XPEL, Inc. (XPEL) Q1 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to XPEL Technologies' First Quarter 2018 Earnings Call. [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.

Good morning, and welcome to our conference call to discuss XPEL Technologies' financial results for the 2018 first quarter. On the call today, we have Ryan Pape, XPEL's President and Chief Executive Officer; and Barry Wood, XPEL's Chief Financial Officer, who will provide an overview of the business operations and review the company's financial results. Immediately after the prepared comments, we will take questions from our call participants. Let me take a quick moment to read the safe harbor statement. During the course of this call, we will make certain forward-looking statements regarding XPEL Technologies Corp. and its business, which may include, but not limited to, anticipated use of proceeds from capital transactions, expansion 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 plans, is expected, expects, scheduled, intends, contemplates, anticipates, believes, proposes or variations, including negative variations of such words and phrases or state that certain actions, events or results, may, could, would, might or will be taken, occur or be achieved. Such statements are based on the current expectations of the management of XPEL. The forward-looking statements and circumstances discussed in this call may not occur by certain specified dates or at all and could differ materially as a result of known and unknown risk 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 the actual actions, events or results to differ materially from those described in 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 on which they are made and XPEL undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Okay. With that, I will now turn the call over to Ryan. Go ahead, Ryan.

Thanks, John. Appreciate it. Good morning, everyone. Welcome to our first quarter 2018 call. I think, clearly, Q1 was an outstanding quarter for XPEL. We experienced a record quarter, as I'm sure you're aware, with revenues finishing a little over $25 million, which almost doubled our prior year revenue, and exceeded our previous record, quarterly high of $20 million in revenue, which occurred in Q4 of 2017. So excellent rate there. China represented about 30% of our revenue for the quarter, so this is sold through one primary distributor, but it's important to remember that it represents, in fact, many, many, many hundreds of individual installers who are all bought into the XPEL brand, and all the product that we sell is branded product in-country. So clearly, that's an exciting part of the growth and it's become a significant part of the business. That said, we saw strong growth in virtually all of our regions, with only one growing at less than 30% year-over-year. Canada was up significantly, around 95% year-over-year growth. And while that is inclusive of revenue from the Protex acquisition, that acquisition only contributed a small portion of revenue growth because our Canadian subsidiary already sold the products directly to the franchisees, as we talked about previously. So excluding the net effect of the Protex acquisition, our organic growth rate in Canada was still 80%, think it was 83-plus percent. So that was really exceptional. We had a bit of a timing benefit in terms of some larger sales, but it highlights how well we're doing there. For our XPEL product sales, we combined our U.S. and Canada sales teams for a more integrated approach, very important to how we run the business so I think that's paying off. Europe nearly doubled year-over-year in terms of revenue. We're approaching a $10 million-plus run rate for the European businesses, so we're really excited about the growth, starting to see a return on our investment there. Our team on the ground doing an excellent job, led by Tim Hartt, who we've talked about previously. So that continues to progress very well. In Mexico, we're running our first training class, actually this week, in our Guadalajara facility. And as we know, this important step towards building the type of growth in new markets that we've seen elsewhere, so it's nice to see the first class to be a full class with some backlog there. We're also leveraging our team in the U.S. to help support this. So this is really a key leading indicator of future growth in the country, so important milestone for that business. Looking forward, we would expect the strong revenue growth to continue this year, although I'd expect the rate of year-over-year growth to moderate slightly in the balance of the year, mainly due to strength of the Q1 that we just had and the fact that Q1 of the prior year of '17 was a weak quarter. So it was a relatively easy comp. But that said, we're set up to have a very strong year at this point with continued significant revenue momentum like what we've seen historically over the past many quarters. So we're excited about that. Along with strong revenue growth, pleased with our gross margin performance in the quarter. Gross margin finished at 29.7%, which is a marked improvement over the last few quarters. Margin improvement can be attributed to a combination of price increases, contract adjustments for some larger customers we talked about last year that we introduced during the quarter as well as favorable impacts for some of the changes in restructuring and -- we've talked about in the past two quarters and effective management of some of the other costs that contribute to our cost of goods sold. So we're pleased with that, and we're very focused on that. So I think what makes the gross margin improvement even more encouraging is the fact that we still have a mix of lower-margin distribution sales, yet we've grown through that in the overall mix. So it really speaks to the effectiveness of those margin enhancement initiatives. So while we make good progress here in gross margin, this is really a top focus for us and will continue to be for the foreseeable future. Strong gross margin, coupled with operating expense leverage during the quarter, resulted in EBITDA margin of over 12%, 12.2%, or EBITDA of $3.1 million and net income of $2 million, so clearly, clearly outstanding there. We've made and continue to make investments to support the businesses as it grows and add our competencies, supply chain, finance, marketing and to make investments in new markets like the $1 million annual SG&A commitment to Europe that we've done, that we did not have previously. But I think what this shows and what this quarter really shows is that these costs do not ultimately scale with revenue and a significant revenue critical mass, we can blow through that cost structure. So we've known that. We've talked about that. It's nice to see a quarter where that happens in a demonstrable way, and I think revenue growth, sort of topping where we expected it to be, really just accelerates that point in time, from the future to now, in terms of growing through that cost structure. So that's a good thing. As we discussed in our previous quarter's call, we launched our next generation of the core product, ULTIMATE Plus, in April. So that's early, but that's being well received, doing very well. And then we also just recently announced XPEL PRIME XR PLUS window film. It's a truly industry-leading product that complements our offering. And it's one of the highest-performing films in the industry in terms of heat rejection, UV protection, so this will be a really nice complement as we focus on expanding the window film business. Looking forward, we have a very busy year planned. We're active on the acquisition front in North America, looking at additional installation facilities, and we're always looking for other important strategic opportunities. So we intend to stay focused on that, run our plan on that and be active. And then finally, we will be submitting to shareholders at our Annual Meeting a name change of the company, from XPEL Technologies Corp. to XPEL Inc. We think this is a very important change to help focus on the XPEL brand. And we are seen globally just as XPEL, that's how we're seeing it perceived. So after the shareholders approve that in June, we will make that change official. But for me, that's a very important and significant change as part of our global branding and to drive focus to that. So with that, I will turn the call over to Barry to run through the numbers in a bit more detail, and then we will take questions. Barry, go ahead.

