Earnings Call: Q3 2018

Nov 14, 2018

Earnings release

Ladies and gentlemen, greetings and welcome to the XPEL Inc. Third Quarter 2018 Earnings Call. At this time, all participants are in a listen only mode. A brief 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. Thank you. You may begin. Good morning, and welcome to our conference call to discuss XPEL's financial results for the 2018 Q3. 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 prepared remarks, we will take questions from our call participants. Let me take a moment to read the Safe Harbor statement. During the course of this call, we will make certain forward looking statements regarding XPEL 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, 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 current expectations of management of XPEL. 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 can 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 law. Forward looking statements speak only as of the date on which they are made. Nexmo 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, I'll now turn the call over to Ryan Pick. Go ahead, Ryan. Thank you, John, and good morning, everyone. Welcome also to our Q3 2018 conference call. For the Q3 in a row, we've experienced a record revenue quarter for XPEL with revenues finishing at $29,300,000 or a little over 64% growth versus Q3 of last year. As you all likely know, our sequential revenue growth rates have been 99%, 69% and 64% for Q1, Q2 and Q3, respectively, of this year. So clearly, we had exceptional revenue performance in each quarter. I'm really pleased with the Q3 performance. China's revenue mix was about 27% of our total revenue for the quarter, which is a little lower than our Q1 and Q2 trends of 30% plus or minus, yet we still had another record quarter. I think this demonstrates how strongly we performed in our other regions, including the U. S. And Europe. So as we've been saying all year long, we do expect our overall revenue growth rates to moderate. We expected a bit more moderation in Q3. However, we really didn't see it. So it could have been some pull forward from Q4. However, October was very strong from a revenue standpoint, so that hasn't happened yet. Still, we would expect Q4 to come in at a lower growth rate. However, we continue to be very pleased with the underlying fundamentals of the business and the ongoing demand for the products and services we're seeing really in every geography. We continue to monitor the impacts of trade policy, particularly on our China business. As we've talked about previously to date, we haven't seen any real impact from the trade or tariff situation, but we'll obviously continue to monitor that. Q4 was the strongest quarter for China in 2017. So on a year over year basis, we'll see China growth moderate some in Q4 and into next year. And the overall macroeconomic news out of China is mixed, particularly in the auto sector, but signs from our partner in China have remained very positive. Gross margin for the quarter improved to 30.1%, which is really a welcome development and something we've obviously been talking about. We continue to see improvements in our non bill of materials costs that affect COGS, but we've also seen improvement in our actual product gross margin, resulting from a combination of price increases and cost synergies. So this continues to be a top focus for the company and really happy about that number for this quarter. SG and A for the quarter finished at 19.9 percent of revenue. As I mentioned previously, we're targeting SG and A to be 18% of revenue. So it's still going to bounce around a bit in the near term, but we think that 18% target still strikes a balance between driving more operating leverage and our desire to continue to invest in the business. We had some one time expense in Q3 that bumped that SG and A number up a bit higher. Barry will cover through that, but that's still our target. On the EBITDA side, we finished at $3,400,000 for the quarter, 11 point 6 percent of revenue. Net income came in at $2,200,000 or $0.08 a share. We continue to focus on gross margin and hitting that SG and A target. I think there's still substantial opportunity to create more bottom line leverage. As we announced yesterday, we're excited to establish a local presence in Asia with the acquisition of Apogee Corporation. This was our Taiwan based distributor. And with that acquisition, Christine Pugh, who is Apogee's Founder and CEO, joins our management team and will run our Asia operations. She has extensive experience along with her team in paint protection and the window film business. And as many of you know, our strategy around the foundation of our international business is to bring on the best people that we have an established relationship with to help lead our global operations. That is our first consideration when looking at these and the geography and local market dynamics are really secondary to that in terms of how we look at this. You may recall that we began our European business in the UK, which was due to having the right people that we knew and trusted who wanted to join the team and only later did we expand into Continental Europe. So Apogee was operating in Taiwan and serving customers directly in Taiwan, Hong Kong and Macau. So this business is entirely separate from our distributor in Mainland China and we'll obviously benefit from improved gross margin profile in the areas we will now serve directly, although that business is relatively small. There