Q3 2021 Xpel Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the expel Inc. Third quarter 2021 earnings call.
At this time all participants are in a listen only mode and the floor will be open for your questions and comments following the presentation.
It is now my pleasure to turn the floor to your host John Nesbitt Investor Relations for <unk> spell Inc. Sir the floor is yours.
Yeah.
Good morning, and welcome to our conference call to discuss <unk> financial results for the 2021 third quarter.
On the call we have Ryan Pape ex Bell's President and Chief Executive Officer, and very Weird Expels, Senior Vice President and Chief Financial Chief Financial Officer.
They will provide an overview of business operations and review the company's financial results immediately after the prepared remarks, we will take questions from call participants.
I'd like to take a moment to read the safe Harbor statement.
During the course of this call we will make certain forward looking statements regarding <unk>, Inc, and its and its business, which may include but not be limited to anticipated use of proceeds from capital transactions.
Expansion into new markets and execution of the company's growth strategy, often but not always forward looking statements can be identified by the use of <unk>.
Words, such as plans is expected expects scheduled intends contemplates anticipates believes proposes or variations, including negative variations of such words and phrases.
State that certain actions events or results may could would might or will be taken occur or be achieved such statements are based on current expectations of the management of <unk> build a forward looking events and circumstances discussed in this call may not occur by certain specified dates or at all and could differ materially as.
As well as for known and unknown risk factors and uncertainties affecting the company performance and acceptance of the company's products economic factors competition, the equity markets generally and many other factors beyond the control of EXPAREL, Although I suppose attempted to identify important factors that could cause actual actions events or results to differ materially from those described in forward looking statements.
Other factors that cause actions events.
Results to differ from those anticipated estimated or intended no forward looking statement can be guaranteed except as required by applicable securities laws forward looking statements speak only as of the date on which they are made next door 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'll now turn the call over to Ryan go ahead Ryan.
Thanks, John and again I would extend my welcome to our third quarter 2021 call Q3 was another strong quarter, even in the face of some headwinds relative to the pricing pressure in the supply chain and of course, new vehicle inventory revenue finished at $68 5 million for the quarter, which was basically flat relative to Q2.
When you factor out the acquisition related revenue in Q3 was down sequentially from Q2 around 5%, which is right in line with what we were expecting exiting Q2.
As we talked about on the last call. We did see some advanced buying in Q2, primarily due to concerns about supply shortages and the prospect of price increases coming.
Looking at the regions our U S region continues to outperform revenue growing 69, 5%.
Doctor out acquisition related impacts their U S revenue grew 49% which is <unk>.
Really a great result for our largest region Q3 U S. New car sales are actually the slowest in a decade, owing to the vehicle shortages. So in that sense, we're really pleased to drive such organic growth.
And in that environment.
On October one we acquired two businesses in one armor, which have similar business model to the perfectly films business that we acquired earlier in the year. As you May recall. This is a high volume window film installation business for dealerships, we like the business because it further expands our overall business.
So the mid range market.
And provides a platform to grow our paint protection and other and other products.
Into the dealerships covered by these acquisitions.
Unlike the rest of our business this business being the net one armor and perfectly to films.
We acquired earlier is really tied more to new car inventory than to new car sales. So as new car inventories have continued to lean out.
This has had a temporary negative impact on this business because there are simply fewer vehicles to 10.
We talked about this impact last quarter, but it does now seem that Q4 will be the bottom in terms of inventory you're hearing this from many of the manufacturers and we're starting to see it in our numbers as well. So this is very encouraging.
And we expect that we will actually see revenue increase just as the vehicle inventories recover because thats the time that we're making the sale.
Today in this business, we're operating at less than 70% capacity, which impacts our gross margin and we saw that a little bit in Q3 versus Q2, as we have to subsidize our labor force with extra compensation to make up for low inventories to the tune right now of about $1 million a year.
<unk> and extra expense and simply put that there to ensure that we retain our labor, which is so important of our team because by and large they are paid on on the work that they do and if there is if there is a lower inventory and less work to be done we've got to subsidize that to retain our team. So no question we would.
Do that but that's right now about $1 million a year.
Excuse me an extra expense through Cogs.
Regarding the perfectly films acquisition Youll note that we incurred the majority of our expected integration expense during the quarter during the quarter.
This should be complete by year end, a little bit left to go in Q4, but.
