Greetings, and welcome to XPEL Technologies Fourth Quarter and Year-end 2017 E arnings 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, Jen Belodeau .
Good morning. Welcome to our conference call to discuss XPEL Technologies financial results for 2017. On the call today, Ryan Pape, XPEL's President and Chief Executive Officer, Barry Wood, XPEL's Chief Financial Officer, will provide an overview of the business operations and review the company's financial results. Immediately after their 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 Technologies Corp and its business, which may include, though are not limited to, anticipated use of proceeds from capital transactions, expansion into new markets, and execution of the company's growth strategy.
Often, but not always, forward-looking statements can be identified by the use of words such as plans, is expected, expects, scheduled, intends, contemplates, anticipates, believes, proposes, or variations, including negative variations of such words and phrases, or state that certain actions, events, or results may, could, would, might, or will be taken, occur, or be achieved. Such statements are based on the current expectations of the management of XPEL. The forward-looking 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, 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. With that out of the way, let me turn the call over to Ryan. Go ahead, Ryan.
Thanks, Jen, and good morning, everyone. Welcome to our year-end, fourth quarter conference call. I said previously, last quarter, 2017 was a transformational year for us. I think we accomplished a lot and put up pretty good growth while overcoming some of the obstacles and challenges from the previous year. We ended the year with revenues of just under $68 million, which was a 30.9% growth rate over 2016. We also saw rapid increases in our 2017 sequential quarterly growth, I think, represents, reflects strong revenue momentum.
While some of our strongest growth last year occurred in markets where we have the lowest margins, we've begun to address this mixed phenomenon through a combination of targeted price increases and price increases and reduction in other non-product costs in our cost of goods sold due to efficiency. We're already seeing these efforts pay off in 2018, which is a great thing. For the fourth quarter, revenue grew 52.7% to $20.2 million, which was by far the highest revenue quarter in our history. We're seeing strong growth across all of our regions, which was a little bit different than earlier in the year, where it was a little more spotty, but particularly in Asia and China specifically. China revenue grew to just over 20% of our total revenue for the fourth quarter.
Obviously that's a nice development that's been building over the year for us and, you know, it's obviously a new dynamic for us. We're building strong revenue momentum during the year, and we're seeing that momentum on revenue growth continue into Q1. We executed on several major initiatives during the third and fourth quarter as we started discussing last quarter. That included consolidation of several facilities and a major restructuring of our sales and operations staff. This resulted in recruiting and severance costs in the fourth quarter like we experienced in the third quarter. These were anticipated as part of those changes. These costs, the costs associated with these changes have been fully recognized in the fourth quarter. Those two things are substantially complete.
We are also impacted in the quarter by the elimination, consolidation of some of our paint protection film products, specifically some of our oldest and more specialized product lines. These happen to be the lines that were the lowest margin, and we worked aggressively to eliminate these products in favor of our higher margin products going forward, the other products we offer today, as well as just leaving us the flexibility and working capital space, if you will, for our next gen products that we will be bringing to market. While that elimination of those SKUs is not entirely complete, the impact in Q1 will be minimal, if any. It's substantially complete.
This consolidation of SKUs resulted in about half a million dollars in non-recurring costs in the fourth quarter, similar to some that we experienced in the third, that impacted gross margins in the quarter. As well, because we sold some of these products we're discontinuing at a very aggressive price point, that also contributed to pressure on gross margin for the quarter. As we mentioned in our release, this generated significant cash flow from operations, and that helped us reduce our revolving debt by 2/3 at year-end. That's a really good thing.
Also, as we discussed on last quarter's call, we'll be officially launching our next generation of a product called ULTIMATE PLUS, which is the next evolution of the ULTIMATE Paint Protection Film product in April. ULTIMATE PLUS has better optical characteristics, better installation characteristics, which is a key advantage for our installers. As a result of this, we're able to introduce some modified pricing that will further provide for margin enhancement in all the geographies that we operate really. Also in the fourth quarter, as we previously announced, we acquired Protex Canada, which is a leading franchisor of paint protection and window film in Canada with over 75 franchise locations. Our Canadian subsidiary, XPEL Canada, already had a supply agreement to serve the franchise group on an exclusive basis.