Thanks, Ryan, and good morning, everyone. For the quarter, revenues increased 99.5% to $25.2 million, and we saw strong growth across all of our product lines. And leading the way there, it was growth in our PPF product segment, which grew about 117% versus prior year. Our window film segment grew 47%, while our film installation segment grew a little, right at about 60.7%. And same-store sales within our film installation segment grew 34%. As Ryan said, we saw strong revenue growth across all of our regions in which we operate. Gross margin for the quarter grew almost 125% to $8.4 million, an increase, as a percent of sales, to 29.7% versus the prior year quarter of 26.4%. And as you'll likely recall, our gross margin percentage for Q3 2017 and Q4 2017 was 23.8% and 24.8%, respectively. And while those quarters did have some onetime anomalies that impacted the gross margin, we did see nice improvements in our trend resulting from price increases in certain targeted channels and realization of the benefits from our reorganization and SKU consolidation initiatives, which we expected those, but it's always nice to see expectations become reality. Finally, we saw a nice improvement in our warranty expense versus prior year quarter, which also contributed nicely to our margins. SG&A expense for the quarter increased 47.7% versus prior quarter and declined as a percent of revenue to 19.4% versus 26.3% in the prior year quarter. The increase in SG&A, again, related mainly to increases in personnel, occupancy, sales and marketing and IT-related costs. Clearly though, we're seeing strong operating leverage and I would expect the SG&A growth to slow as we move forward into the year. EBITDA increased $2.7 million to $3.1 million versus prior year quarter, reflecting tremendously favorable impacts from our revenue growth, coupled with the improved gross margin performance and the operating leverage we achieved. Net income for the quarter was approximately $2 million compared with a slight loss in the prior year quarter. And I'll point out that our Q1 net income exceeded our net income for all of 2017, which is an encouraging achievement. Cash flow from operations for the quarter was $687,000, which was a significant improvement versus the prior quarter where we actually used cash for operations in the amount of $1.1 million, which was primarily related to our growth in inventory during that time. Our financial position remains very strong, highlighted by our low debt-to-equity ratio, approximately 23% as of March 31. And clearly, by all measurements, Q1 was a great quarter for us, but, and Ryan alluded to this earlier, this only means that we have to keep our foot on the accelerator and not let up as we move forward. And we look forward to continuing to build on this strong momentum in Q2 and beyond. And with that, operator, we'll now open the call up for questions.

[Operator Instructions]. Our first question comes from the line of Adam Goldstein, a Private Investor.

I guess, my first question is, on the gross margin, you've got 29.7%, which is a huge improvement from where it's been. Is 29.7% a reasonable expectation going forward or would you say that's higher than you'd expect going forward?

Adam, good to hear from you. Thanks for the question. Yes, I don't -- there's nothing in this quarter which we see as an aberration that says gross margin or anything else was impacted in an abnormal way. That wouldn't sort of be reproducible going forward. So the actual gross margin in any period is a function of a lot of things that are happening, currency, mix, et cetera. But we've done a lot of work to start moving that number in the right direction, and we have in the first quarter. And there's nothing that happened in the first quarter that is an aberration that made that happen. So we think we'll continue on a positive trend there going forward.

