Q2 2020 Xpel Inc Earnings Call
Greetings and welcome to the smelting second quarter 2020 earnings call.
All participants are in a lessening <unk>.
A brief question and answer Sasha will follow the formal presentation.
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The conference. Please press star zero on your telephone keypad.
It's now my pleasure introduce your host Jonathan Hawaiian last Investor Relations. Thank you John you may begin.
Good morning, and welcome to our conference call to discuss textiles financial results for the second quarter 2020.
The call today are right pared back spells President and Chief Executive Officer, and very Weird Expels Chief Financial Officer.
Provide an overview of the business operations and review the Companys financial results immediately after their prepared remarks, we will take questions from a call participants.
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Okay with that out of the way and I'll turn the call over to Ryan good right.
Thanks, John appreciate it good morning, everyone is well welcome to the second quarter 2020 conference call.
During our Q1 earnings call in May I indicated we were seeing signs that the business in many of our region just turning the corner.
After the pandemic after the 21% revenue decline, we talked about an April Robyn certainly been pleased with our results in Q2, which by almost all measures was an outstanding quarter Bras and a fantastic come back from April certainly well ahead of what could have been given the kogut 19 intact.
Revenue for the quarter grew 19% over Q2, 20, Nike Inc. 35.8 million.
Certainly topped our expectations revenue ramp up.
Acceleration began in May and June ended up being a record a monthly revenue month Forex Bell and just for context June revenue was over double April revenue. So quite a swing. We will also review our performance by region some things have been.
Similar across regions, a pronounced decline followed by a strong rebound what's been inconsistent among regions the timing of entering the decline and the duration of the decline.
The China region continued the momentum we saw in April as revenues grew over 200% to just under 10 million for the quarter.
Obviously, China had an easy comp as Q2 29 team as a week quarter based on the previous inventory build a prior to the core part of that quarter, which we previously discussed this was the second highest revenue quarter for China. After 13.5 million. We saw in Q4 last year as a reminder, accelerated.
A few million in revenue from Q1 2020 into Q4 2019, just based on the timing of shipments.
Non auto sales rep or 10% during Q2, so we certainly benefiting from that our forecast tied to join that had been consistent strong. Obviously, there's still question in China. As there is now in other parts of the world how much demand is being driven by going up demand during shutdowns and how much of the new normal.
It's hard to say for sure obviously, something we're watching closely.
This point, we're expecting year over year growth in China compared to Q3 2019 for Q3, which was the first quarter in which we saw significant increases last year, which also then translates to modest sequential growth in China from Q2, 2020 to Q3 2020.
As a reminder, 2019, our China revenue was very back half loaded. So obviously, we're very pleased with China I'm very pleased to see how the markets performed coming out of a very severe shut down very severe go get impact.
Outside of China already pack business grew 7.7% for the quarter pandemic impact is very spotty and they pack country. So it's been pretty hard pressed to forecast near term impact there, Hey pack, which excludes China has probably been the most volatile thrust during the pandemic. So we have at least visibility about this part of the market. We also have largely.
Attributed orders, which are subject timing comparisons.
U.S. business finished down only 2.3% for the quarter, which was a great result, considering the U.S. was down 36% in April as we previously mentioned.
The year over year decline in the U.S. drop dramatically in May and we returned to year over year growth in June.
Oh, that's strong year over year growth continued in July.
Similar to China have questions around whether were satisfying pent up demand or resuming normal selling process. It's been fairly widely reported cash down payments. It increased on average for new car purchases in the U.S. as things have reopened. So this helps suggests the changing prioritization of spend as result of the pandemic.
Back, but it's too early to call that for sure, but we're really see the U.S. come Roaring back very happy about that.
Canada U.S. dollar revenue declined 24.1% for the quarter.
Canada had a strong lock down compared to the U.S., particularly in Quebec.
Our installation businesses in Canada are performing extremely well that extra working hours. So just to meet demand so a little bit unable to square that fully with the overall trend in Canada. It was certainly unfortunate timing with our Protex Center acquisition in February just before coded, but it's performed very well eggs things.
Beyond our expectations.
In Continental Europe had a great quarter posting U.S. dollar growth is almost 47% as we've talked about in May we saw fairly strong performance in the early days and the in the you locked down so were not as universal or some other countries, particularly in the markets in which we do best in absence, we lucked out but it does.