will not be any immediate impact on our China business. However, clearly, one of our objectives here is to set us up better to serve China over time as that might be beneficial to how we can influence the growth rate or the long term economics of that market. And there are things that we will be doing in Taiwan to assist our partner in China that we just can't easily do from the U. S. Initially, our objective is to serve those 3 markets well directly and use our new team in the region to help our efforts to better develop all the countries in Asia region. We'll make additional decisions over time regarding possible acquisition of other distributors in the area or whether to establish our own operations or to redouble our support for our existing area. It's a strategy that's been working very well for us in the development of the European business, and we will apply that here as well. In Europe, we continue to build out our sales team. We're adding in country sales team members in key countries with local knowledge. So we've got dedicated sales team members in 4 countries now with more plan. So really pleased with how that business is going. It was a great quarter for us. We continue to have great momentum heading into the end of the year and the beginning of next year. So with that, I will turn it over to Barry. Barry? Thanks, Ryan, and good morning, everyone. As Ryan mentioned, it was another record breaking quarter for the company. Revenues grew 64.3% versus Q2 2017 to $29,300,000 which was sequentially higher than Q2 revenue by about a little over $400,000 On a year to date basis, revenues grew 75.4%. Once again, we saw growth across all product lines strong growth across all product lines, but continues to dominate the growth mix coming in at 76.7% growth quarter over quarter. Window film was 7.3% of total Q2 revenue and grew 15.5% quarter over quarter. We had a rather large window film order in China in Q3 last year, which is somewhat masking this quarter's growth rate in this product line, but we continue to be extremely pleased with our window film product line performance. Looking at it from our operating segment perspective, Europe revenues more than doubled and growth rates in of World continue to be robust. Canadian revenue grew 13.3% versus the quarter in the quarter and 42.8% on a year to date basis. Some Canada revenue was shifted ahead to Q2. So Q3 was slightly lower, which is part of the reason why we saw a strong Q2 in Canada last quarter. And as Ryan mentioned, our China mix moderated slightly, representing approximately 27% of our total Q3 revenue. Gross margin for the quarter more than doubled to $8,800,000 an increase as a percentage of sales to 30.1% versus prior year quarter of 23.8%. And as many of you will recall, we incurred some onetime costs in Q3 last year related to our SKU consolidation and warehouse consolidation initiatives, which impacted our gross margin. When you normalize for that, our gross margin in Q3 last year would have been about 27%. So we're pretty pleased with our continued improvement this year. This quarter's gross margin numbers also included about 180 $1,000 of costs that we do not expect to recur in future quarters. And despite that, we were still able to achieve 30 0.1% gross margin, which I think speaks to the progress we're making in this area. As Ryan mentioned, we're beginning to see improvements in our product margins in addition to some of our continued improvement in our non product COGS items. And gross margin enhancement continues to be a top priority for us as we expect to continue to show improvement going forward. SG and A expenses for the quarter increased 63.8% versus prior year quarter and were relatively flat as a percent of revenue coming in at 19.9% versus 20% in the prior year quarter. On a year to date basis, SG and A expenses grew 55.2% versus prior year to date. For the quarter, we experienced a rather substantial growth in personnel, sales and marketing costs and professional fees. And as we said before, we continue to invest in the business. And our professional fees were higher due mainly to several project related costs, some legal costs related to our acquisitions and generally just higher overall general corporate legal costs. And also increases in our audit fees in connection with our auditor change. Included in SG and A for the quarter $300,000 of nonrecurring costs related to some marketing expense in support of our distributor in China. We also completed a transfer pricing study, and we incurred some severance costs as we continue to refine the organization to further position for growth. If you normalize for these items, we clearly would have been much closer to our 18% SG and A target. So we feel pretty good about where we are there. EBITDA margin for the quarter was 11.6 percent and increased $2,200,000 to $3,400,000 versus prior year quarter. Sequentially, our EBITDA was approximately same as Q2 if you normalize for the onetime items I mentioned previously. On a year to date basis, EBITDA increased $7,000,000 to $10,200,000 versus Q3 2017, and year to date EBITDA margin finished at 12.3%. Net income for the quarter was approximately $2,200,000 or 7.4 percent of revenue compared with $445,000 in prior year quarter. On a year to date basis, net income finished at $6,700,000 or 8 percent of revenue versus $1,100,000 in the prior year. Cash flow from operations for the quarter was $3,000,000 $4,900,000 on a year to date basis compared with cash flow used in operations of $3,500,000 in the