Q3 2020 Xpel Inc Earnings Call

[music].

All participants are in listen only mode.

[music] exercise so all the formal presentation.

Anyone require operator assistance during the call.

Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded it is now.

My pleasure to introduce your host John as well.

I have asked Investor relations. Thank you you may begin.

Good morning, and welcome to our conference call to discuss sex spells financial results for the 2023rd quarter on the call today right pace X Bell's President Chief Executive Officer, and Barry would X Bell Chief Financial Officer will provide an overview of the business operations and review the Companys financial results immediately after prepared remarks, we will take questions from call participant.

Let me take a moment to review the Safe Harbor statement. During the course of this call. We will make certain forward looking statements regarding XL inc. and its business, which may include but not be limited to anticipated use of proceeds from capital transactions expansion into new markets. The execution of the companys growth strategy, often but not all but not always.

Forward looking statements can be identified by the use of words, such as plants as expected expects.

Casual intends contemplates anticipates believes proposes or variations, including negative variations of such words and phrases, where we're state that certain actions. He that's results may could would bite or will be taken at Kirby achieved such statements are based on the current expectations of management that all the forward looking that's the circumstances disguise.

On this call may not occur by certain specified dates we're at all and could differ materially as a result of no no no risk factors and uncertainties affected by the company performance and acceptance of the company's products economics doctors competition, the equity markets generally and other factors beyond the control of Docs Bell, although I suppose attempted to identify certain important factors.

That could cause actual actions is that result to differ materially from those described in the forward looking statements there, but maybe other factors that cause actual 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 at which they are made and export.

Takes no obligation to publicly update or revise any forward looking statements, whether that's a result of new information future events or otherwise.

Okay with that I'd now like to turn the call over right go ahead.

Thanks, John and good morning, everyone welcome to our third quarter 2020 conference call by all measures Q3 was the best quarter, we've ever had to that spell we had record revenue of 46.1 million coupled with record net income of 6.6 million you had record EBITDA non-GAAP.

Revenue for the quarter grew just south of 30% and was led by robust 40% year over year growth in the U.S. region, our largest momentum we saw beginning in the second half of Q2 carried over into Q3, which was great to see the revenue growth was was broad based.

I mentioned, our U.S. business grew 40% year over year to 22 million, which was a record for the region. In fact, we had records in almost every region in almost every financial metric this quarter with just a handful of exceptions. We've seen good performance on the U.S. auto industry in Q3 generally.

Speaking.

Well it really tight inventory for those that follow the sector at a really tight dealer inventory.

Thats could be a blessing or a curse depending on depending on how you look at it but in the current dynamic it certainly hasn't caused us a problem, we're seeing that momentum in the U.S. business carry into so far into Q4, which is very encouraging.

I try to region was flat quarter over quarter and down about 6% sequentially versus Q2. This was a bit less than our previous estimates as we talked in Q2 as we ended up pushing several orders from Q3 to Q4 due to our own operational needs in a busy costs.

Order sales in China from our distributor to the rest of the network in China were up over 30% year over year. According to our in country sales reporting and trying to auto sales have continued to do well and grow during the third quarter, so momentum seems to be continuing there.

This point, it's an open question as to China revenue in Q4, mainly due to timing of shipments and making up for delays we incurred in Q3, Oh, China Q4, 2019 was the highest revenue.

In the history for China that we've had at 13.5 million so it'll be a tough comp for us either way as expected due to the acceleration of orders from Q1 2020 into Q4 2019 that we've been been talking about over the course of the year. So for Q4 2020 per ton.

China, we could end up with sequential gains off our Q2 Q3 run rate for China, which would still leave us a little bit off from Q4 2019, well, we may see some orders push due to operational region reasons in which case Q4 would be closer to Q2, China revenue of around 10 million.

And we'll be set up for a really awesome Q1, 2021 for China. So irrespective of the shipment timing in Q4 versus Q1, we expect the 30% plus or minus in country sales growth that we've seen in Q3 to continue so a very strong.