Highlight how different markets are performing relative to the timing in and out of killed it.
Previously mentioned, we Oh you on projects in Europe that have yielded good results for us and they were not overly impacted by the shutdowns.
Our UK revenue declined 32% for the quarter UK had probably the most effective and comprehensive locked down of all the regions in which we operate except for China and it was one of the last regions to open back up so the results not surprising <unk>.
In contrast to the U.S. as I mentioned earlier, we saw steep decline in the UK during the month of May willing to their locked down time, even though we returned to growth in June.
Latin America revenue declined 5.5%.
Mexico business. However, it's continued to grow for the quarter, which was notable Mexico continues to be substantially locked down Mexico was one of the last countries.
We have exposure to you entered locked down in the still being impacted today.
Q2, we knocked on revenue grew 87.8% and represented 16.6% of total revenues. So this is a great result, obviously, an all time high on a percent of revenue basis.
And the growth there is really broad so it's not it's not attributable to just anyone region. It's it's truly global for us.
The growth is coming.
From the automotive segment.
Our commercial and residential product line continues to grow I'd still a small part of the overall, 16.6%. Although we're we're seeing a lot of momentum there and we had record sales months for that product line in June and then again in July so that's great.
Well, obviously be talking more about that going forward.
Likewise, our fusion ceramic coating products also good record sales in June and then again in July as we see increased adoption.
We have product line extensions plan here for fusion that will be released soon so we'll be talking more about that as well in the future.
From a strategy standpoint, like you mentioned in May we have also re initiate our acquisition programs, which we did temporarily suspended the beginning of a cold it.
We're in a good cash position and intend to deploy some of that cash throughout the rest of the year further and so those strategies both in the United States and beyond.
Overall gross margin for the quarter finished at 32.8%, which was down from 35.3% in Q2 2019.
Primarily driven as many of you are aware by mix from growth from our 200% growth in China in slide revenue declined in the U.S., China represented about 28% of Q2 revenue, whereas it was only 10% Q2 2019.
That being said, we also had some downward pressure on gross margin there related to covert 19 during the quarter our installation labor from our installation business has also hits Cogs during the shutdown we continued to pay our team.
Obviously, we knew that would have an impact to gross margin, but it's only way. We would operate we also incurred additional shipping costs related to some strategies around mitigating a our exposure during the beginning of the Kobin impact and then also a additional shipping costs really related to meeting the surge in demand.
Once the various regions began opening up.
And the May and June.
[noise], so nice leverage during the quarter, that's DNA, which finished at 18.4% of revenue, it's close to our internal target, 18%. We saw an impact on sales and marketing expenses during the quarter as many planned marketing events were cancelled and we made the decision to temporarily suspend some other marketing activities at the onset of the pandemic.
We previously announced last year, our intention that 90 basis points to our marketing spend on annualized basis for 2020 odd unlikely we will fully spend that this year, although we expect the sales and marketing expense to increase for the balance of the year off of kind of acute your number jute you've run rate.
Oh this resulted in solid EBITDA net income performance for the quarter, which given the headwinds. We saw in April was was really great to see a while the Q2 momentum has continued into Q3, so far but still obviously quite a bit of uncertainty as to the future impacted.
Co bid in the fall out from Joe Good China seems to be on firms putting at this point U.S. business is obviously turned a corner.
Like I said, we question to what extent, we're seeing benefit of pent up demand or where consumers reprioritizing their spending a these trends will continue to play out, but I I would certainly say it's been encouraging so far.
As we look over the rest of the year, we're expecting growth in the high teens in Q3 compared to Q3 2019 based on what we're seeing in the U.S. and beyond recognizing that our China business ramp significantly a last year in Q3 of 2019 compared to Q2.
Finally, I want to again, thank our team for their unwavering commitment to provide exceptional service to our customers. It's been really a very challenging year, thus far from an operational perspective, and our teams really stepped up I want to thank all of the operations team, obviously continue to show up and serve our customers day in day.
Out even during the pandemic you know if you do you think about it we pivoted from an environment in end of end of March and April where we're looking at every way to minimize expense to make sure. We're on the best footing to one where we have to meet our highest revenue month ever in June and that's all in a 90 day.
Spend that's been incredibly challenging operationally, obviously these aren't job that can be done from home.
