prior year quarter. Adjusted EBITDA margin of 27.5% reflects an impressive 550 basis point improvement compared to the third quarter of 2019, a 580 basis point improvement in gross margin to 38.8% more than offset the impact of lower revenues. The improvement in gross margin was mainly related to lower raw material costs, and greater operating efficiencies from prior automation initiatives in a higher mix of revenue from manufacturing activity versus installation activity.
The slight reduction in SG&A dollars was due to lower variable expenses related to shipping, commissions, and other personal expenses as well as tight cost controls. As a percentage of sales SG&A was unfavorable due to lower revenues. A significant margin improvement in 2020 is a testament to the prudent investments in our business over the past several years to improve efficiencies, and produce the highest quality products for our customers. This is farther supported by our dedication to quality and innovation, which we are able to achieve in multiple areas of our vertically integrated platform.
Looking at our group balance sheet, and leverage profile on slide number 10. It has been a long-standing goal for us to improve the terms of our debt. And we were very pleased to announce earlier this week, a new $300 million senior secured credit facility. This consists of a $250 million delayed draw term loan and a $50 million committed revolving credit facility. Our maturity schedule was extended by three years to 2025 compared to a weighted average of 2022 for our previous facilities. The new facility has an initial interest rate of LIBOR plus a spread of 3%.
Beginning in April of 2021, the spread will be based on our prevailing leverage ratio. We therefore expect the spread of LIBOR to decrease to a level of 2.75% in April, in accordance with our credit agreement. This will represent an approximately 400 basis point reduction from our weighted average interest rate of 7.4% previously. Through this new facility, we intend to pay down all other existing indebtedness, starting with our previous facilities and lines of credit.
Our existing 210 million of senior notes, which bear an interest of 8.2%, will be redeemed at the end of January of 2021 upon a step down redemption price. Following the pay down of previous facilities and redemption of the notes, we will significantly reduce our immunization schedule and cash interest expense. We estimate aggregate savings will be approximately $11 million per year.
That recapitalization of our debt structure will significantly enhance our financial flexibility to execute on our growth objectives. We are grateful that our consumption of mostly U.S. and European lenders have recognized our strong track record of growth and cash generation as a U.S. focused company. As I mentioned, the terms of the deal reflect this fact, and are comparable to or better than many similar sized publicly traded U.S. companies.
During the third quarter, we generated record cash flow from operations of 26.2 million, bringing our year to date to approximately 51 million. This reflects our aggressive cash management tight cost controls, working capital improvements and automation benefits with topics during the quarter largely limited to maintenance spend. In turn, we farther the leverage our balance sheet to end the third quarter we are very conservative net leverage ratio of 1.9 times net debt to LTM adjusted EBITDA.
From a capital allocation perspective, we remain committed to maintaining our defensible balance sheet investing in value enhancing opportunities and returning a portion of capital to shareholders through our tax dividends. Moving to our outlook on slide number 12. As we move into the month of October, single family residential continue to represent a growing share of our revenues and is supported by strong trends, increasing home sales, and single family housing starts. Based on our current invoicing, schedule, and underlying market demand, we are pleased to provide a full year 2020 adjusted EBITDA outlook of 95 million to 100 million, implying year over year growth of 6% at the midpoint of the range.
This outlook also implies roughly 18% growth in the fourth quarter of 2020 adjusted EBITDA on revenues comparable to the prior year quarter. We expect to have a higher mix of product versus installation revenue. Furthermore, we continue to expect the U.S. to represent a significant majority of our growth through year end, led by residential with stronger demand in the U.S. are expected to offset this lower recovery, you know Latin American markets.
Given sustainable benefits related to our automation initiatives, a higher mix of manufacturing revenue and weak local currency for the rest of the year. We expect our adjusted EBITDA margin for the fourth quarter of 2020 to be higher compared to the prior year quarter. Are they lower sequentially compared to the quite exceptional level in the third quarter of 2020.
In regards to gross margin, as our markets and raw materials cost satellites over the next several quarters, with gross margins to trend back toward a more normalized level in the mid 30s range. These normalized margin is slightly higher than our previously communicated low to mid-30s range due in part to our previous capex investment in automation initiatives. We are very excited about our success so far in 2020, considering the unprecedented circumstances of this year.
