XPEL, Inc. (XPEL) Q1 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the XPEL Technologies’ First Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host John Nesbett of IMS. Thank you, Mr. Nesbett. You may now begin.

Good morning and welcome to our conference call to discuss XPEL Technologies’ financial results for the 2015 first quarter. On the call today we’ve Ryan Pape, XPEL’s President and Chief Executive Officer who will review the company’s financial results and provide an overview of the business operations and future growth strategies. Independently from his prepared comments, we’ll also take questions from our call participants. I’d like to take a moment to read the safe harbor statement. During the course of this call, we will make certain forward-looking statements regarding XPEL Technologies and its business, which may include but not be limited to anticipated use of proceeds from any capital transactions, expansions into new markets, and execution of the company’s growth strategy. Often but not always forward-looking statements can be identified by the use of words such as planned, expect, scheduled, intends, contemplates, anticipates, believes, proposes or variations of such words or phrases or state that certain actions, events will result may, could, would, might, will be taken, occur or be achieved. Such statements are based on the current expectations of the management of XPEL. The forward-looking events or circumstances discussed in this call may not occur by certain specified dates at all, and could differ materially as a result of known and unknown risks factors and uncertainties affecting the company, performance and acceptance of the company’s products, economic factors, competition, the equity markets generally and other factors beyond the control of XPEL. Although XPEL has attempted to identify important factors that could cause actions, events or results to differ materially from those described in the forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. No forward-looking statement can be guaranteed except as required by applicable securities laws, forward-looking statements speak only as of the date in which they are made and XPEL undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Okay with that done, I will now turn the call over to Ryan Pape. Go ahead, Ryan.