All right. That's fabulous news. Second is, you said China was 30% of revenue for the quarter. If I heard that correct, that's rather shocking. I mean, what was China, say, two years ago as a percentage? And what's happening there? Can you just give us any more color here?

Yes. So I think the trend there is, throughout last year in 2017, we started to see the business really accelerate. So I think maybe in Q2 or Q3, we were at over 10% and then trending up. And I think we said for Q4, it was very -- varies by 25%. That's what I thought. So we've seen that happening and that's a function of a lot of things. We've been in the market there with our partner now for a while. We've put a lot of effort to help them, to help build the value proposition work we've done with supply chain inventory and various things, has increased the amount of product that we have available for the market, so that's helped accelerate the growth. And then obviously, the automotive business and the economy, in general, is doing fairly well, and we're still talking about a country with very minuscule penetration of these products. But that's really true for us everywhere. So it's really a culmination of things, some of which have been in the works for a long time, some of which have really kind of come to fruition in the past year. And it's just helped our partner there scale up that business, and that's happened pretty dramatically in the past three quarters, and we're seeing the benefit of that now. And I think it -- I don't think it means that the revenue there grows at the same rate all the time. I think we've seen a period to get to a new baseline revenue of a lot of growth. So it's not like this is going to come to totally dominate the business based on that growth, but it's exciting. And while you have that, what is technically a concentration in terms of we're selling this product to one partner that's disturbing in-country because, obviously, we're not doing it directly, now this represents hundreds and hundreds of customers using the product. And they're very bought into the XPEL brand. The facilities are branded as XPEL. It's very impressive and it builds a, I think, a really strong footprint for continued growth there and for continued introduction of new products as we have new products. So I'm just really, really pleased with it.

[Operator Instructions]. Our next question comes from the line of Jason Hirschman, a Private Investor.

Got a few questions for you today. ULTIMATE Plus, you mentioned it was released in April 2018. Holding all other factors equal, is it reasonable to expect maybe a little bit of margin expansion because of that ULTIMATE Plus taking over from ULTIMATE?

Yes, we'll see some of that. We have a little bit of effect of that in the quarter already. So April was the -- was official launch, but it started selling prior to that somewhat. So we picked up a little bit on that, and we may see a little bit more of that in Q2 in the U.S. business primarily, yes.

Okay. And just a second question, it's a housekeeping question. I know in the first quarter last year, there were some XPEL Dealer Conference costs. Were those same level of costs or similar costs also in Q1 of this year's numbers?

Yes, they were. In fact, the costs, I think, were actually a little bit higher this year because we expanded that event and we'll continue to hold that. I think we actually have it scheduled next year. It will be in Q2. I think we moved it back to May. But yes, we did have full loading of those costs in Q1.

[Operator Instructions]. Our next question comes from the line of Selim Najim, a Private Investor.

One follow-up question on China, just to help us understand the lumpiness of the business. How often do you ship to China? What is the frequency of shipment to China?

We're shipping multiple times per month. So yes, when I think -- what I was referring to is the fact that the business has accelerated dramatically over the past few quarters, and I think we'll continue to see growth. I don't think that the growth isn't necessarily perfectly linear in terms of when it occurs. We've seen it where you have growth, you plateau a bit and you grow again. We've seen that across all of our distribution channels at different points. So I think, really, it's saying the growth in China we've seen, the rate of growth we've seen over the past year, that rate of growth may not continue at that same rate going forward, more so than this year, as an example. It is front-end loaded with sales to China or something like that. That's not the case at all.

Okay. I'm sure you saw the news coming out of China yesterday that they're planning to reduce their import duty on cars, around 25% to 15%. What do you think that means for your business in China?

Well, we've obviously been following all of the news regarding the trade discussions very closely, and it changes every day or it seems to. And we have people calling us, excited one day and worried the next. And I think we just have a very pragmatic approach, a wait-and-see approach. But fundamentally, we do well where the car business is doing well. And I think if you believe that a reduction there will help the domestic car market in China, particularly with the imported luxury wheels -- luxury vehicles, that's probably a net benefit for us. But I think right now, it's just we've got to wait and see like everyone else. And whatever adjustments we need to make as we go, we make those adjustments, but we're just pretty much in wait-and-see mode on that.

Our next question comes from the Raj Taijirian, a Private Investor.

I was just wondering if you had any more color on your expected sales growth for the rest of the year.