Formats in in China.

This will be a big driver of our overall topline revenue growth for Q4 in terms of timing, but the China business is performing great. We're seeing increased adoption of our other products now beyond just paint protection films.

Outside of China, Our Asia Pacific business came back with nice growth of 24.4% is the region recovered from the pandemic as we mentioned previously this region can be volatile small size for us and we have a lot of distributors that we sell through everywhere, but Taiwan also create some volatility but we.

We expect continued good performance there in Q4, Canada.

Canada return to solid growth during the quarter with U.S. dollar revenue, increasing almost 26% as a country came out oh, they're locked down in Q2.

I'll note the performance of our Protax Center acquisition, which we which we completed in February exceeds our expectations, which is really great and helped contribute to a good quarter and we have a really great team in Quebec, Who's performing excellent in Continental Europe really knocked it out of the park with revenue growth of 88%.

To a record 3.7 million a million dollar U.S. dollar terms for the quarter. This strong growth again, it's broad based across all countries in which we operate and sell to and in our European segment.

Oh, it's product awareness and adoption increases in the region, we want to make sure that we're there to meet demand and we have been a growth also helped by continuing success at some of the OEM projects, we have in play at the region as well.

You may recall last month, we announced our intent to acquire assets, a friend's auto racing, which as distributor of ours, Serbia, France, We did close that acquisition last week and France is another underpenetrated market for us and consistent with our acquisition strategy, which centers around the notion of getting close to the customer.

To provide better service and drive increased product adoption.

The acquisition of our distributor in France is certainly consistent with that strategy, France will be managed as part of our Netherlands, a European based European headquarters welcome our new team members in France, and look forward to growing that team next year as we mentioned in the past, we still expect to use up bar our excess cash.

Cash and our cash flow from operations, primarily on acquisitions and we have multiple acquisitions that were currently pursuing.

Our UK region came back strong coming out of one of the most restrictive lockdowns growing through 43.5% for the quarter.

Oh, which was also a record for the region, perhaps there's some pent up demand, but the momentum has continued into into Q4 will be watching the UK, yeah Tobin restrictions in Q4, they reported some resurgence some government taking escalating steps, but they seem to be more measured than they were the first time around.

Latin America revenue declined just under 7% again with the exception of Mexico Latin America is comprised.

Largely distributors and so you've got order timing, but.

But our Mexico business continues to perform well and in U.S. dollar terms doubled revenue this quarter compared to Q3 2019. So this was another region that faced severe lockdowns and and the reemergence out of that in Mexico has been really strong.

We're also planning on moving the management of our Latin America region to our Mexico Office and 2021. This is a big big move for US I'm really looking at the rest of Latin America, which we expect will help drive development of the market leveraging obviously calm language for the most part and other operational efficiencies. So that's a big big play.

And for next year, and finally middle East I had strong growth 72%.

Oh, which was another another record once again, we had tremendous performance of our window film product line in the quarter, which grew just under 79% to 6.3 million representing 13.7% of total revenue.

As in past quarters growth, you're is broad based across regions for sure our.

Our vision product line, well not yet material to our overall total revenue continues to make solid progress we had our highest revenue of bijan since launch during the quarter.

We're working hard with the new product and we will certainly be hearing more about it in future quarters.

It's a it's an exciting area of growth for the company.

We also had record sales for our automotive ceramic coating product fusion plus during Q3 in October we launched five new fusion plus product line extensions to complement our core ceramic coating product. A these are designed to protect glass wields plastic trim and other surfaces. This gives our customers more.

Our opportunity to increase their revenue per vehicle, while simultaneously provides more coverage options for the for the car owner. So another important add to that channel as we build out that product line.

Also of note in the fusion plus.

Product line is a marine product, that's really to complement the automotive line up and marine applications exist across our product line or pay protection film coating as I, just mentioned and for a window count.

So we're going to look to focus on this next year to really highlight.

Develop these applications.