Moving forward, the momentum in our business is positive. We expect to drive additional market share gains through the continued expansion of our business. And we are working closely with our customers to execute on our backlog, and invoice single family orders across our footprint. Our focus on attractive new project opportunities should allow us to continue gaining share through the recovery. Our innovative product portfolio, growing industry relationships, and structural competitive advantages provide us with the right foundation to continue growing faster than our end markets to 2021 and beyond.
With that, we will be happy to answer your questions. Operator, please open the line for questions.
Questions and Answers:
Operator
Thank you. At this time, we'll now be conducting a question-and-answer session. [Operator Instructions] And our first question is coming from the line of Mike Shlisky with Colliers Securities. Please proceed with your questions.
Mike Shlisky -- Colliers Securities -- Analyst
Good morning, gentlemen.
Jose M. Daes -- Chief Executive Officer and Director
Good morning, Mike.
Mike Shlisky -- Colliers Securities -- Analyst
I'm glad to see-good morning. My glad to see you're finally getting some credit for the fact that your business is essentially a U.S. company. I'm glad it's finally showing up in your actual lending agreement. I wanted to ask just a couple of details on that agreement. It doesn't seem like you're going to see any kind of EBITDA slowdown anytime soon. So you'll still be generating some decent free cash. Do you have any plans to repay this deal early at any point? And are you restricted from any debt pay down for the first few quarters, or a couple of years or so?
Christian T. Daes -- Chief Operating Officer and Director
Thanks. Well, first of all, it is definitely encouraging to see how the deal was underwritten. I think, as you mentioned, one of the key factors in the financing was to see this company as a U.S. based company, in the sense that our exposure is now 95% into the U.S. market. And clearly, that is showing, based on how resilient that market has been basically, vis-a-vis some other markets in LatAm, which now account for very little of what we do. So that was a fundamental part of being able to get this deal done in the terms that we were able to get it done. So that was very encouraging.
As far as cash pay down or prepayments, we have flexibility to do so. So as we move forward, and the company continues to generate a healthy amount of cash flow, if we see that from a capital allocation, that's what makes best sense, we are able to do so. So we don't have any prepayment penalties there to speak off. So we'll manage our cash flow accordingly. And if it makes sense, to prepay some of this debt ahead of time, we will.
The nice thing is that, the way that the credit agreement was negotiated, we do have flexibility on the amortization schedule, based on amortizing at 5% of the capital for the first three years and then 7.5% percent for years four and five. So we do have ample flexibility. But if we continue to generate this healthy amount of cash flow, we'll go ahead and use that accordingly.
Mike Shlisky -- Colliers Securities -- Analyst
Got it. Let me move on to a different topic, I want to ask about the present dynamics in the industry in the third quarter and maybe in the start of the fourth quarter here. No, it sounds like not everyone's doing quite as well as Tecnoglass these days. I'm curious if you've seen any sharp elbows when it comes to bidding on anything new recently.
Christian T. Daes -- Chief Operating Officer and Director
I'll let Jose take that.
Jose M. Daes -- Chief Executive Officer and Director
Yes, Malaysia, we have been quoting tons and tons of new jobs. And previously, delayed jobs became, especially mid-rise and low-rise. The encouraging thing is that, the large inventory that there was in high-rises has been selling really fast. And now all developers are calling to get quotes for high-rises too.
Because through the epidemic, people found out that they could work from home and is much nicer to be in a home in Florida, with better weather and sunny skies than anywhere in the north of the US, so we're getting a lot of migrants and shells, skyrocketing of condos and houses. So we're very happy, we're very pleased and the amount of quoting and the amount of jobs are closing is very encouraging.
Mike Shlisky -- Colliers Securities -- Analyst
Okay. Thanks for that. And maybe one last one for me. It wasn't really mentioned. And maybe it's not worth mentioning at this point. But can you update us on the impact of COVID-19 as well as in your, in your actual facility? Anything you should be aware of there?
