Q1 2020 Earnings Call

Greetings welcome to Excel first quarter 2020, <unk> earnings conference call. At this time, all participants are no listen only mode. A question and answers that she will follow the formal presentation. If any once you acquire operator assistance during the conference. Please press Star zero on your telephone keypad. Please note. This conference is being recorded.

I'll now turn the conference over to John does that was I am I think you may begin.

Good morning, and welcome to our conference call to discuss textiles results from 2021st quarter on the called <unk> Capex Bells, President Chief Executive Officer, very worried textiles, Chief Financial Officer.

By the overview of the business operations and review the Companys financial results, we directly after the prepared comments, we will take questions from a call participants.

Let me take about three cents harvested.

Then of course it this call we will make certain forward looking statements regarding extel Lincoln's business, which may include the not be want me to anticipated use of proceeds.

Capital transactions expansion into new markets, an execution of the company's growth strategy, often but not always forward looking statements can be identified by the use words such as plants as expected expect scheduled in cans contemplates anticipates believes proposals or variations in couldn't negative variations of such words and phrases or state certain actions events.

Results may could would might or will be.

To be taken the Kirby cheered such statements are based on a current expectations are the management is axtel forward looking events or circumstances disgusting. This call may not occur by certain specified gauge weren't all I could differ materially as results at no no no risk.

Factors and uncertainties affecting the company's performance.

And acceptance of the company's products economic factors competition do equity markets generally and other factors beyond the control the Blackstone.

Well deluxe Fellows attempted to identify important factors that could cause actual actions you've got results to differ materially from does described and forward looking statements. There maybe other factors could cause actual events or results to differ from those anticipated estimate or tend to no forward looking statement can be.

Guaranteed except as required by applicable securities laws forward looking statements speak only as of the date in which they have made an excellent takes no obligation to publicly update or revise any forward looking statement, whether as a result at north Michigan future events or otherwise, okay with that I would now be turned a corner Ryan good luck.

Thanks, John and good morning, everyone again, welcome to our first quarter 2020 conference call. Overall I was quite pleased with our performance in the first quarter in light of some fairly significant headwinds due to a cobot 19 in China early in the quarter and in the rest of the world at the end of the quarter revenue for the quarter grew 14.

1.8% over Q1, 19 to 28.4 million.

Revenue from China declined to 55%, while our non China growth was about 30% as we mentioned last quarter. There was around 2 million and pull ahead im trying to revenue out of Q1 back into Q4 2019.

Even with that there was a significant impact in China from Colgate 19, if you compare Q1 to Q4 run rate obviously.

Our Q2 forecast from China is encouraging and it seems that leaves for now we maybe on the other side of the pandemic in China.

China Auto sales were up in April as some of you may follow ending a 21 month decline streak, we've certainly seen that positive impact on our business and expect that to continue we should be up significantly year over year in China for Q2, and it could be as much as 100% plus year over year revenue growth.

Again this has been expected due to weakness in Q2 last year as a result of inventory build prior to that quarter.

And then as a result of coming out of the other side of Koby 19 in China. So I think very good news. There. We also saw some cobot 19 impact in our Asia Pacific region, where revenue declined 11.7, 11.7% quarter over quarter I would certainly less than our initial more pessimistic assumptions for those markets.

Which again is good news.

Looking at our other regions, we really didn't see any impact from coded 19 until the last seven to 10 days of March or so our U.S. region finished the quarter with 24% growth, which is good performance for our largest region in Canada, Canada, a U.S. dollar revenue grew 35% for the quarter.

Which was helped somewhat by two months of a new revenue, resulting from approach Tech Center acquisition organic growth in Canada was around 25%. So still a very good results there.

In Europe, we had a very strong quarter with U.S. dollar revenue growth at 96.5%, we continue executing in gain traction in.

In Continental Europe, as we mentioned on the last call.

The Continental Europe business did quite well you've been during the initial cobot 19 stages, which hit your up earlier than say U.S. Yoo, Canada, we did see more slow down later in the in the quarter.

But it really did outperform our UK posted U.S. dollar growth of 26.4 person, which is lower than recent quarters, but still good results. Our Latin America region was essentially flat in Q1, but that math, 120% year over year growth in Mexico, which is our primary focus within Latin.

Mexico is now over 60% of the total Lat am revenue and this is direct revenue were selling too.

Dealers and installers, whereas the remainder of that Lat am revenues to various small distributors through the through the rest of the region, it's inherently more volatile so.