Great John, thanks. So, good morning and welcome to our quarterly earnings call. I hope you've all had a chance to review the first quarter which was released earlier this morning. We delivered solid results for first quarter, strong revenue growth and growth in profitability. We'll take a few minutes and run through the financials and then I'll give an operations update. So for the first quarter we grew revenue 54% to 8.1 million over first quarter of the prior year and that was 7% sequential growth from the fourth quarter of last year. So much of this revenue was really organic growth, we completed the acquisition of Parasol Canada in February but sort of largely because of currency and a unique front end monthly loading of the revenue in Canada there was really a modest impact from the acquisition in the first quarter. So the quarter really reflects our ability to just continue with the organic growth we've had and expand our existing customer base and expand sales to our existing customers. Overall we think that at the signs at where we are if we can drive revenue growth year-over-year in excess of 50% we think that's a great growth rate and so we're very pleased with that number. So our gross margin improved slightly to 35% compared to 34% last year, these are good gross margins, they're consistent with what we've seen and now we expect that if we see the US dollar weaken at all we'll see additional gross margins specifically as a result of our Canadian and European presence. On SG&A expense side we increased to almost 25% of sales 24.9% from 21.5% in the first quarter last year, much like as we've talked about before the increased SG&A reflects our investments in building a much larger business, it's sales and marketing, it's new IT systems. We did have some legal and accounting cost associated with the acquisition and now also in the expense structure for at least part of the first quarter you're consolidating the overall expense structure of the Canadian operation that we acquired. So we're proactively continuing to add to our headcount, I think we added two salespeople this past month alone and as we mentioned before a lot of the hiring that we've done over the past 18-24 months is really sort of catch up from really a skeleton crew years before. So we think we're at a point now where we're really starting to get ahead of our needs both from an employee and systems infrastructure standpoint. So our costs have grown a bit faster than revenue this quarter and certainly in the quarter or two before but we still expect that that increase in the cost structure will moderate in the future. We achieved net income $672,208 or $0.03 per share as compared to net of $459,000 and $0.02 a share in the same period of 2014. Now the first quarter included about $70,000 in acquisition related expenses to finalize the Parasol acquisition. So that was the extent of the one-time costs associated with that acquisition. Our balance sheet remains strong, we think working capital 6.3 million $8 million in shareholders equity, so we continue to have a really good foundation to grow the business. Let we switch to operations, we’re still committed to growing our recognition of our brand and growing our international reach by bringing our products and services closer to the customer and we must have the ability to support customers in key geographies ourselves to maximize the value proposition that we bring to them. And we made excellent progress towards that goal with our operation in the UK and in the Canadian acquisition that we did during the quarter. So our UK facility was our first presence in Europe we’re providing sales, support, distribution and training and it's performing well. If you listen sort of our growth rate domestically, it's driven by maintaining a full pipeline of new customers while we also work with expanding our existing ones. And that pipeline needs to be built and it needs to remain full in order to have a consistent growth. So we've been developing this pipeline in the UK for the past six months or so and now we actually have trainings booked already in to September, so that’s a really good sign of what we’re doing is working there. Relative to Europe, we plan to further develop the market and we will have an additional corporate presence in Continental Europe this year which will bring us physically closer to more customers and bring the company important cultural knowledge and language skills which you just can't get only in the UK. So we’re excited about that and it really shows the commitment to that strategy. So as I mentioned during the first quarter we acquired Parasol Canada who was a distributor of paint protection, film and window tint products in Canada, there are a largest customer in Canada. That integration is really progressing well and despite us having a small team we've implemented a really powerful ERP system in the past 12 months and this has allowed us to manage the added complexity of this international operations better than a lot of companies our size. And it's not a -- that type of implementation is not easy, it certainly not an expensive but we think it set us up to do some really amazing things going forward internally and then by extension to our customers as well. Canada is a tremendously important market, represents a lot of opportunity for growth so we have a dedicated sales force in what is the largest outside U.S. market for us at this point we've retained all of the Parasol Canada employees and we've already added to the total Canadian headcount since the acquisition closed and we’ll continue to do so as we need to. So the acquisition is great for us on many levels. We get to own and control our channel which de-risks the current we've had, we get to bring our operational and product knowledge directly to the customers in Canada which creates more value and a stickier relationship that we like to have. We get to create more opportunity for the Canadian employees to help us globally, while they are there today they may not be there tomorrow, we may need them somewhere else. And we get to decide what additional products are delivered through the channel. And that will become an important part of our strategy and that’s not something you can always dictate in a traditional distribution model. So the weakness of the Canadian dollar has reduced the accretive nature of the acquisition in the near term. But going forward we will recapture substantial margin that was previously lost to distribution either through price increases in Canada or through the appreciation of the Canadian dollar. So while we’re very happy with the acquisition and happy where we sit we feel like it's really in Canada and relative to the impact to the company to the bottom-line it's really almost all upside from here and we’re seeing a great growth rate in Canada exactly what we want. We continue to fine tune our operations elsewhere in the world and in China specifically looking for the best options to grow. As we mentioned on a previous call at the end of last year we removed several of our underperforming distributors in China, as China is an important market we had products in the country since 2009 and we believe that reducing the number of distributors is the right strategy for us even though it's temporarily reduce sales. Fewer sources of the product in China will ultimately create more value and give us more control as it does in other places and as it does in Canada even virtue of the acquisition that we've done. So our sales in China are not back to their prior level before we rationalize the distribution but we’re confident that they will be this year. We’re continuing to evolve the business model and as some of you know originally we started as a software company and the software component of the business is a key element of our overall value proposition and we subsequently many years back entered into the film business we now have the best film in the market and but customers can still buy the software and the film independently, but increasingly we’re developing a strategy where that software and the film will be bundled together and in Europe and Canada specifically we've moved to a more aggressive model to bundle those and this really helps us maximize our competitive advantage, we'll continue to do more of that going forward. So we've made really continued measurable progress growing the company in the first quarter. We're seeing that the brand awareness continued to grow, we're seeing success with the development of the international markets and really of course all of our channels. So we think we're positioned well for growth, very much consistent with the strategies that we've had to keep that going for the rest of the year. So I want to thank all our employees for their hard work, the integration of an operation like we did in Canada's a lot of work and we spent a lot of long hours and so we owe a lot to them to getting that done. So at this point I'll open it for some questions.

Thank you. We'll now be conducting a question and answer session [Operator Instructions]. Thank you, our first question is from the line of [Adam Goldstein] a private investor; please proceed with your question.