Jose M. Daes -- Chief Executive Officer and Director
Well, I'm in charge of operations. And we haven't had many cases in the last two months, probably five or six. We have over 5,000 employees. And the situation in CDs on the controller, as a matter of fact, we have one people die every two days in balance, and probably less than 100 cases, a day when we used to have back in June and July, above 1,000 cases a day. So is pretty much under control. He has been there for the last three months. And we hope that we continue to be on the same path.
Mike Shlisky -- Colliers Securities -- Analyst
Well, great, that's great news. I appreciate the color then. I'll pass along. Thank you.
Jose M. Daes -- Chief Executive Officer and Director
Thanks, Mike.
Operator
The next question is from the line of Tim Wojs with Baird. Please proceed with your question.
Tim Wojs -- Baird -- Analyst
Hey, gentlemen, good morning. Nice job in the quarter and debt agreement. Maybe just a two part question. First on residential, just to builder products that you're introducing here. I mean, what are the what are kind of the operating things you need to do to go out and sell that product? And you need to sign builders to get that that product kind of going? And is that something that can meaningfully help the residential business as you look at 2021? Or is that more of a 2022 type opportunity?
Jose M. Daes -- Chief Executive Officer and Director
No, opportunity even now. We have many requests from developers do track homes and that is a very, very low price product that we did not have in our portfolio. So we've developed the product in the last nine months. We tested it, and then we got it out. And as soon as we got it out, we've been getting no requests, we have sold a few jobs already with that product is an unbelievable approach is much better than the competition. And the same price are lower in most cases.
Tim Wojs -- Baird -- Analyst
Okay. Okay. And then I guess on your kind of existing are in our business on the residential side, one of your peers spoke about, I think 20% order rates in Florida this quarter. Are you seeing kind of a similar level of order activity? And would you expect that to kind of convert over the next couple of quarters?
Jose M. Daes -- Chief Executive Officer and Director
Yes. We do we do. We're growing. I mean, we are new in the business and we're growing and everybody's going. I see our competition is doing better because there is a lot of movement into new housing in Florida. I mean, it's really encouraging. And we're penetrating the market. We are growing with our own existing clients and getting new clients, which is why we keep going and going.
Tim Wojs -- Baird -- Analyst
Okay, OK. And then and then maybe just on free cash flow, you've had really great performance the last couple quarters. As you look at 21 and incorporate the debt refinancing savings, is there a way to think about what kind of a normalized free cash flow number could look like going forward?
Santiago Giraldo -- Chief Financial Officer
We will basically assess that team as we close the year because we'll have much better visibility on what working capital will look like. And what growth rate we can achieve next year is really going to depend on that from a capex perspective, we don't anticipate to see a high capex number based on the fact that the automation initiatives have been completed. If we see other opportunities to further optimize, then we might have some capex in 2021, but nothing like you saw last year, for instance. So my expectation is that we will continue generating free cash flow.
I mean, I couldn't talk about the level that we would expect on a normalized basis, without really kind of understanding what things look like. We called it with the election out of the way and everything else, because a key variable to that is going to be working capital, right.
So the nice thing is that the more that we get into residential, the better that we cash flow, because residential lease carries a much harder cash cycle, right? I mean, he's a spot business where you get paid right away, as opposed to having retainage or other things. So the expectation is to continue the trend. I mean, I don't see any reason as to why not. I'll give you further clarity and more detail when we report next call.
Tim Wojs -- Baird -- Analyst
Okay, OK, that's helpful. Good luck on the rest of the year. And we'll see you next week.
Jose M. Daes -- Chief Executive Officer and Director
All right, thanks.
Operator
The next question is from the line of Josh Wilson with Raymond James. Please proceed with your questions.
Josh Wilson -- Raymond James -- Analyst
Thanks. Good morning and congrats on the quarter.
Jose M. Daes -- Chief Executive Officer and Director
Good morning Josh.
Josh Wilson -- Raymond James -- Analyst
First question for me, could you give us a sense of how much of your backlog is for 2022?
Jose M. Daes -- Chief Executive Officer and Director
Typically, the way it works, Josh, the back of the envelope is that two-thirds of the backlog gets executed within the next 12 months and the remaining part of the backlog goes into the back end of 18 months, so from month 12 to 18 and that kind of back of the envelope. And then it's also important to note that the more that we get into residential, the more unrepresented that the sales are in the backlog, because you're not accounting for all of that residential, single family residential activity that is not captured there.