Continue to be really proud of our team in Mexico, and a real affirmation of our direct I get close to the customer approach is viable and many many markets.

Overall gross margin improved 330 basis points compared to Q1, 19, 36.3% clearly our lower China mix during the quarter contributed to that increase.

Gross margin as you would expect given the margin profile of the China business.

Our EBITDA finish to 2.6 million for the quarter, which was down from 2.8 in Q1 2019, while net income finished at 1.6 million or six cents, a share which was down from 1.9 million in Q1 night team.

We held our 29 team dealer conference in May of night team. While we held this years conference in February. So the net cost is that it was around $450000. We had a record number of participants well over 300 customers in attendance, which was up around 50% terms of attend.

He's from the prior year and I don't believe we we've ever grown that conference attendance, 50% year over year in recent years anyway. So that was a really nice and we're still planning to hold our 2021 call.

[noise] barrel talk a bit more about this but if you normalize or for the conference since it was out of period comparatively in fact throughout the negative FX impact that we experienced from coding we posted strong growth in EBIT and net income. So all in all I was I was pretty happy with Q1 performance as I mentioned.

As you can imagine, though Q1 feels like it was really long time ago like other companies, we got to quickly shift our focus to managing through that the crisis created by uncertainty created by the Kogut 19 pandemic.

Our response really centered around four main objectives first ensuring the safety of our team second a ensure we can continue to operate and serve our customers.

Third we want to maximize liquidity given the immense uncertainty and certainly that was a priority in the very early days, where we just really didn't know what we were dealing with and then for a minimize the impact in the financial impact to our employees and our partners as much as possible to that.

And we took a very early position with our team that we were not anticipating any reduction in our workforce and we would adopt other shared sacrifice in a variety ways before that was necessary it was necessary.

We've worked really hard to build the team we have to allow us to get to this point and I think we'd all agree we're not certainly not overstaffed in any area. So we've been able to live up to that commitment to our team and expect that to continue and we certainly do not underestimate the cost of recruiting training and hiring a winning team.

And I think some companies do on it so it's a big mistake so.

That was very important as I mentioned on our last call. We had performed a detailed reviews on supply chain risks and this is really suppliers ups or downs to suppliers of suppliers of suppliers just looking at the impact of really a global supply chain and consistent with what we said lifestyle.

Well, there's no disruption and really no impact to.

To the supply chain and we do not expect any.

I know a question on everyone's mind is what will the overall impact of the October 19 pandemic do you US you know in the future and particularly in Q2, we won't be providing an overall guidance related to keep too because there's just too much uncertainty and in it so unprecedented in many ways.

However, it will I will tell you what we know so far.

Our overall April revenue was down 21% versus April of last year are equal U.S. revenue was down, 36%, which was significant but less than than we saw car sales decline for the U.S.

Our data usage declined quite a bit less than 21%. So it suggests some deferred restocking and that perhaps there's better underlying better underlying demand performance. Then revenue alone indicates and I think you know, we we wouldn't be too surprised you have as.

The has been pandemic escalated in the U.S., but there was some deferred reordering by our customers.

We've seen a definite picked up in order volume in customer service phone call metrics in the last 10 days or so it's more of our customers are coming back online. So I would say it certainly feels like Weve turned a corner, China, obviously, which I mentioned and then you asked in Canada, Mexico in the UK behind in there.

Timing, but we expect them to follow a similar path.

We've also had some great wins on the sales side.

You, even when you're selling a product that will make your customer money or make them more successful. They still have to have to have to make time to engage with you and in the slowdown that we felt it really allowed our team to spend time with some key prospects and also significantly more.

Time with various dealership accounts and dealership groups Oh, you when things are blowing and going at a 100%. It's a lot harder to get that needed face time. So we're actually quite optimistic on our current customer pipeline, particularly with their dealership initiatives I believe we'll see impacted out over the next two quarters.

And finally, we track our average daily installation revenue through our company owned locations principally in the U.S. in Canada and for me. So far we're back around March daily averages. So it's too early to say, whether that's back to trend or if its addressing pent up demand.

But it's certainly a very positive departure from April significantly reduced average daily installation numbers and while that only represents our corporate owned locations. There's nothing to expect a fundamentally that our customers are faring in differently.

Our training classes are opening backup next week, starting in the United States with enhanced safety protocols.

And we have plenty of of new interest from customers across our regions. We also have customers, who we had to cancel as we close down training in March and April who are looking to reschedule. So that's encouraging will open reopened Europe next followed by the UK and then and then Mexico. So we're encouraged by that trend.

