Greetings, and welcome to XPEL Technologies first quarter 2018 earnings call. At this time, all participants are in a listen-only mode. A question- and- answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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, 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 Technology Corp and its business, which may include, but not limited to anticipated use of proceeds from capital transactions, expansion to new markets, and execution of the company's growth strategy.
Often, but not always, forward-looking statements can be identified by the use of the words such as plans, is expected, expect, schedule, intends, contemplates, anticipates, believe, proposes, or variations, including negative variations of such words or 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 would 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. Excellent right there. China represented about 30% of our revenue for the quarter. This is sold through one primary distributor, but it's important to remember that it represents, in fact, many hundreds of individual installers who are all bought into the XPEL brand, and that all the product we sell is a branded product in country.
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. 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 product directly to the franchisees, as we talked about previously. Excluding the net effect of the Protex acquisition, our organic growth rate in Canada was still 80%. I think it was 83%+. 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, and 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, we're really excited about the growth, starting to see return on our investment there. Our team on the ground doing an excellent job led by Tim Hartt, who talked about previously. That continues to progress very well. In Mexico, we're running our first training class actually this week in our Guadalajara facility.
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 be a full- class with some backlog there. We're also leveraging our team in the U.S. to help support this. This is really a key leading indicator of future growth in the country, so important milestone for that business. Looking forward, we'd expect 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 the strength of the Q1 that we just had and the fact that Q1 of the prior year of 2017 was a weak quarter. It was a relatively easy comp.
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, you know, historically over the past many quarters. We're excited about that. Along with the 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.
We're pleased with that, and we're very focused on that. 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. It really speaks to the effectiveness of those margin enhancement initiatives. 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 the operating expense leverage during the quarter resulted in EBITDA margin of over 12%, 12.2%, or EBIT of $3.1 million and net income of $2 million. You know, clearly outstanding there.
We've made and continue to make investments to support the business as it grows and add to our competencies, supply chain, finance, marketing, and to make investments in new markets like the million-dollar annual SG&A commitment to Europe that we did not have previously. I think what this shows and what this quarter really shows is that these costs do not ultimately scale with revenue, and at a significant revenue critical mass, we can blow through that cost structure. We've known that. We've talked about that. It's nice to see a quarter, you know, where that happens in a demonstrable way. I think, you know, 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.
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. That's early, but that's being well-received, going very well. We also just recently announced XPEL PRIME XR+ window film, a truly industry-leading product that complements our offering. It's one of the highest performing films in the industry in terms of heat rejection and UV protection. 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 acquisition front in North America, looking at additional installation facilities, and we're always looking for other important strategic opportunities. We intend to stay focused on that, run our plan on that and be active.
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're seen globally just as XPEL. That's how we're seen and perceived. After the shareholders approve that in June, we'll make that change official. For me, that's a very important and significant change as part of our global branding and to drive focus to that. 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. Good morning, everyone. For the quarter, revenues increased 99.5% to $25.2 million. We saw strong growth across all of our product lines. Leading the way there 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%. 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 and increased as a percent of sales to 29.7% versus the prior year quarter of 26.4%.
As you'll likely recall, our gross margin percentage for Q3 2017 and Q4 2017 was 23.8% and 24.8% respectively. While those quarters did have some one-time 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, you know, 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 year 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 that the SG&A growth to slow as we move forward into the year. EBITDA increased $2.7- 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. 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 year 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 of approximately 23% as of March 31st. Clearly, by all measurements, Q1 was a great quarter for us. You know, 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. We look forward to continuing to build on this strong momentum to Q2 and beyond. With that, operator, we'll now open the call up for questions.
Thank you. At this time, we will be conducting a question- and- answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from the line of Adam Goldstein, a private investor. Please proceed with your question.
Hi, guys. Wow. Obviously, you know, congratulations on a fabulous quarter. 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. I don't You know, there's nothing in this quarter which we see as an aberration that says, you know, gross margin, or anything else was impacted, you know, in an abnormal way that wouldn't sort of be reproducible going forward. You know, the actual gross margin in any period is, you know, a function of a lot of things that are happening, currency, mix, et cetera. You know, 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, you know, an aberration that made that happen. We think, you know, we'll continue on a positive trend there going forward.