So we really have a better gratitude is among the team you know as I've said before our team is really what sets ex fell apart and I'm very proud of the effort you know that every at every level in every area. The organization during these times.
And I'm really proud that we get on or the commitment I made very early on that we would not have any reductions in our workforce. As a result of those are even when things looked far more uncertain early on which which we which we did on to that so with that I'll turn it over to Barry Barry take it away.
Thanks, Ryan and good morning, everyone. Oh, clearly Q2 was a very solid quarter for us with revenues growing 19% to 35.8 million, which is the second highest quarter in our history.
Included in this was approximately <unk> point Threemillion, a new revenue net of product sales related to our February acquisition or Protex Center in Montreal.
We also had a bought point 2 billion a revenue included in Q2 2019 related to our 2019 dealer conference that was out of period.
If you normalize for those items revenue would have grown approximately 18.5% and total revenue for the first half the year grew 17.1% to 64.2 billion.
Product revenue in the quarter grew 21.8% to approximately 31 billion.
And in this category paint protection film grew 14.6% 24.2 billion due mainly to the strong performance in China during the quarter, there's right pointed out our window film product line continued overperform window films ended up being 16.6% of revenue, which again was a record high.
Q2, 2020 service revenue grew 3.8% for the corner and 13.7% for the first half a year.
In this category software revenue grew 4.4% for the quarter and 9.3% for the first half of your due mainly to to increases in DAP subscribers.
[noise] Cutbank credits revenue declined 21.9% for the quarter, an 8.6% for the first half of the year and as we've discussed in the past our cutbank revenues the value assigned to the square footage added the customers cut back.
When they buy or film and this effectively is just a reclass sought a product revenue and this cline, resulting mainly from declines and product revenue in the U.S. in Canada, where the cutbank programs more prevalent.
And obviously less cutbank affiliated product revenue means less square footage assigned to cut back revenue and therefore less cutback revenue.
Installation labor revenue grew 45.1% for the core and 49.8% for the first half of the year.
Our total installation revenue combining product on labor increased 45.2% represented 8% of our total robinho and if you exclude the impact from the Protex Center acquisition total installation revenue grew right at 28.3% for the quarter and this growth is attributable to increase in demand for install services.
Primarily in Europe, and that's mainly related or OEM projects over there.
Our U.S. installed business was flat for the quarter, while our Canadian installed business, excluding Protex center declined substantially all due to cope with 19 impacts.
And our training program, which resumed during the second half for the quarter and that continues to ramp up here.
Gross margin for the quarter grew 10.5% to 11.7 million in as Ryan mentioned, our gross margin percentage finished at 32.8% first 35.3 person Q2 2019 gross.
Gross margin for the first six months grew 17.4% and represented 34.3% of sales, which was similar to the same period last year, obviously gross margin can vary from quarter to quarter, depending on our distributor direct customer mix, but gross margin improvement remains remains a top priority for us.
Our Q2 2020, <unk> expense was essentially flat versus Q2 2019 and represented 18.4% total revenue for the six months ended June Thirtyth 2020, total <unk> expenses were up 16.9% and represented 22 and a half cent of revenue.
Overall, we realized about <unk> point 7 million in savings from our expense management initiatives in Q2 in response to the pandemic and there was probably are these were primarily in reductions in travel in sales and marketing. Some of this came naturally with the suspension of travel and cancellation of certain marketing events. We also took advantage where we could go.
<unk> programs and all the jurisdictions, where we operate and this yielded another proximally point 2 million up expense offset.
And as we mentioned last quarter, we also elected to defer salaries for members of the management team, which we did end up paying back during the quarter.
So as we think about us DNA for Q3 in Q4 were expecting slight increases to the Q2 run rate to some of these cost saving initiatives are rolled back in and travel and other initiatives reserve.
Sales and marketing expenses declined 7% during the quarter and if you normalize for the dealer conference costs in Q2, 2019, which brought a period sales and marketing would have grown by about 18.9% and on a year to date basis sales and marketing grew 27.3 per cent compared to the same period last year Q.
220, 20 general and administrative expenses grew 1.9% versus Q2 2019 and for the six months ended June Thirtyth 2020 general administrative expenses were up a 12.5%.
And also point out that you'll notice an increase in interest costs in Q2 and for the first half of the year and this increase is related to interest on the lines of credit that we drew down in late March early April in response to coated and we did pay all the lines back in June and also as you may recall from last quarter, we did experience.
