XPEL, Inc. (XPEL) Q1 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the XPEL, Inc. First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Jen Belodeau with IMS Investor Relations. Thank you Ms. Belodeau you may begin.

Thank you. Good morning and welcome to our conference call to discuss XPEL's financial results for the 2019 first quarter. On the call today Ryan Pape, XPEL's President and Chief Executive Officer; and Barry Wood, XPEL's Chief Financial Officer 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. I'll take a moment now to read the Safe Harbor statement. During the course of this call, we will make certain forward-looking statements regarding XPEL Inc. and its business which may include but are not be 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 events 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 many other factors beyond the control of XPEL. Although XPEL has attempted to identify important factors that could cause 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 statements 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. With that out of the way, I'll turn the call over to Ryan.

Thanks, Jen, and good morning, everyone. Welcome to our first quarter 2019 conference call. First, I'll start by reviewing our performance by geography. Our U.S. business is very strong with 36% year-over-year growth. We continue to see pretty broad-based growth in the U.S. business both by geography within the U.S. and tighter of business, as well as the mix of current customers and new customers. Also you may remember we launched our ceramic coating in the U.S. in March, so we had our first revenue there and that's progressing very nicely for the U.S. business. We continue to invest in the U.S. both with an expanded regional sales team and as it pertains our acquisition strategy which has largely been paused for the past six months as we've gone through our U.S. GAAP conversion, but will be a focus going forward. Next, we'll talk about the international business. Overall, currency had a more significant impact in our year-over-year comps than it has in recent quarters for the international business. Q1 2018 was a real high point for many of the currencies we have exposure to. As we've talked about in our last call, we expected significant year-over-year decline in China and that occurred in the quarter to the tune of 42%. Along with our record growth in China last year, there was also an inventory build in-country at the distribution level. The build in inventory principally occurred March through August at the time the business in China was ramping and there was a need to get product in quickly via air shipment and then also inventory more economically via ocean shipment. So, we have better line of sight into the sell-through now and have that on a go-forward basis. Our China revenue for last year was highest in Q2 and peaked in the months of March and April, so we're pleased we made great strides in offsetting the year-over-year China decline with growth in other areas. And as we've talked about that replacement comes at higher margins. In April, for example, our total revenue was up approximately 10% with further improved margins despite the China declines. Obviously, we're just closing out May and June that's yet to come, but it's a good trend to start the quarter. So, we expect to continue to see significant year-over-year declines in Q2 for China as that the inventory evens out in the channel and our overall revenue for the quarter most likely would be close to flat. That said, we still expect to get relief from the overall trend in Q3 as we come off peak China sales for last year. We also have two new paint protection film products launching in China. This will be a nice complement to our existing product line and offer the customers and installers the choices and options that they want for that market. Additionally, we have another line of window film we'll be launching in China later this summer. In Canada, our revenue was down 20% on the quarter. This was really due to a rough February specifically some large dealership programs that buy in bulk and deferred purchasing. In particular, they ordered aggressively in Q1 of the prior year, which made again for a tough comp, but the trend in Canada has improved significantly since February. In our Continental Europe region, we posted year-over-year growth of 11%. That's certainly off our recent trend. There are a few factors impacting that. First was currency, as Q1 2018 was a high watermark for the euro on last year. If we look at our Continental Europe sales in euros as opposed to the U.S. dollar equivalent in which we consolidate our financials, revenue grew 21% versus the 11% we reported today. So a big impact from currency. Additionally, we also had an interesting mix of revenue in the European -- in the Continental Europe region. In 2018, we had a limited duration project for an OEM that occurred in Q1 and Q2. Since that project