Hi Ryan, first of all I'd just like to complement you on your introductory remarks that you really I thought did a very good job of covering a lot of material, in fact a lot of my questions you answered so that was very useful. So one question I have is on the Parasol acquisition, can you give us an idea of what Parasol's annual revenue was and what percentage of that revenue was XPEL product versus non XPEL product?

Sure, so generally we do not break out the revenue by geography or by country mainly for competitive reasons because a lot of people would like to know where we're strong and where we're weak. So I can't, I can't give a Canadian total sales number but the majority of the revenue, Parasol's revenue was derived from selling XPEL products, north of 80%.

Okay. And can you give us, may be you can't for competitive reasons but can you give us some idea of the margin they were making and so the incremental margin that XPEL will now capture?

Well generally if you look at that type of distribution business, you'll see a range in the average gross margin of 15 to 30 or 30 plus percent and that depends on exactly what they're selling, the customer mix and pricing, so you know, absent any fluctuation from a currency standpoint they're in that range across different customer set for gross margin.

Well okay, that's actually higher than I would have thought. Okay, so, I've got a few, I'll just ask one more question jump back into the queue. I'm curious now, I'm not terribly clear on which geographies XPEL is now selling direct versus through distribution. Could you walk me through that a bit?

Sure, so obviously we're direct in the US, we're now direct in Canada and in Europe we have the operation in the UK from there we're selling to, directly to customers throughout Europe although there are still a few other distributors servicing different countries in Europe but we're adopting more of a direct model there. Elsewhere outside of those key areas it's still through independent distribution.

[Operator Instructions] The next question is from the line of [indiscernible], please go ahead with your question.

Thanks, good morning. Ryan could you give us an insight on the composition of the end users or end customer base, how it breaks down between say the high end autos and kind of the regular car enthusiasts

Sure, it's a great question. What we look at when we think about the product and what we see is overall paint protection film is still generally doesn't have a lot of awareness with the average consumer and in any given market where locally paint protection film is relatively new we first see adoption at the very high end of the market and we see adoption from the enthusiasts which are those that are really passionate about their vehicle and that spans not just the high end, it's a wider range and then once the market is more developed and there's more awareness and that might be more awareness at the consumer level or more awareness through the local dealership community then we start to see a rounding out of the customer base and a wider distribution between sort of everyday driver which is more mass market and the enthusiast or the high-end.

[Operator Instructions]. Our next question is a follow-up from the line of [indiscernible] with Private Investor. Please go ahead with your question.

So another question I had was, I noticed on the income statement that there is something called exchange differences on translation that maybe reclassified into operations. Could you explain that a bit, what is the nature of that translation?

It's essentially -- happy to provide a more technical answer off line, but it's essentially the translation of the balance sheet of a subsidiary who has a different functional currency than apparent. So in that case our Canadian subsidiary operates in Canadian dollars and obviously we report and operate in U.S. dollars is apparent so that’s the translation of the whole balance sheet from period-to-period to adjust for that and that will kind of go back and forth one way or the other and if so it's a balance sheet change on their equity section is just presented there.

So what I was worried is that it's not the actual operating -- the actual sales that went through, that of course is already taken into account in terms of foreign currency translation it's just the balance sheet translation that’s referring to?

Correct.

I guess my last question would be about what’s going on in China. It's hard for me to understand how reducing the number of distributors which as you said temporarily reduce sales. It's hard for me to understand how that’s a good thing, and unless you are going to a direct model, if you are going to do something in China like you’ve done in Canada and Europe then that would make sense. But I don't understand how it’s beneficial to have just one distributor and to have reduced sales.