The mere act of the acquisition didn't result in a lot of extra revenue because we're already selling the product to the franchise. Now we can double our support and ensure the success of the franchise group and really lock onto the relationship. We've got a dedicated management team for Protex who remains in place, and franchisees will still get great value from them. Previously, we paid a rebate on sales back to Protex as part of the exclusive arrangement to supply them. Obviously, we get to recapture that now, and Protex's other primary source of revenue is a royalty on sales from franchisees. We obviously pick up that revenue, which is of course, high margin, but not a significant dollar amount relative to the overall revenue.
We don't have any significant plans for Protex at this point beyond Canada, but we'll continually evaluate our global footprint for opportunities for Protex beyond Canada going forward. During the quarter, we established operations in Mexico by opening a distribution facility and sales office in Guadalajara. Mexico is a great market for our products and one we've worked to penetrate for a number of years, even prior to establishing the facility, and we're excited about the prospects there. We're running now about a 50/50 mix of paint protection film and window film in the country. We expect window film to play a large role there and probably larger than some other markets that we're in. It's not a particularly well-served market, but it's a large market, and we think we have an attractive cost structure and an attractive product portfolio to address the market.
You know, right now, our initial sales are modest in the country, but they easily dwarf in months what we've sold in years previously in Mexico. It's important to us. We're well-positioned to support Mexico also through our San Antonio, Texas headquarters as well. Many connections between the two markets and a long history of business ties, so this is really a strategic advantage for us. We're excited about that and hopefully have more to talk about there over the coming year. In the quarter, we also acquired a longtime customer in Boise, Idaho. This is a further example of our get close to customer market development strategy.
Boise is a smaller market than others where we have a physical presence. This presents a different set of circumstances which is helpful for us as we continue to tweak and evaluate the model going forward. As with our overall strategy around this, we're looking to use that local presence in Boise as we are in the other locations to build on the base of customers buying our films, not just to add service revenue. That's a key part of the strategy and applies to Boise as well. I'm very pleased with what we've been able to accomplish in 2017.
I think we're, with the various personnel changes we've made and the different restructuring, the product line consolidation, I think we're positioned to have a really great 2018 and improve on a lot of our overall operating metrics. I think it should be a really good year upcoming for us. With that, I'll turn it over to Barry to review some of the numbers in more detail, and then we'll take questions. Barry?
Thanks, Ryan, good morning, everyone. For the quarter, revenues increased 52.7% to $20.2 million. As Ryan mentioned, our fourth quarter revenue squashed our previous record quarter of $17.8 million, which occurred in third quarter of 2017. We experienced robust growth in all of our regions, the growth was particularly significant in Asia as demand has continued to accelerate in this region. For the year, revenues grew 30.7% to $67.8 million. As a point of reference, our revenue growth in 2016 was 24.8%. Gross margin for the quarter grew 44.4% to $4.6 million and declined as a percent of sales to 22.9% versus prior year quarter of 23.9%.
We did incur right around a half a million dollars in non-recurring costs related to the continuation of our SKU consolidation initiative that began in Q3. Normalizing for this additional cost, gross margin for the quarter would have been 24.9%. Gross margin was further affected by higher mix of sales through lower margin distribution channels as Ryan alluded to earlier. However, we do believe that, you know, we have offset future impacts of this potential mix effect with price increases within the channels as we move forward. On a year-to-date basis, gross margin grew 19.7% to $16.8 million and decreased as a percent of sales from 27.1% to 24.8%.
Normalizing for the year-to-date impacts of our product consolidation initiatives, gross margin would have been 26.3% for the year. Again, this lower margin is really due to mainly to the sales mix. SG&A expenses for the quarter increased 26.2% versus prior quarter and 35.1% on a year-to-date basis. As a percent of sales, SG&A costs declined to 21.1% versus 25.6% in 2016, we began to see some leverage there.
We did incur approximately $125,000 of non-recurring costs related to our sales and operation staff restructure that again began in Q3. Also, as we've noted in prior quarters and discussed on these calls previously, effective January first, we changed our method of depreciating our fixed assets from the double declining balance method to the straight line method. Again, this change was made to better reflect how we consume the future benefits of our assets, and this change did accelerate the depreciation of some of our older assets into 2017. The impact of this change will lessen significantly beginning in 2018 and beyond. The impact for Q4 was right around $90,000.
If you normalize for our one-time restructuring costs and the aforementioned depreciation change, SG&A expenses would have grown 19.8% and represented 20.3% of total sales. You know, we feel pretty good about the direction and continuing to work on the SG&A line as we move forward. EBITDA for the quarter increased $0.9 million to $1 million versus prior year quarter, which was only $92,000 last year's quarter, and decreased right around $100,000 to $4.3 million on a year-to-date basis. Factoring in our non-recurring items that would impact EBITDA would have been $1.6 million for the quarter and $5.6 million on a year-to-date basis, representing a 28.9% increase versus prior year.