So you know, for for modeling purposes or whatnot, you'll have to account for that. But on the residential on the commercial side, the back of the envelope calculation is two-thirds within 12 months, and then one-third from 12 to four months -- 12 to 18.
Josh Wilson -- Raymond James -- Analyst
Okay, I want to make sure there were no changes there. And then as it relates to your joint venture, we saw that you went ahead and made the land transfer. Is that an indication that the plans to begin building the plant are back online and you and Saint-Gobain have increased confidence in the outlook to go ahead and proceed there or is it just a step you're still in a holding pattern?
Jose M. Daes -- Chief Executive Officer and Director
The way it's going is that Columbia is sold on glass. Phaedra, and Dino, which we are a part of Phaedra, and Dino today, we're importing a lot of glass in order to supply the demand in Colombia; we still feel it's a very good business. Saint-Gobain thinks the same. We have -- we are continuing to go with permits and we make a decision within the next few months. Obviously, we want to know how all these pandemic will play out finally, make sure that everything is in line. But yes, we are up to today we're moving forward.
Josh Wilson -- Raymond James -- Analyst
Got it. And then one of your competitors talked about labor availability issues, both in the factory and out in the field. Can you talk about to what extent that's having any throttling effect on your production or installations?
Jose M. Daes -- Chief Executive Officer and Director
No, in Colombia, we have we had higher unemployment for a long time and Barranca we could grow to double or triple the size and still be not labor to hire. So, we don't have that problem. Installation, we do very little installation in the U.S. through GMP, and we're doing fine. And the rest of it, we sell to installers that they have their own crews and personnel. So, we don't see that happening to us at this moment.
Josh Wilson -- Raymond James -- Analyst
Got it. Good luck.
Jose M. Daes -- Chief Executive Officer and Director
Thanks Chuck.
Operator
The question comes from the line of Alex Rygiel with B. Riley FBR. Please proceed with your question.
Alex Rygiel -- B. Riley FBR -- Analyst
Thank you. And really nice quarter gentlemen.
Jose M. Daes -- Chief Executive Officer and Director
Thanks Alex.
Alex Rygiel -- B. Riley FBR -- Analyst
Looking at 2021 backlog is up a little bit, Resi should grow nicely. So does low to mid single digit revenue growth sound achievable in 2021?
Jose M. Daes -- Chief Executive Officer and Director
Yes, Rygiel. As I was saying earlier, we like to have as much clarity as possible before we kind of start talking about guidance for, for 2021, but that's certainly achievable, especially with the growth that you heard from OCA and where we expect single family to continue to do and over the next few quarters. So, yes.
Alex Rygiel -- B. Riley FBR -- Analyst
And then you made some comments about gross margins in the mid 30s. 2020 is going to come in closer to 37%. So are you expecting 2021 gross margins to be flat to down a little bit? And if so, I suspect it's because of a shifted mix, but if you could clarify that.
Jose M. Daes -- Chief Executive Officer and Director
Yeah. So basically there were a couple of moving parts here in Q3 as was the case in Q4. raw materials, obviously, you know, aluminum was still much cheaper at the beginning of the quarter and now its up to par to pre COVID levels. So we've got a little bit of benefit from that. The quarter was also benefited from mix, as you just heard Christian, we're doing much lower installation in the U.S. and have done for the next two quarters, but a lot of other things are structural.
So, we increased our kind of guidance on gross margin from last quarter to this quarter. Based on the fact that we're seeing why these structural related to efficiencies related to the automation that was put in place. So I think maybe 30s could be the run rate. It could be maybe another point here on there, but to be conservative, I think that absent a giving quarter with a higher mix of installation, that should be a normalized run rate 35%, 36%.
Alex Rygiel -- B. Riley FBR -- Analyst
And then lastly, can you expand upon plans to take the residential product outside of Florida?
Jose M. Daes -- Chief Executive Officer and Director
Yes we do. Now that hurricane Harvey, Louisiana and Texas we have a loan requests and we have made a couple of visits. And we are-in a way of establishing and new distributors and dealerships all over the gold coast and all of the East coast where all the way down to Jacksonville and we're plugged to go up to South and North Carolina.
