Q4 2020 Xpel Inc Earnings Call

Greetings and welcome to the <unk>, Inc, fourth quarter and year end 2020 earnings call.

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A question and answer session will follow the formal presentation.

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As a reminder, this conference is being recorded it is now my pleasure to introduce John Nesbit of IMS Investor Relations. Thank you you may begin.

Good morning.

Thank you for joining us on the call today, we have Ryan Pape, <unk>, President and Chief Executive Officer, and Barry Wood ex bells, Chief Financial Officer.

He will provide overviews of the business operations and review the Companys financial results immediately after the prepared comments, we will take questions from our call participants.

Let me take a moment to read the safe Harbor statement. During the course of this call we will make certain forward looking statements regarding ex bell on its business, which may include but not be limited to anticipated use of proceeds from capital transactions expansion into new markets and execution. The company's growth strategy, often but not always forward looking statements can be identified by the use of words such as plans.

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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 on the management of EXPAREL forward looking events and circumstances discussed on this call may not occur by certain specified dates or at all and could differ materially as a result of known and unknown.

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No forward looking statement can be guaranteed except as required by applicable securities law forward looking statements speak only as of the date on which they are made and Expo undertakes no obligation to publicly update or revise any forward looking statement, whether as a result of new information future events or otherwise, okay with that I will now turn the call over to Ryan go ahead.

Thanks, John.

And good morning, everyone welcome to our year end 'twenty 'twenty call, we closed out the year with another record revenue quarter, reflecting strong top and bottom line performance momentum. We saw on Q3 continued into Q4 with revenues growing $23 one per cent to $48 6 million, which was a really solid quarter and given the COVID-19 headwinds we.

Early in the year I was really pleased with how we finished the year with revenue of $158 9 million growing 22.3 per cent compared to 2019, especially as we saw some COVID-19 related lockdowns reinstated at the end of 2020 and some other markets.

Looking at the regions our U S region continued its second half momentum with solid 36% growth in Q4 after posting 40% growth in Q3 sequentially revenue was down slightly from Q3, but all in all was a great quarter. As you know new car sales relatively strong second half of 'twenty 'twenty on the U S is certainly a benefit to us.

I'm trying to close out the year strong with an $11.4 million quarter. This was down a little over 15% compared to the fourth quarter of 2019, but considering the timing of shipments as we had been discussing on the relative performance of China. In 2019. This was really better than we initially.

<unk> sequentially Q4 was up 21% versus Q3 and represented the highest quarter for the for the year.

China Auto market has been performing well and we're off to a great start in China for 2021.

In Canada revenue was up 32, 6% in Q4, which again was a great result, our protect center acquisition from February of last year continues to outperform our expectations and it really highlights our strategy in the channel where our installation related acquisitions serve to grow our product sales in the markets where they are.

Operate.

Parts of Canada re-entered locked down on the last week of the year given that I was really pleased with the Canadian results Continental Europe continued to outperform with revenue growing 64, 8% after posting incredible 88% growth on the third quarter and as we've seen in recent quarters.

This is being driven both by our aftermarket and OEM segments in Europe.

Our U K business, another great quarter growing 58%, even more impressive considering our team posted those results while COVID-19 lockdowns were being reinstated in the U K. So another another great job in Asia Pacific, We had a record quarter in Q4 with a little over 49% growth Our Latin America region grew a little over 48%.

Team in Mexico continues to do a great job.

We also had a record quarter in the middle East in Q4, where we've seen some nice momentum in the second half of the year. So it's really great to see good results in all three of these regions because they're still small they have a lot of growth opportunity as we run our channel strategy to drive market development and as we mentioned previously we are building a team to manage our.

Latin America business based in Mexico, and this will be a significant driver for 2021 on on for that region.

From a product line standpoint, we saw continued growth on our window film segment with revenue growing over 96% sequentially. Our window from revenue was down about 11% compared to Q3, which was a record quarter, but strong performance given the time of year seasonality, there's there's a bit more seasonality to window film than paint protection products.