It's over.
Point, Fourmillion and foreign currency loss late in Q1 that is reflected in our year to date number on that line item.
So we did see some nice leverage in the quarter as reflected in our EBITDA net income performance Q2, 2020, EBITDA increased approximately 1.3 million for the quarter over quarter to 5.7 million, reflecting an EBITDA margin of 15.8% and this was our second highest EBITDA quarter in our history and on a year to date basis EBITDA.
Grew 14% and represented 12.8% of total revenue.
Q2, 2020, net income increased 32.1% versus Q2 2019 to 4 million. It represented 11.1% of total revenue.
Yes for the quarter came in at 14 cents per share on a year to date basis net income grew 14.7% represented 8.7% total revenue.
Q2 cash flow from operations was very strong at 11.5 million buoyed by strong EBITDA performance and changes in working capital, primarily primarily related to reductions in our inventory levels and this was by far a record quarter for cash flow generation for us we did a nice job managing our inventory levels as we dealt with the rapid.
The increase in demand during the latter half of the corner, which which certainly contributed to the strong operating cash flow performance.
Being said, we exited the quarter with lower inventory levels. Then we like so we anticipate building that back up as we move through the rest of your and we also continue to study our target inventory levels and the possibility that we may be trading lower inventory for higher operational costs. So we'll continue to be looking into as we move.
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And as I mentioned earlier, we did pay back our lines of credit during the quarter and you May also recall from our last call. We did close on a 6 million dollar term debt facility with the bank San Antonio and May.
In total we have just under $26 million in cash on the balance sheet and we anticipate a that will fund future acquisitions, while also providing us flexibility to manage through any future Kobin 19 pandemic uncertainty.
And finally, I want to Echo Ryan's comments regarding our team and especially your operations team have done a great job, serving our customers and really serving on the front lines. There. So so oh, great work on that front. So obviously, great corner for us and we're hopeful these positive trends continue as we move through the rest of the year and with that operator, we'll open the call for questions.
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Our first question, it's probably a line of Steve Dyer with Craig Hallum. Please proceed with your question.
Oh, Thanks, Good morning, guys and a really appreciate the detail Lois. So so thank you just a couple from me.
Window fill look like it really sort of you know began to inflect in the quarter. So I guess it you're kind of a two parter there as you look forward and through half of Q3 is does that does that feel like there is some catch up in there given its still a relatively speaking small number or is that a number you think you can grow off.
But I guess just as you look at the categories for Q3 would you expect you not to get to that high teens number sort of similar growth rates of the different categories or is there a deviation there.
Yeah, Steve No. Good question I think when when we look at that there's nothing in this quarter that we would say is you know sort out of period or abnormal relative to the trajectory on the window on business. So I think we expect that to continue to to grow a lot.
Side, the rest of the business going forward. So I wouldn't I would not expect that there was any catch up on say window films for any reason I'm in the quarter that wasn't present or other product lines I think what what's you're seeing there is just more and more adoption of the product, but the automotive and the.
And the architectural really across the world and you know it takes time to when the customers and takes time to show them. The this is a good product.
And we're really just seeing the the fruits of that now continue to continue to develop.
[noise] <unk> and you make an interesting point is architectural starting to be a more meaningful piece of that about mix or or or is it still quite a bit of yeah. No. It's it's you know like we mentioned that still small, but it's becoming more meaningful and we expect to talk more about that and and have a number of.
Investments and other things plan, but we did see a record a record sales for the architectural in June and then another record in July and and really with any new product that's sort of what we expect because it. It it does take time to win new customers allow them to evaluate it a and then.
Sort of build on that so I think you know while the automotive window films been in our product portfolio for several years now you know, it's it's not surprising to me at all that we really see that continue to grow now.
As opposed to say winning all the business. When we initially launched it I think we'll see similar thing with the architectural film and then the other products we've got.
That's helpful. And then as you look towards the next quarter you gave very good granularity and maybe I missed this but just as it relates to gross margin how should we think about China mix in Q3 relative to Q2.
I think the I think our sense is that the the China mix is gonna be very similar maybe slightly less than in Q3 than Q2, but we don't expect a big substantial swing one way or the other so it's probably comparable or slightly less than the overall percentage.