Yes. So we've historically not given specific guidance on where we think revenue growth will be, in large part because it's just very difficult for us to forecast. We've got lots of customers and lots of different channels. But that said, we've had quarter after quarter with really, I think, one exception being maybe Q1 of 2017, which was less than a 20% revenue growth, with substantial revenue growth. And so we're expecting substantial revenue growth for the rest of the year. And there's nothing that's happened in this quarter that's driving revenue growth that we wouldn't expect to continue. I think Canada was probably the only area that just benefited slightly from some timing on some sales. But in the grand scheme of things, that wasn't overly material. So hard to say exactly where we'll be for all those factors, but we expect really strong revenue growth for the balance of the year.

Understood. That's great. And I guess, do you have a sense of the incremental EBITDA margins as you move forward in that, the sales growth?

Well, I think what we've seen in Q1, kind of like we talked about before, is that with the revenue accelerating, as it would over time anyway, we grow through that fixed cost structure and that's driving that EBITDA margin and the net margin. And I think with the near 100% growth we had in the first quarter, that's just really accelerated and that happened that much faster. So I think that we would expect a really strong operating performance from that standpoint going forward as well. There's no planned increase in SG&A sort of beyond what we're already doing that profitable, higher-margin revenue growth doesn't cover. So I think we've reached a scale that we feel pretty optimistic about a solid EBITDA margin and net margin going forward. And if we could grow that from where we are now, I think that's certainly a goal. But from where we've been to where we are right now, we're very happy. And we got to balance, trying to grow that further. We're just trying to maintain that and which is going to give us the longest term success versus near-term success and that's challenged the balance all the time, but we're in a good position to do it, I think.

Got you, okay. So I mean, relative EBITDA margins, I think, were around 12% this last quarter and incremental looked like it was in the low 20s. And do you have some sort of intermediate target?

We have lots of targets, but when -- we don't have perfect visibility on what the revenue growth is. It's hard to forecast it out and stick to it. So we're happy where we are and we're going to keep pushing for that and then try and balance, maintaining what we've got versus growing it versus the long term and push for that for the balance of the year.

[Operator Instructions]. Our next question comes from the line of Andy Preikschat from Edgebrook Partners.

Can you share more about the window film? What was it as a percentage of sales for the quarter? And what is the year-over-year growth that you're seeing there?

Yes. Andy, thanks for the question. No, the window film is going great. I think as a percentage of sales in the quarter, I think it was slightly lower. I think it was about 5%, which is slightly lower, owing mainly to the fact that we had really strong growth on paint protection in China. But I think as Barry mentioned, we were still at, yes, 47% year-over-year growth on window film. So based on where we're growing at any one time, we see that cycle in and out. But overall, the trend there is a very positive. We're continuing to round out the product portfolio. I mentioned the XR PLUS product that we just launched. So -- and you know as a percent of sales in first quarter, that was lower. That wasn't a negative for us. And I think so far in Q2, we've seen that percent of revenue on window film back up where it was or higher. So I think we're on a good trend there.

Our next question comes from the line of the [indiscernible].

I was just wondering, based on the 30% number you guys mentioned in China, did you guys consider breaking that out in your reporting, just so we can kind of see what's going on? Number one. And then number two, do you guys, as films are growing in China, is IT protection a concern of yours? Are you seeing like copycats pop up, trying to imitate the brand? And what kind of challenges are you seeing in that front?

Sure. So Brock, on your first question, I think as you look at our MD&A and financial statements this year, you'll see more disclosure in a variety of ways. We haven't broken out country by country revenue yet, so China is not listed there specifically, but we're continuing to expand that disclosure into something that's most useful and most meaningful. So look for that and look for us to continue to evolve that. On the second question, I think in this business, you have a number of challenges around the IP issues. So we've had certainly incidents were you have bait-and-switch tactics where people are claiming your -- claiming to sell your products but not selling it. Then you have just trademark infringement for people that are actually using your marks or creating confusingly similar marks. And yes, that's an issue China. It's an issue outside China as well. And we had an issue with a company doing that in the U.S. and marketing products using something that we found to be a direct violation of our trademark, and we ultimately want a default judgment in federal court on that last year. And so we take all that seriously and it's very important that we do to protect the brand. And we're going to be moving, I would say, even more aggressively over time to take action where we see that. But I think given the nature of the products, especially it's a clear product, it's virtually invisible product once it's installed, that's a challenge for the business, but it's one we take seriously and that we're going to continue to take action on, both in China and about China, but elsewhere, too. It's not a China-only problem, but it is a problem in China. So thanks for the question.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to management for closing remarks.

I just like to thank everybody for joining us, and we look forward to speaking with you next quarter. Thank you.