is completed that affected our year-over-year U.S. dollar consolidated revenue growth by another 12% for Q1 and even more if you look at it from euros. But we'll feel a little bit of that in Q2 in terms of that project ending. On the other hand, we expect more of these types of projects in the future and we're very active on them. Finally, our second largest customer in the region provide services to fleets, but they don't control the rate of delivery from the fleets they service, they were off about 15% year-over-year. So we felt that in the quarter for Continental Europe as well. So if we adjust for all those factors, we've been closer -- pushing closer to a 50% revenue growth rate in Continental Europe. There are a lot of exciting things going on there, and our team is working very hard and so we remain very encouraged. In the United Kingdom, we reported nearly 42% revenue growth. Like the euro the pound also hit a high point Q1 2018. So we look at it in -- if you look at the U.K. in pounds instead of consolidated as U.S. dollars revenue grew 51% on a year-over-year basis for the U.K. So, really good numbers there. Our Asia Pacific region, which excludes China grew at nearly 70%. Obviously, this is coming off of a small base, but it's an area we're focused on and one that's getting enhanced support from our team in Taiwan pursuant to our acquisition last November. So there's much work to be done here, but very encouraging signs. Our Latin American region showed a decline of nearly 40%. But as some of you may remember from last year, we worked to retire our older lines of paint protection film including our extreme line. We worked to liquidate that product in the first quarter of last year. And if you exclude the two customers that participated in that liquidation, who aren't regular purchasers we saw year-over-year growth for the Latin American region of 61%. So we're happy with that and our performance from our operation in Mexico specifically. We're actively working to add sales people to our team in Mexico for our direct sales model there. And Mexico remains one of our highest gross margin countries. Middle East was down slightly for the quarter. As you know, this area's underperformed our expectations last year. We think we're making good progress here, not present in the regional reporting is the fact that we've stabilized the margins in the region, and we do expect growth for that region for the year. To comment overall on gross margins, we saw a roughly three percentage point improvement from the prior year, which we would have expected to some extent with the China mix, but it was also reduced by the aforementioned currency swings on a year-over-year basis. So, overall, we're on a promising margin trend for 2019. Inventory was up substantially from year-end around 25%. Given our strong cash position, we've moved to increase inventory to allow us to move our European business to ocean shipments versus air. This sets us up for significant expense savings later in the year. We don't see much movement in the total inventory number one way or the other through the end of Q2, so it should end up close to where it was for Q1. On the product side, I mentioned the XPEL FUSION ceramic coating has been very well received, as we talked earlier, and it's a complementary product for us and for our customers and allows more dollars per vehicle for everybody involved. And overall, it's accretive to our margin mix. We continue to make progress on our XPEL VISION architectural film line. We'll be adding our VISION PLUS series soon, which are high-end specialty selected films. This is all part of having a complete line-up and that line of business is very product intensive, and we have a lot of SKUs to serve the customers. We also have several technology projects with our DAP, and we've staffed up the DAP development area as well to build some really compelling features for this line of business into our platform, which we'll be able to talk about later this year. And lastly, we just concluded about two weeks ago our 2019 Dealer Conference. It was an amazing two-day event, it was our best attended ever. We had attendees from 16 countries here in San Antonio. Eight breakout sessions, which included sessions on our DAP installation techniques, the Dealer Round Table selling strategies and marketing. And as we always do, we had our paint protection and automotive window tint install competitions. Plus this year we had our first architectural window film competition and we have no doubt that that will become as popular as the others are over time. And with a total of $24,000 in prize money for our customers this year it was a big draw. So feedback was amazing. It's a perfect time when we have so many customers present for us to reiterate what we stand for and why we want to earn their business. And if you're interested, you can check out a full recap of the conference on our website. And with that, I'll turn it over to Barry. Barry?