Our vision sales grew over 60% compared to Q4 2019 continue to be pleased with our progress there and as you may have seen in the fourth quarter, we acquired the lucci innovation or brand of architectural window film. This is another catalyst for this line of business to bring focus on dedicate more folks to the product line, we have earn outs as part of that acquisition.

That will align interest to ramp the architectural window film business. Our local teams will still be responsible for these products as they as they are the automotive products in the region, but they are being backed up by a more specialized team to give them the confidence to sell and grow that product line.

Our fusion product line continues to make great progress a good quarter in Q4 revenues grew 70% compared to Q4 of prior year on.

On a gross margin front 'twenty 'twenty gross margin close to 34%, which was up slightly from 2019. Our Q4 gross margin ended at 32, 8% versus 31, 5% on Q4, the prior year as we mentioned in the past our gross margin is dependent on our direct versus distribution sales mix, particularly on China.

Distribution, we typically see gross margins fluctuate on the range of 32 to 35 per cent from quarter to quarter, depending on that mix. We're working on initiatives that will allow us to break out of that typical 32 to 35 per cent range and we should be able to see start seeing results in the second half of this year early next year on the gross margin side.

Q4, EBITDA grew 45, 3% and our 2020 EBITDA grew 34, 9% Q4 net income grew 31 eight per cent and our 2020 net income 36%. So clearly strong operating leverage there.

And as we've said in the past looking at our overarching financial objectives, obviously want to grow revenue meaningfully.

Drive gross margin as I, just mentioned and were still targeting SG&A at around 18 18 per cent of revenue and if we're able to do that we can drive tremendous leverage in the business and we were able to do that this year for sure.

Momentum we saw on Q4 has carried over into 2021, China revenue will be very strong in Q1, which is the weakest quarter for China revenue due to Chinese new year on other seasonal reasons as you will recall, China was significantly impacted by Covid last year and as a result, we have a bit of an easy comp in Q1, but even excluding.

The Covid impact China has been doing great as such we expect our overall 2021 Q1 revenue growth to be in excess of 60% year over year, which will be a great result in our seasonally slowest quarter.

A couple of other things I want to mention before I turn the call over to Barry we're expanding our facilities in San Antonio to offer more distribution and production space for new products as well as a brand new World Class Training Center. Our training program continues to be a key part of our business and this new facility will allow for more classes. So we've been increased.

The size of our training staff in recent months also we closed the year out with about $22 million on inventory and we're targeting increasing that another three or $4 million going into Q2, as we mentioned on our last call.

Increasing our inventory levels to mitigate various risks we identified after reflecting on what could have happened during the initial days of COVID-19.

While we are consuming working capital to do so we will ultimately benefit and reductions in non product Cogs cost and SG&A were more inventory lowers logistics costs. So another win on that side and other exciting announcement. We made earlier. This month. This will be the title sponsor of Texas Motor Speedways second race of the Indy car series double header, which will be named <unk>.

Fell $3 75 scheduled for May 2nd it includes a multiyear sponsorship at Texas Motor Speedway, So great opportunity for more brand exposure and is a nice complement to our existing Indy car relationship with team Penske, Texas is a great market for US and includes the largest portion of our U S installation business. So we're excited to sponsor such a prominent <unk>.

In the state.

And finally, we're really active on the acquisition front, primarily around domestic and international channel strategy that we talked about but also including product expansion and application of our existing products in other verticals. We're seeing some great things that are highly strategic to us its our expectation that we'll be able to close more acquisitions. This year in dollar.

Terms than we've done cumulatively in our history. So the teams are very focused on that obviously, a great year for us I couldnt be more proud of our team.