As we talked about previously we will be increasing our inventory levels between now and the beginning of Q2 2021. We're doing this for two reasons first oil we will immediately realize cost efficiencies outweigh any carrying costs of additional inventory and the ramp up after COVID-19, we.

And our customers resorted to expense of air shipments. This demand recovered faster than we had planned. This this weighed on shipping costs that for us show up in Cogs and SGN I, even in Q3 with with really outstanding gross margin. That's gionee numbers those are still negatively impact that actually by those.

Excess logistics costs.

Secondly, having more inventory in our various locations will mitigate risks that we've identified coming out of our analysis COVID-19 impact up while we did not suffer any direct supply chain impact like we've been talking about the past two quarters. We believe there's still risk. We can further mitigate should similar disruptions happened again.

So we're looking for increased inventory level into Q2 of approximately five or $6 million above our current current run rate.

Oh more on hand inventory will also let us move faster in a situation of higher than expected demand like we saw in Q3 that necessitated pushing back some of the orders to China and the case in China. There was no end customer impact from delaying those orders as China has plenty of inventory in the channel, but we should build more March.

And for air in our operations going forward and increasing inventory will help do that in a in a modest way.

Barry will be will provide some more color on gross margin and that's you know what I'd like to specific we note that our yesterday as a percent of revenue.

Finished that at a.

16.5% for the quarter, which was a great result for US we talked in Q2 that we benefited from some reduction in SGN a due to the cold at 19 impact on travel marketing and some other areas that we say that largely reversed in Q3 with with the exception of a handful of marketing events that weren't.

Held which aren't overly material. So we're really kinda back a with a few exceptions, including some reduced travel expenses were more normal SG and they run rates are really great performance.

And as I've said in the past our strong revenue growth coupled with with good gross margins and that S. Junaid management drives tremendous leverage and that's what we saw in Q3.

This is the result, we're striving for and our business Oh levers will vary from quarter to quarter.

But clearly Q3 was phenomenal quarter in this regard and and really not remarkable in terms of what we did and what we intend to do in future quarters.

As I mentioned earlier, we have that uncertainty in terms of timing of Chinas shipments for the balance of the year versus Q1, we expect continued strong results across our other regions like we've been seeing this year for that reason, we won't be providing revenue guidance for Q4, except to say it'll certainly be lower growth rate than Q3, given the Q4 29.

Teen China comp and depending on the timing of the shipments around year end Whats Q4, and whats Q1 finally.

Finally, we just completed our 2021 planning process really excited as ever about the growth opportunities that lie ahead.

I know I'd say it on most calls but couldn't I couldn't be more proud of our team and their efforts to serve and take care of our customers. That's what really sets ex fell apart.

And I'm really honored to be part of it and look forward to continuing that for.

For the long term so with that I will turn it over to Barry and then we'll take some questions. Barry go ahead.

Thanks, Ryan and good morning, everyone as Ron alluded to we had record revenues in many of our regions. During the quarter Q3 total revenue was up 29.5% versus Q3 2019 to a record 46.1 million.

And on a year to date basis through September revenue grew 22% compared to the same period last year.

Product revenue in the quarter grew 28.3% to approximately 39.5 million, which was a record high for this category.

And in this revenue category.

<unk>, new paint protection films grew 20.5% to $32 million again. This growth was broad based and led by the U.S. region and as Ryan said Oh. We also saw another strong performance from our window film product line with window film revenue growing 78.9% to $6.3 million.

Which which was another record for us and on a year to date basis product revenue growth was 21.9%.

Q3, 2020, <unk> service revenue grew 37.3% for the quarter and 22.3% for the first nine months of the year and then this category software revenue grew 3.5% for the quarter and 7.2% for the first nine months of the year.

And one quick note on our software revenue as many of you know our software is a significant competitive differentiator for us and we continue to add users to our software every day, but.

But depending on the channel, we may or may not charge for our software in say for example, as we penetrate more and more dealerships. So we expect to continue to see low growth rates on this line item as we move forward.

