Earnings Call: Q4 2018

Apr 3, 2019

Earnings release

Greetings, and welcome to the XPEL Inc. Year End 2018 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Nesbitt of IMS Investor Relations. Thank you, Mr. Nesbitt. You may begin. Good morning, and welcome to our conference call to discuss XPEL's financial results for 2018. 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 of the company's financial results. Immediately after the prepared comments, we will 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'll make certain forward looking statements regarding XPELT, Inc. And its business, which may include, but 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, 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 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 statement can be guaranteed. Except as required by applicable securities laws, forward looking statements speak only as of the date on which they were 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, and good morning, everyone. Welcome to our year end 2018 conference call as well. Today is a milestone day in the history of our company. As most of you know, by now, we took the first step towards a U. S. Listing with today's filing of the Form 10 with the SEC. Barry will walk you through more of the details on that and the related timelines later. But today's filing of the Form 10 effectively means that we've requested to register our securities in the U. S. Pursuant to the 'thirty four Act. We also applied for a listing on NASDAQ Capital Market under the symbol XPEL. It's been a long time coming for the company and I'm excited that we're finally here. To become an SEC issuer, we're required to issue our financial statements in accordance with accounting principles generally accepted in the U. S. Or U. S. GAAP. Prior to today's filing, financial statements previously issued by the company were stated in accordance with International Financial Reporting Standards or IFRS. In layman's terms, we have to switch accounting standards in order to register our securities in the U. S. And that's obviously a lot of work and congrats to our finance team getting that done. So therefore, any numbers we talk through today relating to our results are now the U. S. GAAP based numbers. With that, let's talk about what was clearly an outstanding year for XPEL. Revenues for Q4 grew 33.1 percent to $26,800,000 reflecting continued strong growth for the company. As we alluded to on previous calls, we expected our revenue growth to moderate as we went through last year and it did in Q4. Given that, I was pleased with our Q4 performance. Revenues from China represented 26 point 1% of our total Q4 revenue, reflecting continued moderation of that mix. For the year, our revenues grew 63.3% to almost $110,000,000 Growth was strong in most all of our regions. In Q4, our European business growth rate was lower than earlier in the year, owing to the WLTP change in emission standards, which impacted a lot of the auto sector in Europe and accelerated some sales into Q3, which in turn negatively impacted Q4 as the industry attempted to get ahead of the new emissions deadlines. You can see this very evidently in aberrations in the car sales data out of Europe for Q3 into Q4. But that seems to have been a temporary phenomenon. Our year over year growth in China was lower in Q4 than the preceding 3 quarters. This is largely because Q4 2017 is where our China growth kicked off. So the year over year comp is a tougher one. Our China revenue declined sequentially in 2018 from our peak around March or April, as we were able to bring more product into the channel to catch up with demand. And as a result and considering our ending run rate for China in 2018, we will see China revenue decline significantly in Q1 of 2019 from the prior year. This is a function of the timing of the acceleration of sales in China last year, some softness due to competitive factors in China and new products we've been developing for China that have been pushed to Q2. Overall, we're still very bullish on China and working hard to keep up with changing needs from our customers and peak China sales from the prior year. As a result of this year over peak China sales from the prior year. As a result of this year over year comparison, our overall revenue will decline modestly in Q1 despite strong sales in our other regions. I was also very pleased with our gross margin performance in 2018, which finished at 30.4%, reflecting nice results from our margin expansion initiatives, which we began in late 2017. Margin expansion remains a top focus for the company and we're working hard to continue to make improvements in this area and we'll be devoting even more time to it now that we have the U. S. GAAP transition complete. SG and A expenses for the year represented 19.7% of total revenue. Obviously, there were some one time costs in 2018 related to our transition to the U. S. And those will continue into the Q1 of 2019. That being said, we continue to be diligent on striking the right balance between controlling expenses and investing in the business as we've talked about. EBITDA for the year finished at $13,000,000 versus $3,600,000 in 2017, driven by the combination of tremendous revenue growth, gross margin expansion and the operating leverage that creates. Net income for the year finished at $8,700,000 or $0.32 per share. I remain more confident than ever that our overall strategy, which centers around the notion of getting closer to customer is the right strategy for our company. I think our 20 18 results confirm this. As most of you know, our strategy centers around 4 key