Their constant focus on the customer than what was initially a very challenging year. Both in the early days of Covid and then in the recovery when things ramped up so really humbled by everyone's dedication and performance and look forward to a great 2021 with that I will turn the call over to Barry and then take some questions. Barry go ahead.

Okay.

Thanks, Ryan and good morning, everyone. Obviously, it was a great quarter for us from a revenue standpoint, Q4 revenue grew 23, 1% to a record $48 6 million, while our 2020 revenue overall grew 22, 3% to $158 9 million.

Our growth for the first half of the year was $17 1%.

Compared to the first half of 2019, while our growth for the second half of the year was 26, 1%, which I think demonstrates the impact of Covid and the subsequent back half momentum that we saw.

Product revenue grew 21 four per cent for the year to $136 3 million in Q4 product revenue grew 24% to 42 million, which was a record quarter for product revenue and in the product revenue category paint protection film grew 13, 8% for the year to 110.8 million in Q4.

Paint protection film revenue grew 11, 5% to $34 8 million, which was a record quarter there as well.

Paint protection film growth was impacted by the China weakness in Q1, and the lower Q4, China Com also when we do acquisitions of installation businesses like protect center. The product. We previously sold to them. When they were our customer comes out of product revenue and it goes into service revenues. So that certainly had an impact on that line is.

Well.

Our window film product line performance was was really amazing this year window film revenue for the year grew 84% to 21 million representing 13, 2% of total revenue in Q4 window film revenue grew 96, 1% to $5 6 million and represented 11, 5% of revenue.

In this line item includes our vision architectural window film, which as Ryan alluded to earlier had great growth. This year. Our vision sales are not big enough to break out yet so the majority of our window film growth is really from the automotive segment.

Total service revenue for the year grew 27.8 per cent to $22 7 million, while our Q4 service revenue grew 43, 6% to $6 6 million and in this category software revenue grew six 9% to $3 $5 million per the year in Q4 software revenue grew six 1% to point 9 million.

Our cutbank credits revenue for the year grew seven 3% to $7 8 million and for Q4 Cutbank revenue grew 27.7% to $2 3 million.

Installation labor revenue, which is the revenue from our labor component of our installation total installation revenue for our company owned installation facilities grew 65% $10 9 million for the year and grew 77, 2% to $3 2 million in Q4.

And I'll also note here that our overall installation revenue grew 65 per cent for the year and 77, 2% in Q4, and if you exclude the acquisition impacts the install revenue grew 32 three per cent for the year and 44% for the quarter. So clearly good performance from our installation business, particularly in Q4.

For which is a nice surrogate for what our customers are seeing.

Ryan talked through the gross margin. So I really don't have much to add there, but I do think our 2020 SG&A performance was another bright spot for US obviously, the pandemic contributed some SG&A help, particularly in our marketing and travel related costs. Our 2020, SG&A expenses grew 16% versus.

2019, and represented 19, 3% of total revenue in Q4, SG&A expenses grew 15, 3% versus Q4 2019 and represented 17, 7% of revenue.

Sales and marketing expenses for the year grew at $28 five per cent to $9 7 million in Q4 sales and marketing expenses grew 34% to $2 8 million. In this Q4 growth was mainly attributable to the resumption of some marketing activities and increases in sales related expenses to support the increased revenue growth.

This line item began to normalize a bit in Q4, and we anticipate an increasing trend as we move into 2020 one.

2020 general and administrative expenses grew 11% to 20.9 million in Q4 general and administrative expenses grew nine 3% to 5.9 million.

So all in all I think we did a nice job holding the line on our G&A costs, obviously will continue to see increases here such as increased costs from our new facilities, but but overall on all in all it was good result here.

Our effective income tax rate was 19, 8% for the year and 17.4% for Q4 and similar to Q4 last year. We did have some return to provision true ups in which the true ups were not near as substantial as what they were last year, but we did have them again. This year, we expect our future effective tax.

<unk> to be around 21% going forward.