Most of that was as we had as we had previously indicated most of that expense was incurred in Q3.
Our Canada region had another great quarter with revenue growing 43% to $8 7 million strong performance in the in the.
U S and Canada, our two highest penetrated regions, it's really great to see and suggest that we will continue to see tax rates and penetration continued to increase.
In Canada, we did acquire several businesses on October 1st around installation and distribution. These are really.
Textbook kind of acquisitions for us.
Keeping with or get close to the customer strategy, we've always been very committed to the Canadian market and these acquisitions are consistent with that there was also a software business.
Which is similar to <unk>, which was acquired that would provide.
Turns and software used to cut paint protection film.
That software will be combined with our <unk>.
We are soon really by year end, bringing more patterns and folks to our design team.
We can continue to design more and more coverage for more and more vehicles and that will really cease to exist as a separate product.
By year end.
Current as the current plan.
So really happy with those.
With those acquisitions in Canada, our China region grew 12, 5% over Q3 to $10 6 million as we mentioned on the last call. There was about $1 million of revenue accelerated into Q2 from Q3.
China's new car sales were down 13% from the prior year, So China will be one to watch over the next year with all the especially with all the other macro news coming out of China.
In Europe, and U K regions, both had strong quarters Europe grew just under 30%.
<unk> to $4 7 million in U S. Dollar terms. The UK grew 34% to just under $2 million in U S. Dollar terms Asia Pacific grew 35, 7% compared to Q3 of the prior year, which is a good result, I think that we continue to see more impact from Covid relate.
Challenges.
In that region more so than others, but it does appear that some of that is continuing to lift.
Latin America continues to do well.
Growing 75, 6% so off a small base but.
As we talked about coming into the year, we put more effort and all of Latin America.
Led out of our Mexico office, and I think we're seeing some benefit from that so clearly the right the right strategy there.
So in total the acquisitions completed on October one we will add.
Revenue of about $17 million in U S dollars term.
Post synergy EBITDA of about $4 million on a run rate basis.
We expect to fully see that as we exit Q1 get into Q2 of next year.
And then finally recently, we announced the acquisition of UK based and visit frame limited to the provider of bicycle frame protection kits. So there's a lot left in the world to protect.
And it makes sense for us to place some bets on where we can expand the reach of the brand and our products into other applications.
And particularly.
In this case, where we had.
Established customer using our product into this adjacent space and.
And we had demand from our existing customers. So we like we like the idea of this is an adjacent protection market because it both opens up new customers in terms of bicycle shops. It is additional products for our current customers to sell and in fact many of them would.
People will bring all manner of thing into our current customers' locations to protect it and then it also adds a.
A direct to consumer component.
Components of the business, which we do a little bit of.
But this has a larger direct to consumer component.
It is a frame will add the lower $2 7 million in U S dollar terms.
And we're really excited about that and our research we found a lot of connectivity between the <unk>.
Some of these bite buyers and our existing car buyers. So.
A good market for us to try and expand into and this and Vince the frame will conclude all the acquisitions that we have planned for this year.
And with one exception all the acquisitions completed this year there have been at least two years in the making and were delayed by Covid and other factors. So really this didn't materialize. This year. These have all been discussions that we've been having for quite some time, so really happy to get them done.
I said that I will conclude what we're doing this year and then obviously have other things we're looking at for next year.
And as you may recall, we've been really focused on supply chain this year.
Possibility of delays and shortages loons really across all industries and this started for us when we took a very aggressive posture early on.
Around the March freeze in Texas.
And the impact in Houston in the Gulf Coast, and it's really paid off our customers have experienced essentially no disruption.
In terms of product stock outs or product availability from us and that really can't be said for others in the space or some of our competitors who have.
Who had substantial problems this year.
It doesn't appear overall that the supply chain situation has really fundamentally improved and perhaps in some ways. It's even more problematic now.
As we look going into next year. So we continue to maintain an aggressive posture in terms of inventory going into next year related with the.
The business and protect the customers. So you saw us build quite a bit of inventory.
Q3 from Q2.
Really just owing to how low inventories got with the record demand in Q2, but we are anticipating inventory around rub $45 million for the end of the year.
We expect Q4 revenue.
To be just a bit higher than the Q2 Q3.
Or perhaps.