Net income for the quarter was approximately $4,000, which was slightly better than the $92,000 loss we saw in Q4 2016. Again, factoring in the one-time items for the quarter, net income would have been about $450,000 for the quarter. On a year-to-date basis, net income decreased to $1.13 million versus $2.16 million in the prior year. Normalizing for the year-to-date non-recurring items, net income for the year would have been $2.27 million, representing a 4.1% increase versus prior year. Cash flow from operations for the quarter was a robust $7.5 million.
Again, this strong cash flow resulted mainly from, you know, the improved collections in our receivables, reduction in inventory levels as we monetized some of our slower moving items. You know, we did receive some customer advances on future sales, which helped quite a bit. On a year-to-date basis, our net cash provided by operations totaled $4 million. We turned our inventory 4.69 x in 2017 compared to 5.17x last year. Our strong cash flow performance, as Ryan alluded to, allowed us to reduce our debt burden substantially as we paid $4 million down on our line of credit, which our balance now sits at $2 million as of 12/31.
Our debt-to-equity ratio at 12/31 was 29.2% versus 47.8% in the prior year. Clearly our balance sheet remains very strong and I think we are well-positioned to effectively meet the needs of the business in a cost-efficient manner as we move forward. We're very pleased with our top-line growth and encouraged by the momentum we continue to see in our top line. Margin enhancement, SG&A efficiency, along with revenue growth, continue to be top priorities for 2018. 2017 was certainly a year of significant accomplishments for our company and, you know, we accomplished some big things that put us in the driver's seat to deliver, we think, outstanding results in 2018. With that, operator, we'll now turn the call over 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 question 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. Obviously, the revenue growth was pretty fantastic this quarter, and you mentioned China was a main reason for that. I just wondering, have you guys considered going to the direct model in China rather than through a distributor?
Hey, Adam. Thanks for the question. I think that, you know, we have been pretty clear that our overall operating preference is to be as direct as possible where it makes sense, because we think that that's how we can deliver the greatest value proposition and position the brand most effectively. I think, you know, ultimately, that's obviously something to consider in China as it would be elsewhere. I think at this point, given the totality of all the factors and all the things we have to work on, that's not something to operate in Mainland China directly that is under any near-term consideration. I think we would all agree that it fits our overall strategy, but it's not something that, you know, we're contemplating at this time.
Okay. You mentioned that, due to some targeted pricing increases and some operating efficiencies, hope to improve the profit margin going forward. Could you quantify that at all, in terms of what kind of impact we could see as a percentage of sales?
Yeah, we're not able to quantify it yet. I mean, obviously, we're in timing-wise, we're in the position where we're, you know, nearing the end of the first quarter. You know, we're confident enough in the direction that we're seeing and the momentum to talk about the improving characteristics that we see. That said, you know, March is the typically should be the busiest month of the first quarter, and it tends to be back-end loaded in the month. As we've learned in the past, you know, we need to get through March and have the opportunity to close the quarter.
You know, given that we are at this point in the quarter, I think it shows us we're headed in the right direction and on, you know, margin improvement, and net performance and revenue growth.
Okay. Well, just maybe focusing not so much on that particular quarter, but just overall, you know, even over, say, trend of past couple of years, you know, there's clearly been a decline in gross profit percentage. Now according to your using, like, your adjusted numbers, the adjusted gross margin for this most recent quarter was 24.9%, the SG&A as a percentage of revenue was 20.3%. You know, the operating margin's getting pretty skinny. We're down to 4.6% of revenue. Just in terms of a business model going forward, is that kind of a margin, say, 4.6% operating margin somewhere around what we should expect of this business going forward?
No, I think, you know, we're aiming for, you know, higher margins than that. I think we've said that pretty consistently. It's just a question of, you know, the exact timing and, you know, where and how we grow and where and how we invest. I think we talked about last quarter, you know, our investment in the European operation added the equivalent of a $1 million in annual SG&A. Now, you know, as a result, we're seeing that as one of our highest growth areas, revenue growth areas by percentage. That, you know, that starts to quickly burn through that fixed sort of SG&A there. You know, it's a constant decision of where to invest and where not to.