So it's a great question and it really the dynamic and the answer to the question is not unique to China at all, it's a global phenomenon. Even was true in the U.S. when we had additional distributors and what tends to happen or what can happen and it was true in Canada as well actually what can happen is when you have multiple distributors that are not geographically restricted or in the geographic territory what we as a supplier want them to do is to go out and acquire new customers and when they do that we grow and they grow and that’s what we want, however there is another incentive for the distributor which is rather than go out an acquire new customers it might be far easier to go acquire market share from another distributor who has already done the hard work of selling the product to begin with. And what that starts is [in fighting] among distribution structure which ends up reducing the margin for both distributors, it likely reduces the selling price of our product in the market which reduces the value -- perceived value of our product. And then ultimately if you have multiple distributors who are now competing with each other to accept they reduced gross margin then they start to lose their enthusiasm to sell the product at all and will focus their efforts on other products whether they are related products or unrelated products because they can generate higher margin from doing it. When you have one distributor or a limited number whatever might be appropriate you can control the message, you can control the -- you can maintain a value proposition and it creates a more stable environment. And there are other geographies where we've had multiple distributors and we've reduced to fewer or to one as it might be and the results are very conclusive that if you can successfully pick the right distributor you get better results when you really double down on them to do the work for you and obviously there is risk there in that if you're going from multiple distributors to one or multiple distributors to fewer if you pick the wrong team and you are going to pay the price, but overall if you can allow them to be handsomely rewarded for the work that they do developing the market -- developing their market then it works out better for you in a long-term.

So can you talk a little about how -- China is now the largest new car market in the world I believe. Can you talk about what penetration either the whole paint protection film field or XPEL has in China versus other markets. I mean I assume it's pretty small

You know it's very small. The penetration in the US still feels very small, China's smaller than that as are a lot of other places. So there's a lot of opportunity there as there is elsewhere to continue to grow the business.

Are you happy with how it's going in China now, or do you still think you need to continue to improve the business there?

Well, I think that our business needs to be improved in a lot of ways in a lot of places. I think we're rarely sort of happy with the status quo. I think reducing the distribution to create more value and give more incentive to the remaining distributors to work harder is the right move but we have a lot of work to do there to increase sales as we do in a lot of places.

Okay, well, I have one more question, but is there anyone else in the queue?

Yes there is.

Okay, so either I'll jump back or I'll just end my question.

Go ahead with your final question.

You want my final question?

Go ahead.

I was wondering about, you know you mentioned you used to be a software company and now you're bundling. I've never been quite clear on really how valuable, I mean my gut feel, my impression is that the customer relationships and the products of the film are the primary thing that XPEL has going for it. Maybe I'm wrong, maybe the software is more valuable than I realized but what I'm wondering is, I mean there's obviously other software available, people use with your competitors film. Do you really think…

No, it's a great question and you're correct so, having a software platform and really the software is the conduit for the patterns and the patterns are what are cut into the film to make the application of the film possible. And you're correct that all our competitors have the software platform and they have patterns. So the distinction is not the presence or existence of software platform patterns but it's really the quality and the quality matters and it matters in a couple of ways. It matters that the database is complete which says if you're independent installer using our product that you know with confidence that any vehicle that's going to come into your shop will be able to write the pattern for and by extension you'll be able to offer the installation for. If you have a database that's less complete you may have customers come in that you can't service using precut patterns which usually means you're going to decline the business or you're going to do it another way which might be more time consuming. But more important than that is the actual quality of the pattern and how it fits and how that impacts their business. When you think about cutting out a two dimensional piece of film and then having to apply it over a three dimensional shape with compound curves that you see on vehicles today. The design of that pattern is the difference between depending on what you're doing installing that piece one time and getting it done successfully or installing it three times and throwing away two pieces of material and it's the difference in installing that panel in 20 minutes or 40 minutes. So the software, the availability of the software and then the quality of the patterns really drives the fundamental pieces of our customers' business because the alternative is increased labor cost or increased material waste.

So sounds like you think that the software is actually a significant value add, it's not just customer relationships and the film itself.

No, it's a significant value add.

Okay, all right. Well thank you very much.

The next question is from the line of [indiscernible] a private investor, please go ahead with your question.

Hi guys, congratulations on the quarter and great job. Since queue is short I thought I'd ask this question, it has to do with the acquisition of XPEL Canada, I see a few items added to the statement which contractual relationships, customer relationships will non-compete. It seems that that probably was in Canada it just transferred over, I was wondering if that's a category that's going to be phased out or expanded to include US and UK.