That much higher if we continue to see recovery in new car inventories materialize like we expect because as those inventories recover.
That's revenue that will have at the time those.
Deliveries are made the dealerships, even even more so than when they're sold so.
We're talking about gross margin for the quarter.
We finished at 35, 7% compared to 34, 8% in Q3 of 2020.
This was down sequentially from Q2, which came in at $36 seven.
And we talked about a bit of this earlier, but we have started to see like many others broad pricing pressure.
Across the board, so whether thats from packaging to.
Two labor to shipping.
Really throughout the <unk>.
Throughout the supply chain, so that we felt some of that in the quarter and then also the additional labor cost relative to our.
Dealership window Tinting business, the perfectly films business like we talked about earlier that really offset some of the continued.
Benefit we have in terms of mix. So that's why we felt a little bit of that little bit of margin degradation from Q2 to Q3.
Despite the pressures on margin we've been seeing we still remain confident that we'll be able to increase gross margins out of our historical 34% to 35% range by the end of Q4 and then we continue to expect gross margins to go higher in next year.
And to be approaching.
<unk>, 40% by mid year, so even with these kind of near term impacts when you look at the overall mix of.
Our product mix and then what we're doing with supply chain. It really doesn't change our expectations for continued.
Increase in gross margin for next year. So we received many price increases, but we've also put in price increases in many markets. So starting in Q4, depending on the geography, but to the tune of 3% to 4% outside the universal across the world.
Depending on the local market conditions, so that will serve for now.
More than offset cost increases that we've been receiving or are expecting.
I will help keep us on track for that gross margin profile that I was just talking about.
So all in all another good quarter for us lots of moving pieces.
Lots of work for the team on all of the acquisitions that we've done and the integration work that that takes.
It's a big commit for everybody so.
It's really much appreciate very much appreciate the work and have done a done a great job so with that I'll turn it over to Barry and then take some questions. Barry go ahead.
Thanks, Ryan and good morning, everyone Q.
Q3 revenue grew 48, 6% to $68 5 million versus Q3 2020 and.
And included in this was about $4 8 million or so of net new acquisition related revenue. So organic growth organic revenue growth was approximately 38, 4% for the quarter. So so really strong performance there.
Year to date basis revenue grew 71, 4%.
<unk> revenue grew 44, 2% to $56 9 million in the quarter and 74% to $166 million on a year to date basis and then this product revenue category paint protection film grew 35, 2% to $43 2 million in the quarter and 63, 5%.
On a year to date basis.
Our window film product had another outstanding growth quarter growing 89% to $11 4 million and 93, 2% to $29 6 million on a year to date basis and I'll also add that our our vision product line had another record quarter and continues to do very well Q3 2021.
Service revenue grew 74, 9% for the quarter and 77, 5% on a year to date basis.
Total installation revenue from our company owned installation centers in our OEM segment grew 107, 6% represented 11, 8% of total revenue for the quarter. If you exclude our acquisition related growth total installation revenue grew 17, 1% and keep in mind most of the pharma quite films business.
This is Mike.
On a year to date basis total installation revenue grew 98, 6% and excluding acquisitions total installation revenue grew 41, 4% on a year to date basis.
And Ryan spent some time on gross margins. So I don't really have much to add here other than we did have proximately <unk> 3 million in onetime costs related to our integration activity.
That hit gross margin that will not reoccur in the future.
On the SG&A front, our Q3 2021, SG&A expense grew 85% versus Q3 2020 to $14 1 million and represented 26% of total revenue and on a year to date basis total SG&A expenses were up 65, 3% represented 19, 2% of revenue and <unk>.
But in Q3 SG&A expenses are approximately <unk> 5 million of integration and other one time costs that again will not reoccur in future quarters.
Q3, 2021, EBITDA increased almost 27, 1% quarter over quarter to approximately $11 4 million, reflecting an EBITDA margin of 16, 6%.
Excluding the integration and other one time costs here EBIT would have grown 35, 1% to $12 1 million, reflecting an EBITDA margin of 17, 7% and on a year to date basis. EBIT grew 98, 4% represented 18, 1% of total revenue.
Q3, 2021, net income increased 26, 1% versus Q3 2020 to $8 3 million, reflecting the net income margin of 12, 2% and EPS for the quarter was 30 cents per share and if you exclude the integration and other onetime costs net income would have increased 35% to $8 9 million reflect.