'twenty 'twenty EBITDA grew 34, 9% to $25 3 million and our EBITDA margin finished at 15, 9%, which was up from 14, 4% in 2019 Q.

Q4, 2020, EBITDA grew 45, 3% to 18, I'm, sorry, $8 1 billion with EBITDA margin of 16.6%, reflecting another strong operating leverage quarter for US 2020, net income grew 36% to $18 3 million, reflecting net income mark.

On a 11, 5%.

Q4, 'twenty 'twenty net income grew 31 eight per cent to $6 1 million, reflecting net income margin of $12 five per cent and EPS was 66% 66 cents per share for the year and 22 cents per share for the quarter.

'twenty 'twenty cash flow from ops grew 68, 4% to $18 5 million and we ended the year with $29 million of cash on the balance sheet and again as Ryan mentioned, we're active on the acquisition strategy and we expect to use.

All of our cash for that purpose.

And finally subsequent to our 10-K filing this morning, we filed a shelf registration statement based on our market cap, we reached well known seasoned issuer wppsi status being a wppsi affords us to put up a general shelf registration that is automatically effective as you likely know this is a very common practice by.

Companies with Wix <unk> status and we did this simply to maximize our optionality to raise capital on a very quick and efficient way should the need ever arise and we do not have any current need to raise capital nor do we have plans to do so and in the near term future.

So 'twenty 'twenty was another great year for us and we're looking forward to continuing to execute in 2021 and with that operator, we'll now open the call up for questions.

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Our first questions come from the line of Jeff Van <unk> with B Riley. Please proceed with your questions.

Hi, good morning, everyone and congratulations on the strong metrics for 2020 any.

Any more color you can give us on adding new accounts, either independent installers shops or car dealers and I guess, how should we think about gaining penetration within existing accounts versus adding new accounts.

Sure. Thanks.

Thanks, Jeff Yeah, I think the way that we think about it is really twofold.

On the.

The trend has played out this way over a number of users which is there's there's a healthy mix of new accounts, both in the aftermarket and from a dealership standpoint and growth from existing customers.

It's hard to characterize how our existing customers grow because their businesses the size of their businesses. Their business models are so varied.

But what's been consistent is that.

We will always have both theres always a need for more customers in the channel and that's part of growing the channel and then there is always growth at varying rates from our existing customer base and what we strive to do is to balance the two of those the most appropriately in every market.

Serves no one's interest for us to over saturate the market with new dealers, but at the same time is as the market grows there's a need for new dealers. So our team does a great job doing that but it's going to be a mix of really I think forever in our in our future our mix of growth from existing and growth.

From new accounts, but certainly Q4 was no exception, we added a lot of new customers on the aftermarket and new new car dealerships.

On a at a good rate.

Okay. Good.

And then did you say, 16% revenue growth is what you're expecting in Q1, I guess, how should we yes. That's correct. Yeah. We're we're expecting 60 per cent a revenue growth maybe a hair above that based on the current run rate and that's really a function of just a fantastic start to the year really on all of our regions.

And then a relatively easy comp due to the impacts in Q1 last year with China with the early Covid and then to a lesser extent you know a bit of a muted end to March last year, but 60% is what we're looking for for Q1.

Okay, Great and then I think you mentioned initiatives to stabilize gross margin.

I believe you spoke to some point in second half of this year can you just elaborate on that a bit yeah. So as we if you look at kind of our the overall gross margin profile, we've kind of trade between the 32% and 35 per cent range. If you go back over the past call. It six quarters and the main driver within that range.

As is our distribution business, where where we're accepting a lower margin to sell to our distributors China being the largest example of that so in quarters, where our China per cent of sales is larger the gross margin is less but you've seen us kind of Max out at $35 35, and a half and with what.

We're working on really as it impacts every aspect of cost of goods, we're expecting that as we get to the second half of this year that that will start to be beyond that 35, 35, and a half cap that we've had so we could start getting 36, 36, and a half up to 37 overtime.