All right. That's fabulous news. Second, this, 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?
Yeah. I think, you know, the trend there is, you know, throughout last year in 2017, we started to see the business really accelerate. I think, you know, maybe in Q2 or Q3, we were at, you know, over 10% and then trending up. I think, I think we said for Q4, it was, yeah, very, very small, 25% is what I thought. You know, we've, you know, seen that happening, and that's a function of a lot of things. We've been, you know, 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.
That's helped accelerate the growth. Obviously, the automotive business and the economy in general is doing fairly well. We're still talking about a country with, you know, very minuscule penetration of these products, but that's really true for us everywhere. It's really a culmination of things, you know, 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. It's just helped our partner there scale up that business. That's happened, you know, pretty dramatically in the past three quarters, and we're seeing the benefit of that now. I think, you know, 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. It's, you know, it's not like this is gonna come to totally dominate the business based on that growth, but it's exciting and while you have that, you know, what is, you know, technically a concentration in terms of, you know, we're selling this product to one partner that's distributing in country, because obviously, we're not doing it directly. You know, this represents, you know, 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 you know, I think, a really strong footprint for continued growth there and, you know, for continued introduction of new products as we have new products.
Just really pleased with it.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Jason Hirschman, a private investor. Please proceed with your question.
Hi, Ryan. Hi, Barry. Good morning, a remarkable quarter. It's like you guys were an expansion hockey team and made the Stanley Cup the first year. It's really remarkable. 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?
Yeah, we'll see some of that. We have a little bit of effect of that in the quarter already. You know, April was official launch, but it started selling prior to that somewhat. We've picked up a little bit on that, and we may see a little bit more of that, you know, in Q2 in the U.S. business primarily. Yep.
Okay. Just a second question. It's a housekeeping question. I know in the first quarter last year, there were some dealer conference costs. Were those same level of costs or similar costs also in Q1 of this year's numbers?
Yeah, there were. In fact, the costs I think are actually a little bit higher this year because we expanded that event and, you know, we'll continue to hold that. I think we actually have it scheduled next year. It'll be in Q2. I think we moved it back to May. Yeah, we did have full loading of those costs in Q1.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Please limit your question to one question and one follow-up question. Our next question comes from the line of Salim Nigim, a private investor. Please proceed with your question.
Ryan, very amazing quarter. 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?
No, we're shipping, multiple times per month.
Okay.
Yeah. What I think, you know, what I was referring to is the fact that, you know, the business has accelerated, you know, dramatically over the past few quarters, and I think we'll continue to see growth. I don't think that, you know, the growth isn't necessarily perfectly linear in terms of when it occurs. You know, 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. I think really it's saying, you know, the growth in China, we've seen the rate of growth we've seen over the past year. You know, that rate of growth may not continue at that same rate going forward.
More so than, you know, this year as an example, 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 from 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, you know, it changes every day or it seems to. You know, we have people calling us excited one day and worried the next. I think, you know, we just have a very pragmatic approach, a wait and see approach. Fundamentally, you know, we do well where the car business is doing well, and I think if you believe that, you know, a reduction there will help the domestic car market in China, particularly with imported, you know, luxury vehicles, that's probably a net benefit for us.
I think, right now it's just we've gotta wait and see like everyone else and, you know, whatever adjustments we need to make as we go, you know, we make those adjustments, but we're just pretty much in wait and see mode on that.
Thanks.
Our next question comes from the line of Reg Tigerian, a Private Investor. Please proceed with your question.
Hey, guys. I was just wondering if you had any more color on your expected sales growth for the rest of the year?
You know, we've historically not given specific guidance on, you know, where we think revenue growth will be, in large part because it's just very difficult for us to forecast. You know, we've got lots of customers and lots of different channels. That said, you know, we've had, you know, quarter after quarter with really, I think one exception being maybe Q1 2017, which was less than a 20% revenue growth, with, you know, substantial revenue growth. We're expecting substantial revenue growth the rest of the year. 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 for some timing on some sales, but in the grand scheme of things, that wasn't overly material.