What you're speaking of would be the additional rolled up together largely as additional intangible assets on the balance sheet. And that's really a function of the acquisition counting of the acquisition of Canada so working with evaluation team, take the total purchase price paid and then obviously you’ve got your receivables or tangible assets and then the rest of the purchase price is allocated between intangible assets like the customer relationships and other contracts that you mentioned and then the balance would be account for as goodwill on the balance sheet, so you won't see an increase in tangible assets typically in our business as a result of new customer relationships unless we would have acquired those as part of some transaction.

And these numbers will just be eventually dissolved or incorporated into the rest of the standards?

Yes, so there, I mean those which you’ve mentioned which are part of the intangible assets those are amortized over a period of time.

Next question is from the line of [indiscernible] Private Investor. Please proceed with your question.

Hey Ryan, can you provide a breakdown of non-recurring expenses in Q1?

So from a non-recurring expense what would come to mind is principally your thoughts associated with the Canadian acquisition which were about $70,000. Obviously in any month in any period in any year we have other expenses that don't reoccur, but really the only one of note would be the acquisition related expenses.

And can you provide your expectation of Parasol's contribution to EBIT for this year?

So given that we’re not releasing the revenue number for competitive reasons, I can't provide the contribution to EBIT or to the bottom line, but I will say in that we brought a business impart because we thought we could recapture substantial margin, and we can and we will and to the extent that we see appreciation in the Canadian dollar then that contribution should only increase throughout the year.

Our next question is from the line of [indiscernible]. Please proceed with your question.

Hey Ryan I want you to talk about your comment you made earlier on and make sure I followed you right. You mentioned top line growth of above 50% and was that mere looking for forward looking and the way I asked it forward-looking you get into some much more difficult comps going forward, the March quarter of 2014 was a 5.3 million revenue quarter and then you step up to 8.3, 8.4 for the next compared to quarters. So obviously if you can hold up for the full year 2015 of greater than 50% growth rate we’re looking at probably $10 million or $11 million plus quarters going forward. So I wanted to make sure to clarify that.

I think you are looking at it the same way we are which is we know those are big comps and 50% growth on second quarter of last year is a big number but that’s what we’re gearing for and if we can maintain at that 50% number we’re going to be very excited about that and in excess of that is just a bonus.

I think we all be very excited about that, so look forward to that. And then switching gears wanted to ask you about the U.S. listing, you’ve got this XPLT listing which is on the low tier of the OTC market and as you -- I don't know how attuned you are to some of these things but there is some issues with the listing I guess is the best way I would frame it there is some incidences where the XPLT here in the U.S. will trade at a price well divorced from what the DAP listing trades at in Canada, some other issues have cropped up where the shares do not show up on screens and varying databases with my point I am actually dealing with an issue right now with JPMorgan use the XPLT listing as [indiscernible] which obviously isn't, but is disconcerting nonetheless. So wanted to see what your thoughts are. I know I am a long term investor and you are managing the business for the long-term and I think a lot of us are patiently putting our trust in you in terms of an uplifting when the time is right but have you given any thought to maybe at least in the interim up ticking the listing to the next level up in the OTC QX so we can actually see a [bit ask] the U.S. listing and the like?

I think it's a great point and as we said I'm a large shareholder we have a lot of people here that are large shareholders we all recognize the benefit and the need to better listing in the U.S. and so we’re committed to keep moving down that path and I can't provide a timeframe on when that will occur I can tell you that since in the past two months since our year-end we've been focused with all we have on getting the Canadian business integrated fully and we've done that successfully. So there is a time to spend review all the other priorities and where we’re in different projects and work that going forward. I think we all agree and we hear you with that concern and it's something that will be addressed just as soon as it makes sense and that it doesn't come at a point where it makes harder to hit that 50% number we want to hit and we want to be able to do both to continue the momentum we have. But we understand your point.

At this time I'll turn the floor back to management for closing comments.

I want to thank everyone for participating. And we look forward to next quarter's conference call. Thank you.