Got it one more for me and then I'll turn it over as you talked a little bit about M&A as you think about that as sort of your strategy. The sandwiches smaller installation centers or or is there any deviation would you look to go bigger would you look to do product extensions any any sort of change of plans there at all.
Well I think we're we're we're open to bigger but in our space bigger is a bit harder to find so there aren't a lot of prospects. There a product line expansion is is always a possibility, but we've got this great.
Portfolio of products now that we really need to expand the double down on so if it was product related it would probably be more built around something we're we're already doing so I think more than likely that sort of our leads us to our bread and butter sort of channel strategy, which is you know installation and then a distribution in can.
In Sri in other countries in which will operate directly.
Got it okay nicely done guys. Thanks, Thanks, Steve.
Thank you. Our next question has come from the line of Jeff Van Sinderen of B. Riley. Please proceed with your question.
Hi, Good morning, everyone. Let me add my congratulations on the strong metrics for acute show I know you touched on this a bit in your prepared comments, but any more color on how you're thinking about how much of the rebound is pent up demand I guess, what you're looking at their <unk> chairman and how sustainable you think the growth rate you fixed.
Variance is going forward all else being equal.
Well I think where we're looking at it kind of two ways. We're trying to look at it and say how is the automotive.
Business performing and the countries in which we operate and then how a long lasting and durable is that down I mean, you've seen in China, where you had relatively good sales numbers for for many months now as opposed to say one really good month following opening up.
And then I guess to a lesser extent, we're looking at is it is it you are we seeing pent up demand solely from customers of ours that had a lower inventory during the pandemic, we sort of alluded to that back for Q1, where we saw our D.A.P. usage trend higher.
And then our film purchasing suggesting there wasn't a big but these stock with our customers and that may very well it happened, but given how little inventory most of our customers Kerry I think it's it's pretty negligible.
So at this point I think we feel we feel pretty strong that where we're seeing something that isn't just a rebound to satisfy that that kinda up demand I think you know there in the world. We're in today there are a lot of factors, while many of them out.
Go little but there are a lot of factors that I think our are driving car ownership and are driving a lot of the things that would ultimately help our business. So now that's but that's really all we know you know if we want one of the concerns has been.
Particularly in the U.S. Yoo inventory levels at a new car dealerships have been really low would that impact. The business. You know we sort of thought maybe it would we see that in July didn't really see that you know some really good results in July as well so knowing the low.
Limits of what we can know we feel pretty encouraged that we're not just satisfying a month or two of demand for when things are shut down.
Okay. Good to hear and then I know you mentioned kind of how you're thinking about acquisition targets, but just wondering are you seeing or are you sensing that may be opportunities are proving around acquisitions, given the current environment.
I would say I would say so I think you know this process, whether you're someone in our industry or US you know it exposes your your vulnerabilities in weaknesses and I think that when you look at the profile of the type acquisitions. We look at I think that's that points been acutely made to a lot of people. So I think that.
It does help us in that process.
We had talked earlier that we would kind of had a hard time closing some of the deals we were looking at because we just thought valuation was was not in not meeting our criteria you know coming into this so I think we're we're a little bit optimistic that's going to help us open that up but that'll that'll be proven out really over the rest of the year.
Right about that.
Okay. Good and then just one more for me if I could squeeze it and how should we think about your marketing plans for second half.
Well, we proactively cut a number of things at the pandemic onset as a lot of companies did and then we're also subject to a lot of canceled activities relative to our event marketing, which is a which is a pretty big component of our marketing.
So we had kind of things, we decided to curtail and things that were just curtailed on us I think we're many of the events that we would look at in the second half of the year have been canceled. So those are expenses that were probably not going to out on the flip side, though some of the other digital mark.
King and other things that we do that we may have.
Curtailed we're definitely either have resumed those are will resume and expand upon those so we're definitely going to see a in increase from the first half run rate or more specifically, probably the Q2 to run rate, but I don't think it will meet the expanded amount we talked about last year one.
So you don't really drive kinda that 90 basis points increase in total spend I don't think will I don't think we'll we'll meet that for the year just really because in many of the ways. We we spend the money we just literally can't.
Got it thanks for taking my questions and continued success.
Yep.
There are no further questions at this time I would like to turn the floor back over to management for any closing remarks.
I'd like to thank everybody for joining us. Thank you for your time and we look forward to speaking with an export.
This does conclude todays conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.