Bank credit revenue increased 17.8% for the quarter and 0.8% for the first nine months of the year and as we've discussed in the past our cutbank revenue just to remind everybody is the value assigned to the square footage added two customers cut back when they buy or film and it's effectively a reclass auto product revenue.

And this increase and this strong performance was was mainly due to the resurgence we saw in quarter pump in the quarter, primarily in U.S. in Canada.

[noise] installation labor revenue grew 77.3% for the quarter and 60.4% for the first nine months of the year art.

Our total installation revenue, which combines product on labor increased a little over 77% and represented 8.4% of our total revenue.

Clearly our insulation centers had a very busy quarter and we continue to see solid results from our various OEM projects across Europe.

Training revenues for the quarter declined 7.4% due to continued impact from COVID-19, but we continue to see that rebound and expect more as travel restrictions or could tail.

Our training classes continue would be scheduled out and we've also reduced occupancy in some classes for safety reasons. This is another area, where our revenue performance from quarter to quarter could vary depending on our channel strategy, where we may or may not charge for training for certain customers.

Gross margin for the quarter grew 30.6% to 16 million and which was another record for us and our gross margin percentage was up slightly to 34.8% versus 34.5% in Q3 2019.

It was up sequentially from Q2, 2020, which came in at 32.8%.

Our China revenue mix was about 20% in Q3, which contributed to this so sequential improvement.

Gross margin for the first nine months grew 22.6% and represented 34.5% of sales, which was slightly higher than the same period last year and we expect to see gross margins in the 33% to 35% range in the near term depending on the mix, but but we should begin to see some enhancement outside of this range as we move.

Through 2021.

As we execute on our planned initiatives around gross margin.

Our Q3 2020, <unk> expense was 7.6 million growing 15.3% versus Q3, 2019 and represented 16.5% of total revenue, which for US was a record low.

For the nine months ended September Thirtyth 2020, total <unk> expenses were up 16.3% and represented 20% of revenue.

Sales and marketing expenses increased 28.9% during the quarter as we ramped up our spending post kober to restrictions.

These expense increases related mainly to the hiring of additional sales and marketing personnel and the resumption of some of our marketing activities and on a year to date basis sales and marketing expenses increased 27.8%.

Q3, 2020 general administrative expenses grew 10.2% versus Q3 2019 and for the nine months ended September Thirtyth 2020, general and administrative expenses were up 11.7%.

Clearly, we experienced tremendous leverage in the quarter with EBITDA, increasing 50.5% to $9 million, reflecting a 19.5% EBITDA margin and both the dollar amount and the EBITDA margin record highs for us our Q3 year to date EBITDA grew 30.5% versus the same period last year.

Flunked in an EBITDA margin of 15.6%.

Q3, 2020, net income increased 46.5% versus Q3, 2019 to 6.6 million, reflecting a 14.3% in that margin again. These were both record highs for Expo.

Yes for the quarter was 24 cents per share and on a year to date basis net income grew 30% and represented 11.1% of total revenue.

Q3 cash flow from ops was $2.5 million with increases in EBITDA offset by other working capital changes, including increases in inventory, we exited the quarter with a little over.

27.2 million in cash in about 19 million and inventory and as Ryan alluded to we plan to increase our inventory levels are.

In the near term quarters by five to 6 million, which will allow us to maximize certain cost efficiencies and sufficiently meet anticipated rise in demand.

I think we're doing a nice job of managing our working capital as evidenced by our continued continuing improvement in our cash conversion cycle trends and we're well positioned financially to execute on our inventory plan as we move forward.

It's obviously, a great quarter for us and the revenue momentum has continued into Q4 and and notwithstanding the Q4, China CCOP and uncertainty about our shipping schedule Q4, shaping up we think to be another great quarter for us and with that operator, we'll turn the call over for questions.