I think we've been happy with those investments and, you know, as the business scales and continues to get larger, growing at the, you know, the rates we've been growing last year, you know, that helps you grow through the SG&A. We just need to make sure that our level of investment in areas going forward is targeted and intentional, and then, you know, help manage to that, to the final number.
Now back to an issue I brought up last quarter, which was some disclosure on the reporting. I notice now it looks like you've changed the reporting from what used to be Europe to now it's called International Other. I'm a little confused. Can you explain how your reporting has changed?
Yeah, Adam, this is Barry. Thanks for the question. You know, basically what we did, since Mexico got started so late in the year, and it really didn't have a significant impact as a separate, line item or anything in terms of our regional disclosures. We put it in that International Other column, and that was really the only change. As we move forward, obviously, as we've said in the past, we're gonna continue to evaluate, you know, that part of the disclosures that we have and try to mirror up what we think is useful, most useful for the investors.
Okay. Well, as an investor, here's my suggestion. I think, at least based on my understanding of the business, breaking it out into U.S., Canada, Europe, and then all other, you know, those four buckets seems to make sense, doesn't it?
Yeah, that's certainly an option for us. We'll certainly, you know, again, as I said, we'll be evaluating that as we continue to move forward in 2018.
Okay. I'm curious how, since it wasn't broken out in the filing, you know, Europe had been discussed earlier as a very fast-growing region. Could you say how Europe did in Q4 of 2017 compared to the prior year?
Yeah. Adam, it's Ryan again. We saw, you know, very high revenue growth in Europe year-over-year. It was, you know, approaching 100%.
Wow.
Our revenue there. Yeah.
Wow, that's pretty impressive. Europe is going as well as you hoped, I guess?
I think that, you know, it's always a challenge to know exactly what to expect because the dynamics in any of these markets are different. I would say that, you know, certainly being in a position where we're we have or, you know, close to double revenue year-over-year, we weren't expecting more. I would say we're very happy with that, and that shows strong fundamentals there. It shows the value of having our team there, and it shows, you know, how well the team's executing. You know, and this is with the backstop of prior to that, prior to establishing those operations over the past two years and relying solely on third-party distribution before that. I mean, we weren't doing but a fraction of the revenue.
I think for us, it really validates for me that where we invest, if we do it smartly and we bring everything we have to bear, and we try and bring all the value that we offer to our customers, say, in North America, elsewhere, that we can really grow faster and be more successful overall in other key geographies where we're able to operate ourselves. I think, you know, Europe was a big test of that.
I think it's proving that our overall level of investment there was a bit higher than we initially thought, just once you get into it and realize what we really need. With the type of growth rate we're seeing, you get through those SG&A in a hurry. Yeah, we're very happy with it.
Our next question comes from the line of Jason Hirschman, a private investor. Please proceed with your question.
Hi, guys. How are you doing today?
Great, Jason.
A little disappointed you didn't do triple-digit top line growth, but there's always a goal for next quarter, I guess. Overall, a fantastic quarter. Have a few questions for you today. Since China's becoming so important, maybe you can give a little bit more color on what's really driving the growth in China qualitatively. Is it, was it the new film that you released, Zeus, or there's just overall growing acceptance of PPF or some combination? Whatever color you can provide would be appreciated.
Sure. Yeah, I would say it's a combination of things. We have a very strong distributor in China that we've been working with for, I believe it's close to four years, and a combination of the product developments. We do have a additional paint protection film line, as you alluded to, that we're selling in China, although that only represents a portion of those sales. What they've really done with our help over the past year is just a massive investment of the XPEL brand. You'll see it displayed in shops and in XPEL branded locations in China in a way that really rivals anywhere in the world in terms of how well they're executing that.
I give them a lot of credit and also our team that's helping to manage that because we've spent, you know, considerable amount of time and lots of miles in the airplane and various things to help support them. I think it's, you know, it's broad based, and it's very heavily rooted in the XPEL brand. I think that that's very important to understand, as a contrast to, you know, anonymous film, shipped by the container, could still be great business, but business that's built around the XPEL brand is gonna be far better for us long term. It's not one particular thing. It's not an overnight thing. It's a result of very hard work that they're doing and our support and, you know, building on that, you know, incrementally over the past couple of years.
Okay. If we could just maybe switch from China to Canada then, maybe I'll ask you a similar question about Protex. Are there any other figures or color you could provide just mainly on the size of that business? I know they're stronger in certain regions of Canada. Is this a seven-figure film user in Canada or a six-figure film user in Canada? Just any color you can provide would be appreciated.