There's still going to be a range right, depending on the distribution mix in China, or not but rather than that would be a 32% to 35 range. You know maybe that's up at 34 to 36, and we try and drive it higher from there starting second half of the year.

Okay. That's that's helpful and if I could just squeeze in one more anything more to talk about in terms of the outlook for the US segment. This year what initiatives you're working on for a year.

No I mean, it's really a business as usual for us there in terms of what we know we need to do.

The attachment attachment rate and penetration of these products.

<unk> significantly country to country, B look at any sort of attachment or penetration metric by country, even within the EU and and they're they're they're just the distribution is huge so we have a lot of work to do on a lot of countries with very low attach rate very low sales and then continue to grow.

All the other countries. So we were feeling really good about what's happening in Europe and really how it has performed during COVID-19 and so for US. It's continued to invest a put more people and more countries get closer to the customer perhaps look at other distribution acquisitions in region like we did in France last year.

But really just to run that strategy can continue to develop the market.

Okay, Thanks, and best of luck for first half thanks, Jeff.

Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Our next question is coming from the line of Steve Dyer with Craig Hallum. Please proceed with your questions.

Thanks, Good morning, guys nice nice quarter nice outlook.

Ryan just kind of circling back to your commentary on gross margin, which was really helpful. It sounds like that's more of a second half positive impacts have given that in the first quarter should we expect to sort of be on the lower end of that range given the strength in China yeah.

I would expect that Steve we're going to have a really good number for China in Q1. So when you look at the range that we trade in that'll that'll bring us to the lower end of that for Q1 for sure.

Got it.

And then a lot of good commentary around M&A, just curious you know kind of further there.

I guess is there anything large and meaningful in the pipeline or should we just expect sort of more more volume of deals more of the same on what you've been doing just.

More of them.

Yeah, I would say both.

Certainly I think the quantity will increase but also with what we have in the pipeline I think the the average size is increasing from where we've been in terms of you know.

Incremental revenue or deal size, and then really the top end of what would the larger type acquisitions be that that's going to be quite a bit higher than we've ever seen before at least in terms of what we're seeing so I think we'll we'll see the.

The complexion of those deals changed a little bit, but really not the strategy. The strategy is going to be very consistent with what we've seen in the past.

And I mean, we should expect sort of a mix it sounds like of sort of the one off installers sort of market share grab channel grab and it sounds like maybe more something significant laterally in terms of other products to put through.

Looking we're looking at both.

You know, we've we've because we've said with the product line expansion that we've that we've done over the past two years you know, we're certainly not short on our products that take the market and we have a lot of work to do with the products that we have but at the same time. There is some other interesting products that we think are a long term mix that we're looking at so there's a component there.

And then the bread and butter really around channel go to market.

Domestic and international to just execute on or get close to the customer strategy in and use that to drive adoption and penetration in all the markets of the world where we can.

Got it.

And then just a quick modeling question for me, obviously very strong commentary around Q1 would you expect sort of normal seasonality then for the remainder of the year I E. You sort of build on on Q1 or are you anticipating there's something abnormal or pent up demand or something that may not make.

Q2.

Be able to grow on that.

Yeah, No I don't see anything exceptional about Q1 aside from just the strength exiting last year and then the relatively easy comp there's no no one timer.

Even the strong performance, we see in China, again, where we track this carefully now and we're not we're not building inventory in China, nor are we expecting to the underlying dynamic and sell through has been really strong. So nothing nothing unusual about Q1 from that standpoint.

Okay I'll jump back in queue, congratulations guys. Thanks.

<unk>.

Thank you there are no further questions at this time I would like to turn the call back over to management for any closing remarks.

Thanks, everybody really appreciate your time and look forward to speaking with you next quarter.

Thank you for your participation. This does conclude today's teleconference. You may disconnect. Your lines at this time have a great day.

Yeah.