initiatives. First, we continue to search for and execute on global expansion opportunities where it makes sense. In addition to our operations in Canada, Mexico, the United Kingdom and the Netherlands, In 2018, we acquired our distributor in Taiwan. It was critical we established our first presence in Asia as all of Asia, including China is going to be a growth driver for us going forward. This won't be our last presence in Asia as we execute on our strategy. Secondly, we continue to enhance XPEL's global brand awareness. We're a premium brand and well known in the automotive industry. We know that growing worldwide recognition of the brand will be leveraged to drive additional product sales. As an example, we recently launched our XPEL FUSION PLUS, our new ceramic coating, which nicely complements our paint protection film. FUSION PLUS is a hydrophobic self cleaning coating that provides additional protection to paint protection film or on a vehicle's painted surfaces to enhance the gloss and make it easier to clean. This product also gives us and our dealers the ability to increase addressable gross revenue per vehicle. The XPEL brand is well respected. The rollout of this product been very well received. We're about a month in. It's a top notch product, very complementary to our line. And as we expand the auto product line from paint protection to automotive window film now with the ceramic coating, we'll be increasingly encouraging our dealers to adopt all of the products on the platform for the best customer experience and incentivizing them to do so. Our third strategy centers around the continuation of our channel acquisition strategy. To that end, we acquired 3 installation facilities in Canada last year. We found that our ability to drive increased product revenue has greatly improved and we have a presence in a given local market. We've had consistent success with this model and we continue we expect to continue this strategy as we move through 2019 with several key opportunities currently under evaluation. Finally, we continue to drive expansion of our non automotive product portfolio. As you may remember, in 2018, we acquired EShields Health, which facilitated the launch of a silver infused antimicrobial protective film, XPEL RX, which has a number of potential uses for customers in different industries, including healthcare and food service and more. We're just now taking that product to market. We also launched our commercial and residential solar and security film XPEL Vision. Last year, we'll be talking more about the Vision line and our plans for this product line as we go through the year. Very excited about these new product opportunities for this for 2019. And I think a year over year comparison of the ending balance sheet is a great way to sum up and highlight our success for last year. We were able to drive 63 percent top line growth while ending the year with more cash, flat AR, almost flat inventory, a reduction of $3,400,000 in accounts payable and over $2,000,000 reduction in debt. So that's awesome operational performance. It's a fantastic year for XPEL. I'm very proud of the results and proud of our employees for the results we delivered to our shareholders, but just as importantly to our customers. And we look forward to building on that success for 2019. So with that, I will turn it over to Barry to review some of the transition we've done and more of the financials. Barry? Thanks, Ryan, and good morning, everyone. Before I talk a little more on our results, I would like to walk you through our filing process leading up to today's announcement. As Ryan mentioned, we have filed a registration statement on Form 10 to securities in the U. S. Pursuant to the 1934 Exchange Act because we're seeking to list our common stock on NASDAQ under the symbol XPEL. To be clear, this is not an S-one filing as we do not need to raise capital at this time. As required by the 'thirty four Act, the Form 10 necessitates inclusion of financial statements audited in accordance with U. S. GAAP. Because we're designated as an emerging growth company under the Jobs Act of 2012, we're only required to submit 2 years of audited financials in the Form 10. As most of you know, our previous financial statements were under IFRS. Given that, we had to go through an IFRS to U. S. GAAP conversion for our 2017 2018 financial statements. And once that was completed, our U. S.-based auditor, Baker Tilly, had to re audit our U. S. GAAP converted 20 17 financial statements as well as audit our 2018 U. S. GAAP financial statements. In addition, since we're currently still a Canadian reporting company, we requested and were granted an exemption by the Ontario Securities Commission, which allows us to file U. S. GAAP based financial statements in Canada instead of the otherwise required IFRS based financial statements. As a condition to granting this exemption request, the Ontario Securities Commission has required us to file U. S. GAAP based 2018 interim or quarterly financial statements on SEDAR no later than April 30. This effectively means that we have to quarterize, if you will, our audited 2018 annual GAAP financial statements, meaning that our IFRS to U. S. GAAP adjustments, which were determined on an annual basis, need to be applied on a quarterly basis. This has been completed, but as an SEC issuer, our 2018 quarterly statements are required to be reviewed by our auditors since they will be used as comparatives to our 2019 quarterly financial statements. And as such, we cannot discuss detailed quarterly results beyond revenue until these reviews are complete. As you would likely expect, there