prior year 2017 period. This improvement is basically attributable to our strong operating performance during the year, and we continue, as part of this, to focus on our cash conversion cycle to drive continued improvements in operating cash flow as we move forward. I'll also note that our revolving line of credit balance remains at 0 as the business continues to generate enough cash for our working capital needs. Our financial position is strong, and we're poised to accommodate ongoing growth and investments in the business as we move forward. Finally, as we announced a few weeks ago, we have appointed Baker Tilly as our new auditor replacing RSM Canada. Since our headquarters and the majority of our operations are based in the U. S. And a a substantial part of our shareholder base resides in the U. S, it just made sense to align with the U. S.-based auditor. Baker Tilly is a nationally recognized firm and one of the 15 largest accounting firms in the country, and we're very excited to be working with them. So all in all, solid quarter for the company, and we look forward to closing out the year strong. And with that, operator, we'll now open the call for questions. Thank you, ladies and gentlemen. We will now be conducting our Q and A Our first question comes from the line of Brock Erwin from Clever Investing. You are now live. Hi, guys. Yes, I was just wondering if you could give an update on what your current market penetration specifically in the U. S. Looks like? And maybe you can give some color on how you measure that and like just relative to competitors? Yes. Well, I think as an industry in the U. S. Market, we feel fairly comfortable that there's a 5% to 7% penetration rate of paint protection film products to new cars sold. Beyond that, we've got a lot of data points that we look at to try and estimate our market share and penetration into specific makes and other things. But it's sort of an imperfect picture. So it's not something we're in the habit of updating recently, but we approximate our internal numbers for the penetration and market share around data that we get, which includes warranty registration data, includes data from our DAP software and then potentially even product sales where that's sort of identifiable in a certain way? Yes. So I mean, obviously, like the market itself is growing and your brand has helped to create awareness with consumers about the pain protection in general. But like I'm just trying to understand like how you're doing relative to your competitors. And maybe it's a hard thing to measure, but you guys probably are in a better position to understand that than anybody else. Well, yes, I mean, we so we obviously know when we win market share from competitors on a deal by deal basis. So that's something that we look at internally. You have to overlay on that the fact that those individual customers may have been growing faster or slower than the rest of the industry in and of themselves at the time that we won that business. So it you don't end up with a real high confidence number in terms of where you end up with market share or where exactly that growth is coming from, which is one of the reasons we don't offer that on a regular basis. But our sense overall, when you look at our U. S. Business, just as one example, has been growing quite well this year, lower than our overall top line. But we know in that, that a portion of that is to winning business from competitors. But I also think that the industry overall is probably growing a bit faster than a lot of people estimate. I think there's a tendency to sort of underestimate the growth of the industry as well. But we feel very confident that we're a net winner of business even today from sort of that competitive cycle. If you had to estimate like what percentage of the market share you guys have in the U. S, could you do that? Well, we have our internal estimates, but it's not something that we're comfortable to share at this point just due to the confidence that we have in that. We use it for our internal purposes. Thank you. Okay. Thank you. Our next question comes from the line of Adam Goldstein, a Private Investor. You are now live. Okay. Hi. XPEL now has 3 basic product types: paint protection film, automotive window film and architectural glass film. Could you talk about the existing market size for each of these product types and what type of future growth you expect from each of these markets? Sure. I think it's very well understood that both the automotive window film business and then the architectural window film business are both very large markets. And I won't sort of quote some of the research that's out there, but it's out there. And obviously, our the percentage of our business that we have in either of those two areas, automotive was over 7% revenue for the quarter and is very, very small going into next year. So our expectation is that those are both incredible growth areas for us over time and that each of those respectively over time should become a meaningful portion of revenue. We've seen exceptional growth on paint protection and that's helped sort of even constrained the percentage of revenue from our automotive window film. But we still expect over time that as a percentage of sales, we're going to see both of those areas grow and be a material portion of total sales. Okay. Well, that's all for me. Thank you. Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing. Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation and have a wonderful day.