Yeah. I think, I think, when you look at the Protex network and the Protex franchisees, you know, there's 75 franchise locations across paint protection film and window film. Those are all owned, you know, independently or, you know, in a couple of cases, there's an operator that owns multiple locations. Those franchisees would buy their product from XPEL Canada directly, even prior to the acquisition, because XPEL had a supply agreement to Protex where we were the exclusive supplier of all products to their franchisees, but we would not sell them to the Protex Corporation, but rather we'd sell them to the individual franchisees. Altogether, you know, that's millions, you know, several million dollars a year in revenue to us.
That's not a net new revenue as a result of acquiring the franchisor because we already had that revenue by selling directly to the franchisees, if that makes sense.
Sure. Just to segue to Flat Glass, I've noticed that they've started to, with online and Instagram, you know, on their own, online marketing promote your Flat Glass line. I was wondering maybe you can give an update on how that's going along in Canada and also into U.S. and elsewhere.
Sure. Yeah. Just to restate what we've said before. We have XPEL VISION, which is a residential commercial window film, which is similar to window film for automotive that many people are aware of, but obviously for architectural purposes. This is a entirely new line of business for us. it's not automotive, but there's customer overlap and supply chain overlap for us. We're really in a very initial soft launch of that throughout our different geographies. Protex with franchisees that are in the architectural film space, we've been able to accelerate that launch and target a lot of the initial marketing and initial work with them because they represent a captive audience we can get to quickly. That's probably why you see more of that marketing coming out of the Protex franchisees than elsewhere.
I think over next year or the rest of this year, you'll see more of that, you know, from us outside of Protex as we work to launch and accelerate that line more fully.
Finally, one question for Barry, if I may. Barry, could you quantify how much working capital was released from these sort of specialty film discontinuations? Was it a million? Was it $1.5 million? Just curious how much working capital you were able to take out of the business.
Yeah, I'll actually answer that.
Okay.
Jason, just, I think that, you know, our goal was to eliminate about, you know, in excess of $2 million of inventory in other products that we wanted to discontinue. You know, as of year-end, exactly what percentage of that was done, you know, we don't have that directly, but it was a substantial percentage. You know, the goal was not necessarily to permanently lower the working capital requirements of the business, but ultimately be able to shift that into product that turns faster and to build more stock of the products that sell the most, obviously.
Okay. Well, fantastic quarter and, looking forward to Q1.
Thanks, Jason.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. One moment while we pull for more questions. Our next question comes from the line of Rob Graham, a private investor. Please proceed with your question.
Hi, thanks for taking my question. I was just wondering if you could talk a little bit about the listing on the TSX Venture Exchange in U.S. currency. I know that this question's come up periodically, but I think it's been a little while. As 2017 comes to a close, and it seems like momentum is just shifting in the upward direction, I was wondering what your thoughts were, and whether you could comment on if they're sort of near- term, medium- term, or it's not really on your radar to shift to an American listing.
Thanks, Robby. Yeah. I think what we've said, and it remains true, is that we recognize this is important and it is a priority of ours, but we don't have any more specific timing to share yet.
Okay. Thanks.
Thanks.
Our next question comes from the line of Andy Prescott from Edgebrook Partners. Please proceed with your question.
Yes, hello, guys. You mentioned in the call just now that ULTIMATE PLUS will be officially launching in April. Can you share any detail on what you're doing with this launch in terms of marketing and what the, what the transition could look like from ULTIMATE? Thank you.
Sure, Andy. We've got a marketing campaign geared around it to try to build some buzz. There's a number of other visual differences with the product and different packaging and a whole different experience to go with it that we think will really create some excitement around it. That's part of the reason why the timetable on that launch is moved back a couple times and ends up a little bit later in April or April being later than we initially targeted. You know, we wanna draw attention to the fact that we've improved the product and created an overall better experience and a splash.
We've got quite a bit of marketing to go with it and some videos and other things to highlight some of the benefits and create that splash and presentation. I think it'll be a really good launch for us with the ULTIMATE PLUS, and then, we can carry that through with, you know, other products and enhancements that we have in the pipeline, you know, beyond that.
Ladies and gentlemen, we have reached the end of the question and answer session, and I would now like to turn the call back to Ryan for closing remarks.
I'd like to thank everybody for participating and asking questions. We look forward to talking with you again in short order for Q1. Thanks a lot.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.