are One major difference is the way in which we account for our kit design cost. One major difference is the way in which we account for our kit design costs. Under IFRS, we capitalize these costs and amortize them over their estimated useful life. Under U. S. GAAP, these costs are expenses incurred, and I'll comment more on our U. S. GAAP results a bit later. And as we mentioned earlier, our Form 10 was filed today. In general, Form 10s are automatically effective 60 days after the file date. We anticipate receiving comments from the SEC during this process, and we will address those comments as we receive them. Assuming our NASDAQ application is approved, we cannot list on NASDAQ until all SEC comments are cleared. There has been no decision yet regarding the TSX Venture listing's future. As Ryan mentioned, pursuing been a long time coming for our company, and we're very excited to enter this next chapter of our corporate life at XPEL. Now let's take a more detailed look into our 2018 results. First, I'd like to point out that our income statement looks a little bit different than past presentations. Our revenue is broken out between product and service revenue in accordance with U. S. Reporting requirements. And as Ryan mentioned, total Q4 2018 revenue grew 33 0.1% and our total 2018 annual revenue grew 63.3 percent to $109,900,000 And geographically, we saw strong growth in almost all of our regions led by China, where revenue almost tripled in 2018. Product revenue grew 69.5 percent to $95,500,000 And in the product revenue category, paint protection film grew 72.8 percent to $85,500,000 and represented 77.8 percent of our total revenue. Window film grew 43.2% and represented 6 point 7% of total revenue. Total service revenue grew 31.5 percent to $14,500,000 Our service revenue consists of access fees for our Design Access Program Software or DAP cutbank credits revenue, which represents cut fees charged for the use of our DAP software and installation labor revenue from the labor portion of installation sales at our company owned installation centers and finally training fee income resulting primarily from fees charged for the attendance at our training classes. While software and installation labor categories are fairly straightforward. I want to briefly walk you through our cut bank program. The essence of our cut bank program is to incent customers who use our DAP to purchase our film. Basically, if you're a DAP user and you buy our film, you only pay your monthly access fee. When you buy our film, we add the total square footage of film you purchase from us to your cut bank. Think of it just like your checking account at your bank. Once square footage is added, you have the ability to cut patterns up to the square footage balance in your cut bank. If your bank goes to 0, you cannot cut any more patterns until you deposit more square footage into your bank either by buying more film from us or purchasing cut bank credits. Historically, we have offered to sell cut bank credits a la carte in circumstances. So all in all, up until now, this is fairly straightforward. But for those of you that follow U. S. GAAP based companies, you've likely heard of new revenue recognition standard known as ASC or Topic 606. I'm not going to go too deep into this, but 606 effectively required us to allocate a portion of our product revenue to service revenue for the estimated value of cut bank credits we added to customers cut bank because they purchased our film. And under IFRS, this allocation was not made. So back to service revenue results. Software revenue declined 9% due mainly to the restructuring of DAP access fees commensurate with the implementation of our cut bank program. Cut bank credits revenue increased a little under 50 percent due mainly to strong product sales. Installation labor grew 40.5% 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 41%. As Moriah mentioned, we are particularly pleased with our gross profit results for 2018, which the dollars doubled from 2017 and our gross margin percentage finished at 30.4%. And again, just to reiterate, gross margin remains a top focus for the company as we move into 2019. Our 2018 SG and A expenses grew 49.3% versus 2017 and represented 19.7% of total revenue. And you'll also notice the income statement presentation is a bit different in this category as well than in past because we are required to break out sales and marketing related expenses from general general and administrative expenses for U. S. Reporting purposes. Sales and marketing expenses grew 37.5 percent due mainly to continued support of the ongoing growth of the business. 2018 general and administrative expenses grew 55.4% versus 2017, due mainly to increases in personnel occupancy, IT and travel related costs to support the ongoing growth of the business as well as increases in professional fees due mainly to the ancillary costs related to the preparation and filing of our registration statement. 2018 EBITDA grew $9,400,000 to 13 point $1,000,000 reflecting strong revenue and gross margin performance and related operating leverage, and EBITDA margin for 2018 closed at 11.9%. As I mentioned earlier, one of the major changes from IFRS to U. S. GAAP is how we account for our kit design costs, Because we now expense these costs as incurred versus capitalizing and amortizing the costs over their estimated useful lives, the EBITDA net income grew $7,700,000 to $8,700,000 and represented 7.9% of total revenue and EPS for 2018 closed at $0.32 per share. 