Hard to say, you know, exactly where we'll be for all those factors. We expect, you know, really strong revenue growth for the balance of the year.
Understood. That's great. I guess, do you have a sense of the incremental EBITDA margins as you move forward and as those sales grow?
I think, you know, what we've seen in Q1, kinda like we talked about before, is that, you know, with the revenue accelerating, you know, as it would over time anyway, you know, we grow through that fixed cost structure, and that's driving that EBITDA margin and the net margin. You know, I think with the, you know, near 100% growth we had in the first quarter, you know, that's just really accelerated and that happened that much faster. I think that, you know, we would expect, you know, a really strong operating performance from that standpoint going forward as well. You know, there's no planned increase in SG&A, you know, sort of beyond what we're already doing that, you know, profitable higher margin revenue growth doesn't cover.
I think we've reached a scale that, you know, we feel pretty optimistic about, you know, a solid EBITDA margin, and net margin going forward. If we could grow that from where we are now, I think that's certainly a goal. You know, from where we've been to where we are right now, we're very happy. You know, we've got a balancedTrying to grow that further versus trying to maintain that, and which is gonna, you know, give us the longest term success versus near-term success. That's, you know, a challenge to balance all the time. We're in a good position to do it, I think.
Gotcha. Okay. I mean, the, you know, relative EBITDA margins I think were around 12% this last quarter, and the incremental looked like it was in the low 20%s. Do you have some sort of intermediate target?
We have lots of targets. You know, when, you know, we don't have perfect visibility on what the revenue growth is, you know, it's hard to forecast it out and stick to it. We're happy where we are, and we're gonna keep pushing for that. You know, 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.
Once again, please limit your question to one question and one follow-up question. Our next question comes from the line of Andy Preikschat from Edgebrook Partners. Please proceed with your question.
Hello, guys. Congrats on the best quarter in your history. 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? Thank you.
Yeah. Andy, thanks for the question. No, the window film is going great. I think, you know, 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. I think as Barry mentioned, we were still at, yeah, 47% year-over-year growth on window film. You know, based on where we're growing at any one time, you know, we see that, you know, cycle in and out. Overall, the trend there is very positive. We're continuing to round out the product portfolio. I mentioned the PRIME XR+ product that we just launched.
Even though as a percentage of sales in first quarter that was lower, that wasn't a negative for us. I think, you know, so far in Q2, we've seen that percentage of revenue on window film, you know, back up where it was or higher. I think we're on a good trend there.
Thank you.
Our next question comes from the line of Brock Erwin from CleverInvesting . Please proceed with your question.
Hi, guys. Congrats on a great quarter. I just wondering, based on the 30% number you guys mentioned in China, would you guys consider breaking that out in your reporting, just so we can kind of see what's going on, number one? Number two, do you guys, as you know, sales are growing in China, is, you know, IP protection a concern of yours? Are you seeing like copycats pop up trying to imitate the brand? What kind of challenges are you seeing in that front?
Sure. On, 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's not listed in there specifically, but we're continuing to expand that disclosure, you know, into something that's the most useful and most meaningful. Look for that and look for us to continue to evolve that. On the second question, you know, I think in this business you have a number of challenges around the IP issues. You know, we've had certainly incidents where you have bait and switch tactics where people are claiming to sell your product but not selling it.
Then you have, you know, just, trademark infringement where people are actually using your marks or creating, you know, confusingly similar marks. Yes, that's an issue in China. It's an issue outside China as well. You know, we had an issue with a company doing that in the U.S. and marketing products using something that we found to be, you know, a direct violation of our trademark, and we ultimately won a default judgment in federal court on that last year. So we take all that seriously, and it's very important that we do to protect the brand. We're gonna be moving, I would say, even more aggressively over time to take action where we see that.
I think, you know, given the nature of the product especially, it's a clear product, it's a virtually invisible product once it's installed, you know, that's a challenge for the business, but it's one we take seriously and that we're gonna, you know, continue to take action on both, you know, in China and about China, but elsewhere too. It's not a China only problem, but it is a problem in China. 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'd just like to thank everybody for joining us, and we look forward to speaking with you next quarter. Thank you.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.