Got it continue to monitor to that.

We can't know whether all these positive signs represent a return to the new normal are result of pent up demand unfinished jobs are deliveries prior to in shutdowns of time will tell the we're certainly feeling fairly optimistic at this point.

Finally, I'd be remiss, if I didn't mention how proud I am of the attitude of our team during this uncertain time.

We asked many on our team to help with our Phase Shield project, where we've been supplying tens of thousands of base yields to meet some unmet demand for <unk> doing that.

In all the countries in which we operate.

We also asked.

Some on our team to work unusual ships for social distancing at significant disruption to their routine and personal lives and and really everyone delivered in delivered without complaint.

Our our attitude and dedication to providing outstanding service to our customers is what sets us apart and our team continues to rise to the occasion. So in light of the circumstances I feel very good about where we are as a company in firmly believe that we will be even better coming out the other side co. Good night.

With that I will turn it over to Barry and then we will take some questions very go ahead.

Thanks, Ryan and good morning, everyone as Ryan mentioned Q1, 2020 revenue grew 14.8% 28.4 million.

Included in this amount was approximately 200000 or so of revenue from customers participating in our annual dealer conference.

And also as Ryan mentioned that was out of period. In addition, we added approximately 250000 revenue related to our February acquisition Protex Center in Montreal. So if you normalize for those items Q1 revenue would have grown oh right around 13%.

Q1, 2020 product revenue increased 12.8% 23.7 billion and in this category paint protection film grew 7.1% to 19.8 million and our window film product line grew 68.6% and this growth in window film was it was really consistent with some of the outstanding growth we saw on previous calls.

Orders this product line grew 55% in 2019 on an annual basis, and we're certainly off to a great start in 2020 pre cobot 19.

Our installation revenue combining product on labor increased 55.6% and represented 8.5% of our total revenue. This quarter. This increase was due primarily to increase revenue from our OEM projects in Europe or the new revenue from our acquisition of Protex Center and of course, the increased sales and our other company.

Honestly Asian facilities.

Gross margin for the quarter grew 26.3% to 10.3 million and our gross margin percentage finished at 36.3% versus 33% in Q1 2019. This gross margin percentage was the highest in our history, but but with lower China mix. It wasn't totally unexpected obviously.

Our Q1 2020 yesterday expense grew 37.6% versus Q1 2019 and represented 27.5% of total revenue now, including this was approximately 670000 of expenses related to our annual dealer conference, which was out of period. So if you normalize for that.

<unk> expenses would have grown 25.6% represent a 25.1% of revenue.

Sales and marketing expenses grew 71% versus Q2, 2019 to 2.7 million normalizing for the dealer conference cost their sales and marketing would've grown 29% and this normalized increases due to our decision last year to increase our marketing spend by 90 basis points part of which was our indycar.

Sponsorship.

Q1, 2020 general administrative expenses grew 24.3% versus Q1 2019, as we continue to support the growth needs of the business and we also picked up some increase does today with mr. or installation acquisition and Protex center that have facilities utilities and then other support staff.

You'll also note that we incurred approximately 416000 in FX loss during the quarter.

And as you are likely where most of the functional currencies in our foreign locations weakened substantially during a period of intense FX volatility in the last week a March in response to the growing pandemic approximately 655000 of this loss was realized based on actual movement of cash in response to the pandemic, while the remainder was on.

Realized.

Q1, 2020, EBITDA decreased approximately 267000 quarter over quarter to 2.6 million, reflecting an EBITDA margin of 9.1%, but if you normalize for the dealer conference in New York FX loss, EBITDA would have grown 21.8% and EBITDA margin would've been run around 12.2%.

Q1, 2020, net income declined 13.4% versus Q3, 2019, a 1.6 million and represented 5.7% toll Robin do <unk>.

Yes for the quarter was six cents per share, but again, if you normalize for the dealer conference on the FX loss net income would have grown 24.3% and represented 8.1% of Robin, yes would've been eight cents per share.

And as Ryan alluded to in his comments one of our key objectives in response to the unprecedented uncertainty related to cope with 19 was to maximize liquidity to meet that objective. We took several steps in March we drew 6 million on our U.S. line of credit.

In April we drew Fourmillion Canadian on our Canadian line of credit.

And this week, we closed on a 6 million three year term debt facility with the bike San Antonio.