2018 cash flow from ops grew $3,800,000 to $6,800,000 And as Ryan alluded to in his comments on our balance sheet, our financial position remains very strong and we're effectively net debt 0 at twelvethirty onetwenty 18. In summary, we're very pleased with our 2018 results. We accomplished a lot and we look forward to continuing to execute as we move forward. And with that, operator, we'll now open the call for questions. Thank you. We will now be conducting a question and answer Our first question comes from the line of Adam Goldstein, Private Investor. Please proceed with your question. Hi. Thanks for taking my question. I just want to make sure I understood, Ryan, you said there will be a decline in revenue in the Q1 of 2019. Was that a decline in comparison to the Q1 of 2018 or in comparison to Q4 of 2018? No, we're speaking year over year. Wow. So that there'll be a year over year decline in revenue. That's the first time I think I've ever seen that. Yes. Well, I mean, we don't know the exact number. Obviously, we just finished March just a few days ago, which is our the biggest month of the Q1 typically seasonally. But when we're sort of normalizing our volume into China instead of sort of building volume and building product out in the channel as we did in the first half of last year, just sort of equalizing to demand coming off tripling the volume essentially last year as we did, that will have a very modest result in a very modest decline in revenue in the Q1 from the Q1 of 2018. And that's despite really strong performance elsewhere. So part of that is that obviously the growth in China on a year over year basis has moderated like we talked about in Q4 And it's just was really exceptional last year. So we have a big comparison to make there. Okay. And one more, my follow-up, I guess is, will there I noticed there's no more disclosure on net income based on geographic segment like there used to be. Did I just miss it or is that the case that's no longer going to be disclosed? That's correct, Adam. This is Barry. We're under U. S. GAAP. We effectively have one segment. So that on a go forward basis, that's the way we'll present. Okay. I've got another I'll put myself back in the queue. I've got a few more questions. Sure. Yes, and I would I'd add to that to Barry's remark there. So you will notice on the U. S. GAAP presentation, we have revenue by geography rather than the segment presentation in the IFRS financials. And I can tell you that while looking at the IFRS segment net income may seem particularly useful To us internally, that particular metric is not that useful because you've got transfer pricing mechanisms that sort of arbitrarily signed profit around the world. So while on the surface, I think losing that sort of segment net income may be a loss. I don't think it's really as useful as it would seem. And instead, the geographic breakdown sort of mandated in the U. S. Presentation like we have now on a revenue basis, I think is actually more useful in fact. Our next question comes from the line of Jason Hirschman, a private investor. Please proceed with your question. Hi, guys. Great year and congratulations on the pending uplifting to NASDAQ. Got a question for you today. I was wondering perhaps you can comment a little bit more on the opportunities that you see in 2019 and a little bit into the future in other areas of Asia Pacific, specifically Japan and Korea? Sure, Jason. Yes, I think we've all talked extensively about the success in China over the past year and the growth. But I think it highlights a very good point, which is that by any metric, many of these other markets in Asia correspondingly are substantially under penetrated or underperforming as you see it. Japan is a particularly good example. I mean for the size of that economy, our sales there relatively speaking historically are very small. And so one of our areas of focus over the past 6 months really and leveraging our team in Taiwan has been Japan specifically. And so we have real high expectations for Japan as an example and other markets around Asia that we're able spend more time and devote more local resources to. And all of these markets are different. China has a certain profile and a unique draw to the product and a unique way to go to market. And these other markets are they're different and we have to sort of cater to them and have the right partners or distributors or direct presence. But you mentioned Japan, that's one that we are particularly focused on among other points in the region. Just one follow-up question is that you've given some commentary on China for Q1 2019. Could you give a little more commentary perhaps on Continental Europe and how that's developing so far? Yes. We've been pleased coming out of Q4, like I mentioned, seeing sort of the growth rates decline there, sort of kind of watching how that's going to behave. Europe, we still see great opportunity. Our flow of customers in terms of new leads and new opportunities continues to be strong as ever, along with a lot of other unique projects. One of the things we're seeing there is Tesla as an example, which we do very well in terms of our attachment rate to Tesla sold. Many of them are just now on the Model 3, just now reaching Europe for the first time. Shipments just started recently. So that's a net positive for us along with all of our other initiatives there. So we're very bullish on Europe going forward and think we have a lot of opportunity there. Great. Thank you very much. Thanks, Jason. There are no further questions in the queue. I'd like to hand the call back to management for closing comments. I'd like to thank everybody for joining us today on our year end call and we look forward to speaking with you next time. Thank you.