Thanks, Ryan, and good morning, everyone. Before I get into some details in our first quarter results, I wanted to update you on our SEC registration process. Today we filed Amendment No. 2 to Form 10. From a process perspective since we're not yet effective we were required to update our previously filed Form 10 with Q1 results, which were included with today's filing. I think we're making great progress on our SEC registration process and expect to be effective very soon. And once we're effective, our NASDAQ listing will soon follow. So let's take a little bit more detailed look into our first quarter results. In total, Q1 2019 revenue declined 1.6% to $24.7 million. Sequentially Q1 2019 revenue was down $2.1 million versus Q4 2018. Now while on those surface, our overall Q1 revenue growth was off from historical patterns there's some very encouraging signs when you peel back the onion a bit as Ryan alluded to some of this earlier. We're seeing very good core growth in most of our regions. For these regions that have been -- for those regions that have been underperforming such as the Middle East, we have a clear strategy to improve performance and we've begun to see some of this improvement in Q2. Obviously the sales declines in China have had a substantially impact on our top line results, but we still see great opportunity for growth in that region as the inventory build works through the channel. And with each passing day we gain increased visibility into that market, which will only help us continue to grow there in the future. Q1, 2019 product revenue declined 4.7% to $21.1 million. In the product revenue category, paint protection film declined 8.7% to $18.5 million and represent 74.6% of our total revenue. This decline was mainly due to the declines in PPF sales into China resulting mainly from the 2018 inventory build that we talked about earlier. Window film grew 56.4% and represented 7.4% of total revenue. Our window film product line continues to be another bright spot for us and we expect to continue to increase that product line's penetration levels in the future. Total service revenue grew 21.3% to $3.7 million. And as we noted in our last call, our service revenue consists of access fees for adapt software, cut bank credits revenue, which represents cut fees charged for the use of our DAP software, installation labor revenue from the labor portion of installation sales at our company-owned installation centers, and training fee income resulting primarily from fees charged for attendance at our training classes. Software revenue increased 22.8% for the quarter due mainly to the increase in DAP users versus prior quarter. Cut bank credits revenue increased approximately 20.4% due mainly to strong product sales primarily in the U.S. region. And as most of you know, our software platform is a key competitive differentiator for us and creates a sticky relationship with our customers. Our DAP software is highly valued by our customers because it helps increase installation efficiency, which drives down labor cost, thereby, maximizing profits for our customers. Our ongoing growth in this area is continued confirmation of this intrinsic value that we deliver for our customers. Installation labor grew 17.4% due mainly to continued strong demand in our company-owned installation centers. And as a side note, total installation revenue, combining product and labor increased about 17% and represented a little over 6% of our total revenue. Gross margin for the quarter grew 7.2% to $8.2 million versus our -- versus prior year quarter and our gross margin percentage finished at 33% versus 30.3% in Q1 2018. And while some of this improvement is attributable to mix, we continue to be pleased with our progress we're making with our supply chain strategy. Gross margin has been and remains a top focus for the company. Our Q1 2019 SG&A expenses grew 17.2% versus Q1 2018 and represented 22.9% of total revenue. Sales and marketing expenses declined slightly in Q1 2018. This decline was due mainly to timing of our annual dealer conference, which was held in the first quarter last year and as Ryan mentioned was held in the second quarter this year. Q1 2019 general and administrative expenses grew 26.6% versus Q1 2018, due mainly to increases in personnel, occupancy, IT and research and development costs to support the ongoing growth of the business and development of new products and also increases – we had increases in professional fees, due mainly to the ancillary costs related to the continuing – our continuing registration process. We incurred approximately $130,000 of one-time costs during the quarter related to our registration process and we will still incur registration-related costs in Q2. Q1 2019 EBITDA declined approximately $260,000 at $2.8 million, reflecting an EBITDA margin of 11.5%. Our Q1 2019 net income decreased $229,000 to $1.9 million and represented 7.5% of total revenue. EPS for the quarter finished at $0.07 per share. Now you may also notice that our balance sheet has three new line items called right of use lease assets and current and non-current lease liabilities. These new line items stemmed from the adoption of ASC 842, which requires companies to recognize both assets and liabilities arising from capital or – and operating leases. In Q1 2019, we recognized total right of use assets of approximately $4.2 million and a corresponding offset to lease liabilities. The adoption of the standard had no material impact on our income statement, or statement of cash flows and did not impact any covenants associated with our revolving line of credit. And as Ryan alluded to earlier, we did have an increase in inventory versus where we're at year-end, due mainly to the planned inventory increases in order to facilitate more ocean shipments to our international operations. Cash flow from ops, totaled $1 million for the quarter versus $0.7 million in Q1 2018, and we ended the quarter with $4.4 million of cash in the bank. And we look forward to continuing delivering great results in the coming quarters. And with that, operator, we'll now open the call for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brock Erwin with CleverInvesting. Please proceed with your question.