Alex Rygiel -- B. Riley FBR -- Analyst
That's excellent. Thank you very much.
Jose M. Daes -- Chief Executive Officer and Director
Thanks Alex.
Operator
My next question is from the line of William Gellison with DA Davidson. Please proceed with your questions.
William Gellison -- DA Davidson -- Analyst
Good morning, gentlemen,
Jose M. Daes -- Chief Executive Officer and Director
Good morning.
William Gellison -- DA Davidson -- Analyst
Chris, I have a question for you about the backlog mix. I'm wondering, are you seeing a pretty significant shift away from office building projects toward those mid to high rise condominiums you're talking about? And also are the types of glass products installed different between those two project types?
Jose M. Daes -- Chief Executive Officer and Director
Yes. We have seen office buildings, hotels which have the hardest hit due the pandemic and we have seen a surge in the mid lies versus ratio lot of rents and the graph since the cold change took effect, and now they require a better sharing provision for the environment. The glass is almost the same now in residential and commercial. So we're very happy about that. And we have the best product in the market for mirror life. I mean, we are the preferred supplier. So we do it really good. I mean, we're very, very excited and happy.
William Gellison -- DA Davidson -- Analyst
Excellent and you mentioned also in the call that your products are well suited toward hurricane prone markets. I'm wondering, when you look at your competitors, are they offering a similar type glass that's specific to Hurricane prone buildings? Or is that a fairly specialized niche that you guys alone occupy?
Rodny Nacier -- Investor Relations
No, no, they offer a similar glass, everybody offers a similar glass, from a different supplier, we offer our own glass because we make everything, they offer from other suppliers that do make a glass and soft coat class they're similar, but the glass is not the only thing I mean, that affects a window. The performance of the glass is similar. But then you have the pressures of the window, I mean, the aluminum and the whole system, and the capacity to retain water, and noise and our window performance a much better than most of the companies have.
William Gellison -- DA Davidson -- Analyst
Okay, great. Thank you. And then, visiting Santiago has a question for you about free cash flow. So it's nice to see that it's been pretty strong so far this year. And as you guys pay down debt and get to a comfortable leverage level, what are your focuses with reinvesting that cash flow into the business so that it can compound into more free cash flow next year?
Rodny Nacier -- Investor Relations
Absolutely, I think though, that from a capital allocation perspective, he was very important for us to get to a very comfortable leverage position. And I think being sub two times is getting us where we want to be, I think now we're going to have to kind of find opportunities, right? I mean, our install capacity is at a comfortable level after having completed the automation efforts last year, right. So we have ample capacity to grow.
So depending on what comes next. And how things shape up, that is one of our focuses either to, to continue delivering the balance sheet or to reinvest in opportunities that are going to add value to the shareholders. So more to come, I think there are there will be opportunities to, to kind of reinvent the free cash flow that you're talking about.
William Gellison -- DA Davidson -- Analyst
That's helpful. Thank you. And that's all I have. Thank you, gentlemen, for answering my questions.
Rodny Nacier -- Investor Relations
Thanks.
William Gellison -- DA Davidson -- Analyst
Thank you.
Operator
Thank you. At this time, we've reached the end of our question-and-answer session. I'll turn the call over to Jose M. Daes for closing remarks.
William Gellison -- DA Davidson -- Analyst
Well. Our reputation for excellence continues to strengthen in the no market with more customers and through more products that have been recognized in a meaningful way by our lenders. We truly appreciate this vote of confidence, in the capital markets. Thank you again to everyone on the line for participating in today's call. We appreciate your continued interest in Tecnoglass. And look forward to speak again soon and give you always good and better news.
Operator
[Operator Closing Remarks]
Duration: 49 minutes
Call participants:
Rodny Nacier -- Investor Relations
Jose M. Daes -- Chief Executive Officer and Director
Christian T. Daes -- Chief Operating Officer and Director
Santiago Giraldo -- Chief Financial Officer
Mike Shlisky -- Colliers Securities -- Analyst
Tim Wojs -- Baird -- Analyst
Josh Wilson -- Raymond James -- Analyst
Alex Rygiel -- B. Riley FBR -- Analyst
William Gellison -- DA Davidson -- Analyst