We're also proactively taking advantage of government programs when eligible and all jurisdictions, where we operate and most of these consist of deferrals of tax payments and or delays and transactional filing deadline.

We believe these measures provide liquidity to affect effectively accomplish our objectives and managing through the crisis.

And it also provides us some flexibility should acquisition opportunities arise in the future. So we're really on a war footing when it comes to this crisis. Fortunately in the good news on the so far has been the businesses continued to generate positive cash flow since the middle of March when the crisis ramped up as a result focus discipline and micromanaged.

Oh, the details of our business.

That we implemented.

We're still in a very uncertain timing and hopefully the recent trends in our business that we're seeing are indicators that though we are in fact coming out of this so time will tell and with that operator, we'll turn call over for questions.

Thank you if he would like to ask a question. Please press star one and your telephone keypad. It confirmation Toma indicate your line is in the question Q you May press star to if he would like dream of your question from the Q and for participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star he is.

Our first question is from Jeff then.

And then with B. Riley FBR. Please proceed.

Hi, good morning, everyone.

Can you speak a little bit more about the sales progression you've seen in China in recent weeks during the reopening I guess, what you anticipate in that region for Q2.

Yeah, I think you know we've we've obviously been following it very closely both.

China business, so important to US and then just trying to understand a you know how how that recovery could be a proxy for the rest of the world and some of the things that we tried to understand is you know is the is the returned to normal there really slow and gradual or did move a lot quicker.

Does it seem like it's sustainable or is it kind of trying to meet a backlog demand and then Peter out in.

Not really everything that we're seeing isn't bad the recovery in China by all.

By all respects has happened quickly and it looks pretty deep ban sustainable and so as we're looking at at forecasting out through the rest of Q2.

You know all indications are that that we're seeing real movement. There. So for US obviously, we had a tremendous Q4 19 with China.

One it was a great great quarter based on the momentum last year, but then we pulled ahead pulled ahead some of the sales from Q1 like we've talked about.

Then we have Q1, which was down 55% really painful with China shutdown between the lunar new year in Kobe really shutdown for most of the quarter. So for Q2 now you know, we're we're conceivably at a 100% plus growth year over year, which is which is really good.

You know it's off of the low base in Q2 19, but it's it's huge growth that way. It's huge sequential growth from Q1, you know, it's still puts us off of that peak that we had in Q4, but I think under the circumstances were really happy to be able to see that for for Q2.

Okay. Good and then I understand you aren't providing guidance, but can you give us more color on what you're seeing in your business in North America, a in regions that have eased lockdown measures and how you're thinking about reopening for your business both in your on shops and.

Our dealers are reopening maybe just touch on carbon measures that you are taking in your own facilities and what your dealers and doing around coated.

Yeah Gretchen.

Sure, Yes, it's been it's been really kind of mixed and when you look at the different regions. You know if you were to compare I, even Canada to the U.S. when Canada was in.

The depths of they're locked down.

It was I.

I would say implemented much more effectively much deeper in you felt that whereas in the U.S. The the level of activity is kinda theyve been bloating and you know sort of bottom there in mid April but it was never as as clean cut it never is sort of just shutting off the spigot.

Charlie and I think is I mentioned, what we're seeing with our average daily revenue trend for our installation businesses.

Anecdotally were were words, you are hearing that echoed from a lot of our customers.

Where it's not uncommon for where we have customers. You know this month that are that are fully booked you know that would that would.

Say they are operating in a normal way now it does vary by geography, but I think it's there's more of that than maybe we would have expected what we're doing and what we are helping to guide our customers to do is looking at things obviously safety of our team. So this.

It's a temperature cheggs news or a mass and shields.

Disinfection procedures and then also.

Oh procedures around how do you ensure that the customers vehicles are disinfected as they come in and as they leave and we're trying to help our customers adopt best practices with that too and they all have the sort of saying the same concerns, but I think given our.

Position is really understanding a the that part of the business since we do it also we're in a really good position helping.

Okay, Great and then if I can just squeeze in one more how are you thinking about perhaps evolving your acquisition strategy. During this current period.

Yeah, I think you know that's that's a very important question and I think that we're not looking at fundamentally pausing that are spending that I think it will it will change I think what we're going to find is that market by mark.

Good you know, even within North America or within another country. Some of the dynamics are going to be different out of this so it may change.

What we prioritize.

It may change, what we're willing to pay.

I think it may.

Increase the number of interested parties, we have a I think companies of every size.