Hi, guys. Congrats on the quarter. And thanks for some of that color on Canada and Latin America that was good to hear. My question though is about gross margin. It was nice to see it up this quarter, but it seems likely that most of the increase is probably related to product mix especially with less low-margin sales with respect to China. So I know that continued margin expansion is a key focus area for the company. So in that light, could you just talk a little bit more about specific initiatives that you're working on to improve your gross margins? Thanks.

Sure. Thanks for the question, Brock. So, yeah, I think a couple of points on that. There is – part of what we see with the Q1 numbers is related to China mix. But there's really more going on with the margins than that. And some of that, I think is obscured in Q1, just looking on the currency side. I mean, when you look at the effect the euro and pound exchange rates had on the overall growth rates, I mean, you feel that in terms of the income statement right in the gross margin line. So I think from that standpoint, we really are making more progress than just what the mix would show. And the ways to do that obviously is sort of three components all are equally important to us, but not all equally applicable in every situation. But one is absolute bill of materials product cost, how do we reduce the actual cost to make product that we sell. And we have a number of initiatives to try and do that and manage that. We have some success with that. The second is there's a whole host of ancillary costs that hit COGS that we would not call those bill of material product cost, but some shipping expense, some production labor, other inventory adjustments. These are things that, we have control over. In some cases if it's packaging or whatnot perhaps we can negotiate better. If it's operational, we can become more efficient, we can reduce overtime, we can manage workforce better. So that's kind of area number two. And then the last piece obviously is just selling price and making adjustments market-by-market and product-by-product where we think that's appropriate. Obviously, if we can hold or reduce product costs bill of materials costs and reduce our other elements of COGS and simultaneously raise prices that's, sort of, the trifecta in terms of improving margins. So I think that there is more positive going on than what Q1 reflects once you adjust for currency and we think that we're going to see even better results on the margin side for the rest of the year based on the trend right now.

All right. Thanks for answering the question. That’s it for me.

Thanks, Brock.

Bye.

Our next question comes from the line of Adam Goldstein [ph], a Private Investor. Please proceed with your question.

Hi. Ryan, you mentioned that in April revenue was up 10% compared to the prior year, but then said that for the whole quarter you expect this to be flat. Could you just expand on that a bit? Was April better than May and June, or...

Well, you know, at this point we're just closing out May and as we've learned long ago you never know what the month is until it's done. That's been a constant with this business. And then obviously June is what June is. We don't get a lot of advanced warning and advanced forecasting. So I think -- the point that we're trying to make is that April was a very positive month in spite of the other declines that we've seen more promising than some of the months to-date. But then at the same time we still expect based on overcoming that inventory build last year that's a significant headwind for the rest of the quarter. So we don't know what June holds per se so I think we're relatively -- looking at it relatively conservatively that it would not be unlikely to kind of end up flat. But at the same time we've got encouraging signs in the rest of the business.

Okay. And just another question here about seasonality is that typically in the U.S. business and I think in most of it Q2 was historically your strongest quarter seasonally. Is that also the case in China and like other Asian markets or other international markets in general?

Yes, normally I think Q2 or Q3 -- Q3 was peak revenue last year as an example. There's no question that in most of the markets where we're operating we do better in the warmer months and most of our business is sort of Northern Hemisphere concentrated so we do see that trend. In China, for example, January, February Chinese New Year is typically weak. Canada we see significant slowdown due to the weather. U.S. we see slowdown, but more moderate. So in most of the big markets where we are that Q2, Q3 if you ask the people in the business that's typically, sort of, peak season for them. And then obviously, if you go back further than last year just with our overall organic growth, I mean, we've beaten Q2, Q3 with Q4 many times, but that's based on the growth of the business. I think if you're looking at it really just on a seasonal basis it's Q2 or more likely kind of Q3 peak to the season.

Okay. And then one last thing. I noticed that in the SEC filing there's no constant currency discussion. So verbally you mentioned in order to better understand how the regional breakdown works it helps to discuss revenue on a constant currency basis. But I don't see that on the fighting itself will that be in future filings?

Well, we had removed the sort of constant currency calculations that we had in the past few years to sort of permeate all of our disclosure just because a lot of times we felt that they weren't really as useful to the reader. And some of the real currency oscillations that impacted us kind of 2016, 2017 they just -- it wasn't as pronounced one way or the other. So it just didn't seem quite as relevant. Obviously now with Q1, it is relevant and it was actually one of the reasons we did so well. 99.5% revenue growth in the prior year we benefited from it then so it makes that comp harder. So I don't think at this point we have a plan to bring back that constant currency measure throughout the disclosure. But I do think as it's relevant sort of to understand regional growth we'll continue to talk about it and bring it up like we did today.