Thank you ladies and gentlemen at this time, we'll be conducting a question and answer session. If he'd like to ask a question you May press star one on your telephone keypad a confirmation tunnel indicate your line is in the question queue. You May press star two if he would like to remark if you'd like to remove your question from the Q4 participants using speaker equipment. It.

May be necessary to pick up your handset before pressing the starkey.

Our first question comes from the line of Steve Dyer with Craig Hallum. Please proceed with your question.

Thanks, Good morning, another really nice quarter congrats to you both.

Thanks, Steve.

Oh very comprehensive review as you always do so just a few for me as it relates to China. It sounds like some of this is a little bit your decision. When you shift is it is there a little bit of de stocking going on or how would you kind of classify sell through versus sell in.

In China in Q3, and then anticipation in Q4.

Sure Yeah, So I think as you're familiar and many who follow you know that.

The inventory expansion or or contraction on hand in China's is always a big driver of these numbers, we had a period in the past, where we really saw inventory build in China I'm. The reality today is that coming out of the cobot impact you know we took steps up whether it was employees.

Last two attrition, but operationally, we slowed down a bit and then coming out of that at the end of Q2 and into Q3, you know, it's really been operationally challenging for US just to have processing can burden and sure we have enough inventory, so with China, where were selling through a distributor.

And there's a product in the channel you know we have the flexibility to make decisions like delaying shipments by a couple of weeks, which my bias time or buyer satisfaction with other customers or allow us to get other things out on time. So we definitely are taking advantage of that to me.

Our overall operational need so.

If you look at the Q3 decisions into Q4, yes, that's absolutely our decision to delay those orders by by really just you know a few weeks or or a month. So that has the effect of shifting to Q3 Q4. As a result, there is less inventory in the channel than there would have been other.

Her wise, but advise us significant flexibility operationally and we wouldn't we wouldn't do that if it had a negative impact to to the customer but it just doesn't at this point. So were taking advantage of that flexibility provide you know sort of the best overall service to all our customers globally.

Yep got it.

I guess jumping to the U.S. you know your business I think my math was revenue up 40% year over year, and I think overall car sales, which I know is not a one to one comparison because you guys do some aftermarket stuff, but overall car sales were still down 10%, even though they were up much much now.

I said that in Q2, but your Q3 business does it feel like there was some pent up demand given that Q2 much you know a lot of things were shut down or or was that you feel like you're just getting that much sort of penetration.

In the new business <unk> no I would say, we don't feel like Q3 is a result of pent up demand. We we really had that question when you looked at June.

Which was so strong and then July which was really strong we said OK coming out of some of these shutdowns maybe that's the pent up demand, but the reality is what we saw in the balance of Q3 really wasn't any different. So I don't think its a result of pent up demand I think it's just a result of everything were doing now, adding the new products the differ.

In product mix the growth in attach rate the paint protection film and just sort of the core blocking and tackling that we're doing.

Great.

Yes, good segue with respect to the window film that's now a 25 million dollar run rate business and growing extremely quickly what do you think that business looks like in 2021, I mean, it's probably not realistic to be growing close to 100% every year, but it's still really early stages for you guys. How do you think about that.

I mean, we certainly wouldn't I wouldn't say, we're going to maintain the same growth rate on a on a bigger on a bigger base, but for us as we're taking market share and executing in that product and doing it globally. You know not not all regions are equally penetrated it's still gonna result.

In a in a significant growth opportunity for us and and as its smaller probably still continues to grow faster year over year. Then then paint protection does up up until the point. It becomes you know probably even a larger percent of our overall sales. So we have big expectations for growth there.

Next year to continue.

Got it last one for me and I'll hop back just as it relates to the M&A environment, you have a little bit of cash most of what you've done from an M&A perspective has been you know.

Sort of small tuck in and certainly accretive by the looks of of the model is there anything out there sort of transformational that you could or would do or is the game plan to sort of continue just kind of do it the way we've been doing a small you know tuck ins installation centers et cetera. Thanks sure. Thanks, Steve Yeah, I think that.