A real lives with something like this that so unprecedented how vulnerable really all companies are and particularly the smallest companies arduous that much more vulnerable the prospect of business going to zero due to government Bandaid. You know is really a frightening thing so.

I think it I think it.

It really opens up a window.

As we plan to do as part of that strategy to get more engaged like we've been talking about it and then you know obviously, we did the last transaction in a in Canada earlier this year.

I think it really gives us an opportunity to double down there, but I think there will be things different I think but the mix may shift.

The the economics may ship, and we may be looking for different deals, but it's it's not going to slow us down at all.

Okay. Good to hear thanks for taking my questions and best of luck.

That's great. Thank you.

As a reminder, just a one on your telephone keypad, if he would like to ask a question. Our next question is from Steve Dyer with Craig Hallum. Please proceed.

Thanks, Good morning, guys.

You've given a lot of great color about you know sort of what you've seen in China versus here and I know, it's very very early days here are some dealerships aren't even open but I think you'll typically back to the house has been opened through through some of this are you able to sort of compare and contrast that all sort of what you saw in China in terms of Oh.

Reopening to what you're seeing early days here isn't because one of them you know sort of responding better bouncing back a better.

Well the one main difference I would say is like some of the other countries you know the shut down in China was certainly no either more absolute more effective. So you know China activity when zero for a period of time or close to.

Whereas in the U.S. you know, we really didnt see that so I think that's going to be a key differences you're not ramping off of the insane low because it just didnt it didn't get to that level.

But I think so far and I'm really.

Basing this on the past 10, 10 business days or so in May but you know we were seeing a lot of instances where things have ramp quite quickly now maybe too soon to say that across the board say within the U.S., but in pockets in with certain customers. We've seen added in that you know that resemble.

China to some extent so.

Got it that's a that's great running things in terms of Europe.

Yes, but had a really strong Q1 display you know sort of being on the on the leading edge of the curve relative to us.

What do you sort of seen there in the second quarter so far.

You know we were been off of our sort of the peak rate that we saw on Q1.

We saw some you know slow down in in Europe, really very into March and April sort of like we saw in the U.S., but we're seeing that picked up.

You know really a commensurate with sort of what we're seeing in the U.S. in Canada now so I don't I don't think that Europe's a situation where he the impact of that will say fundamentally delayed and that's why we didnt see it more in Q1 I think it's just a for us spin.

A bit more muted compared to some other or some other markets.

Sure.

In Q2 would you anticipate just sort of the relative higher mix of China vis-a-vis sort of China's bouncing back in the U.S. will probably have its worst quarter would you anticipate any sort of material swinging gross margin on that or my over thinking the well I think we will see.

On what that mix is you know we will see gross margins going I mean, we're at Q1.

36, plus percent we're at the at the highest than we've ever been you know if you go back and look at at Q4, 19, where China was a a much bigger presented the mix you know we were significantly off from from 36. So I think we're gonna be closer to that.

Got to that range, probably in Q2 Ah if if we see China really outperformed relative to the rest of the world, which which right now I think is our best guess, but the exact mix of that to be determined. So yeah. I think from from the Q1 run rate with gross margin, we'll see that decline substantially sequentially.

Q2.

Got it.

And then lastly, just sort of more one off the face shields is that something you anticipate doing for some some time, yet and is there any sort of material contribution from that that's it for me. Thanks guys.

Sure No Steve Thanks, Yeah, I think what would you know we early on we said how can we help and.

Many of the raw materials use for they shields and other things produced in short supply and and we said well we can create a base shield using a raw materials that we out and it's going to be a premium nicer higher cost of construction product, but we have ample supply and it was a good way to really.

We get our team rallied and we're seeing that demand continue and you know people think about ppt relative to a medical facilities and whatnot, but I think what's what's lost in that is that they're all sorts of businesses that need P.E. that never needed it before.

We're just trying to protect their their workforce. So it's not it's not a you know material from a revenue sense a it does allow us to keep inventory moving that sort of this cash flow from that standpoint is a nice side benefit, but we do intend to continue doing it.

As long as there's demand and then if that ends will will stop doing it but it's a it's a good project and something we can help.

Just a little bit so we're happy to do it.

Okay, well done thanks, guys.

Thanks, Steve.

We every 10 of our question and answer session I would like turn the call back over to management for closing remarks.

Yeah, I want to just make one correction earlier I think Barry stated that we had 665000 of our FX losses realize there's actually 265000 out to be approximately 400, K FX loss. So just so that's clear.

Thank everybody for your time, 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 and thank you for your participation.