Our next question comes from the line of Andy Preikschat with Edgebrook Partners. Please proceed with your question.

Yes. Congrats on the strong U.S. growth. Can you share what is driving U.S. growth? Is it mostly from new installers coming on or is it mostly from additional volume from existing installers?

Sure. Well, I hate to sound like a broken record relative to the U.S., but it's been remarkably consistent over time which is a healthy mix of both. And if you look at our overall customer base there's a really long tail in terms of customer size, customer volume and growth aspiration. So if we said, what is the average growth rate of our existing customer base? It ends up sort of a less meaningful number. So we've seen a really healthy combination for a long time. And the way we're looking at it internally is, we really stack up all of the various metro areas against each other and we're trying to look at measures of penetration sort of per capita, per metro area and how best to get there. And if we have really strong customers that are growing at really good rates that we can help grow, that's a great way to get there. But there's some markets that are just clearly underpenetrated. There's only so many folks offering the products. And in that case there's a more intense focus on adding net new people. But it continues to be a mix dominated by some customers who have a huge appetite for growth that grow sort of far in excess of our overall growth rate, some that grow but at more modest rates and then continued addition of new customers. And I think big picture, we all -- we have expect that we need to continue to always add new customers just to meet the demand that's out there. It's not possible to do that simply with current customer base. So that will always be a focus of ours.

Okay, great. And maybe I missed it but can you share what month you are targeting for the NASDAQ listing?

You want to mention that Barry?

Yes. So Andy, obviously, we filed our Amendment Number 2 today, there's a review process for that, that occurs. I would expect that we would be effective soon. I can't say exactly when that is and we're really beholden to the timing of the SEC. But once we become effective then the NASDAQ listing should follow very soon thereafter. That's all we know at this point.

Our next question comes from the line of Jason Harshman, [ph] a private investor.

Hi guys, how are you doing today?

Hey Jason, How are you?

Okay. Very good, I got one question and one follow-up for you. And it's basically -- the first question is asking a little bit more detail about the U.S. sales. I was wondering that strong growth how much of that is perhaps due to a heightened push into the dealer channel as opposed to the independent installer channel?

Yeah. I think if you look at it overall. And we don't -- we've not yet broken out those numbers. We're seeing sort of direct sales to dealerships increase at a slightly faster rate than the rest of the U.S. business. So, in terms of what we're seeing that is having a net positive impact. But it doesn't radically diverge in terms of growth rates into the aftermarket versus into the dealership direct. And the main reason is that many -- half the time products are sold by dealership, regardless of who they're installed by be it the dealership or the aftermarket. And so, you kind of see that growth even as dealerships are selling more of the product and pushing more of the product you see that growth split. But we are seeing increased activity from the dealerships at a rate higher than the overall growth rate.

Okay. My follow-up question is actually about a very small line item on your income statement, which is the training service revenue which was above $163,000 which is still year-over-year good growth. I was wondering if you can give me a little bit more color on that. Is that because of just additional training sessions in the U.S. or in Continental Europe or Asia? I just view that perhaps as sort of a leading indicator of the overall demand for PPF and XPEL products.

Yeah. Well, I would tell you for sure that the number of people coming through our training sessions is an important leading indicator, and one that we follow closely. And from that measure we are doing more training however you look at it. In the U.S. we've increased our capacity. We've obviously added window film training in the past two years. We've done in Canada one of our first architectural training classes. We will be adding ceramic coating training soon And then, we've also in the past two years done a lot more training and added a lot more training capacity in Europe specifically. So we have a lot of classes both out of U.K. and the Netherlands facility. So in terms of the number of people we're training that is important and that is increasing. Most of the time there's a correlation between number of people trained in that training revenue but not always. We're open to negotiation for training if it brings us a really good opportunity. So I would definitely encourage a focus on how we're training a lot of people that's critically important. I wouldn't focus quite as much on how much revenue we derive from doing that.

Okay, well thank you very much.

Thanks, Jason.

There are no other questions in the queue. I'd like to hand the call back to management for closing comments.

I want to thank everybody for your time for the first quarter results. And we look forward to speaking with you next time. Thank you.