We're we're always open with the platform, we have now to something transformational, but the reality is that most of what we see or are small tuck in relative to our channel strategy and then to a to a lesser extent related to the process.

Yes that either you know, adding product or doing something to expand the product line and I think that you know more than likely that's a that's going to be what you see from us. The the transformational opportunities I think are probably fewer and farther between but it doesn't mean, they don't exist, but that's certainly not the primary focus of our M&A strategy.

Alright, thanks, well done guys. Thanks, Steve.

As a reminder, this star one to ask a question.

Next question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed with your question.

Hi, Good morning, everyone and let me add my congratulations on a terrific Q3 metrics.

Can you speak a little bit more about some of the underlying channel trends in terms of dealers added versus selling more product through existing dealers and maybe give us a sense of whether you're adding more independent dealers auto dealers any metrics you can share there I know, there's a sort of an indirect element there.

Yeah.

Sorry, I, just got saying also multipart question here sorry about that.

Also maybe touch on.

New products to existing dealers expect there going forward. Thanks sure.

Thanks, Jeff Yeah. So I think that you know that the dynamics that we're seeing are are pretty consistent with what we've seen even over a longer period of time, which is that it's really a a mixture of multiple factors, we see growth in the core product the pain.

Protection film from our current dealers and customers.

We're always adding a new product dealers, but you know as you know and we see we don't talk a lot about number of dealers because we just don't find it a very useful metric in and of itself because.

But the composition of our of our customer base is so very some can be a much smaller than others, but the but the fact is that number continues to grow and then we see increased adoption of the new products.

By our current dealer base a window film is it's still a new product for songs ceramic coating products are new and I think the thing that that we all have to remember is that.

Just because you're our customer already doesn't mean that.

By default, we deserve the business when we come out with a new product we've got to earn the business and that involves a working with our customers showing them about our products, the new products and and hopefully wowing them on why they're better and why they are a good fit so that process continues as we move forward and then I think on the on the last.

Part no there are more and more dealership relationships that we have that's a component of our strategy.

We do see a lot of adoption.

In the dealerships with the window film.

In some cases, we're actually leading with window film and then looking to add paint protection later only because many of the the dealerships from an in house perspective are more familiar with when the film because it's more establish so that's kind of a a bit of a reversal in the dealership market than what you might see in the aftermarket, but it's it's all of the above.

And it's very consistent quarter to quarter, there's no remarkable shift in that trend for Q3.

Okay terrific my multi part question [laughter], so as far as the architectural window film dinner you mentioned much on that just wondering if there's an update on that yeah.

Yeah, No we had record record quarter, there still a small percent of our overall revenue, but that's an area. We we continue to focus on you know we are we are tracking there how many how many dealers that we have carrying the product because in order to do some of the marketing and accelerate some of the marketing we want to do we need a critical mass.

Yeah, so the installer base to benefit from that so we're actually making good progress with that you'll see a lot more coming from us in terms of highlighting that product and the applications Oh, there's a lot more content coming out from US now are really in the past 90 days. So that's a big push for next year to do that and build that too critical.

Mouse.

Okay, Great and then one more if I could squeeze it and just any other thoughts on on a growing yes.

You business next year.

Any other thoughts <unk>, yeah, I mean, the the the European market when you compare to U.S. or Canada, you know our our revenue.

Revenue per capita still significantly less so we're focused on kind of our core strategy there of getting our own people in the right places to build the network to build relationships and build out each country and you know, we're we're cognizant that doing that in Europe is going.

To be different than how we do that in the U.S., hence things like getting on the ground in France, which is which is required for <unk> for the language and culture and to develop the market and in Europe. Overall, we're looking to do that in even more places next year within Europe, because we think.

That's instrumental to the strategy and we know that it works.

Okay, great. Thanks for taking my questions and continued success. Thanks, Jeff.

There are no further questions any care I'd like to hand, the call back to management for closing remarks.

I want to thank everybody for joining us today, and we look forward to speaking with everybody next year I appreciate it.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.