Net income margin of 13% and again, if you exclude the integration and other one time costs EPS would've been 32 cents per share.
And on a year to date basis net income grew 108%, reflecting net income margin of 13, 4% and our year to date EPS of <unk> 92 per share.
Cash flow from ops was $1 1 million in the quarter, which was quite a bit lower than what we've done in prior quarters, primarily due to our increase in inventory levels.
Did close up quarter with minimal debt, but that will obviously change in Q4, given our recently announced acquisitions and our decision to continue to increase inventory to hedge against potential supply interruptions, but even with that we're in very strong financial position to continue to execute on our acquisition initiatives and our other strategic priority.
And finally, I'd like to really give a shot out to our team did a great job integrating perfectly films and we're well down the road and getting the recent acquisitions integrated.
And as Ryan mentioned, we do not anticipate closing any acquisitions for the rest of the year as we continue to focus on finishing up on our integration initiatives that are currently ongoing.
So it's been a very busy few months for us and we look forward to continuing our momentum in Q4 and with that operator, we'll now open the call up for questions.
Ladies and gentlemen, the floor is now open for questions.
If you have any questions or comments. Please press star one on your phone now.
We ask that will posing your question. Please pickup your handset speaker phone to provide options sound quality.
Please hold them all you poll for questions.
Your first question is coming from Steve Dyer from Craig Hallum.
Your line is live.
Thank you good morning, gentlemen, nice quarter.
Good morning, Steve.
Just as it relates you guys are performing really really well, particularly given.
The situation with new vehicle inventory and sales do you feel like are you seeing any difference in take rate or any other things that maybe dealers are doing the push.
The product and the service.
It seems like that should be have a more of an impact to you guys that it is sort of all else equal.
Yes, I think.
Hugh.
We've tried.
Trying to understand when we see what what.
<unk> been experiencing and what we're watching is how.
How much benefit are we getting from just the continued momentum of the products being adopted like paint protection film in the growing attach rate.
Versus.
Extra work extra incentive by the dealers.
Who are in such a position to be able to accessorize the vehicles more because of the low inventory. So it's obviously some of them.
Both and we get the benefit of that and so that's obviously see the benefit of that weighed against the.
The other part of our business, where the low inventories may be a negative and Thats, where you get.
The net balance where it's been pretty positive in spite of that.
<unk> inventory situation.
Yes.
Got it and then you had talked about.
About sort of your your sale, having more to do with the sell into the dealership as they've put vehicles into inventory as opposed to selling it through to the customer. Just curious are you seeing more dealers sort of pre wrap the.
Different pieces of the car, so forth and sort of pro forma charge people or how does it sure does it how does it work as it goes.
Yes, so if you look at our business historically, even from a year ago.
Two years ago really all of our sales were tied to the sell through for the most part because.
You're generally selling the products.
At the time, the vehicles sold or at least that's when we're generating revenue.
That's really historically was the vast majority of the revenue where thats changing a bit is with our OEM business and then with the perfect play films and the other related acquisitions, we did because in those cases from.
And OE standpoint, or from these <unk> films and the perfectly films business.
With that business, we're exclusively pre loading the vehicles as they are delivered to the dealership loss. So that is in direct contrast to our historical business and it's really tied.
It really tied almost entirely to inventory in that sense and in a similar way the OEM business, while it's a small part of our of our overall revenue is the same way and then it's tied to new vehicle production and if that's delayed.
Because of supply chain shortages of parts shortages that will impact that as well. So you really have.
That mix now, which just didn't exist before but is now a component of the business. So it's not really Steve so much.
<unk> changed our.
With our core business, but rather that the acquisition.
Several of these acquisitions, we've done have just a different model where it is.
Preloaded.
Got it that's very helpful.
Last one for me and I'll pass it along as you look at potential future acquisitions be it next year the year after et cetera.
Are you looking sort of more along the lines of installation and buying up chunks of that like you've done more recently I mean in other words do you feel like you have the product portfolio, where you want it and now it's more of a.
And installation and distribution thing or should we continue to look as well would you look for different sort of product add ons as well.
Sure, Yes, no we definitely would not say that our product portfolio is complete from.
<unk> Dot standpoint, so there are definitely other adjacent businesses that we're interested in so I would not foreclose anything on the product side.
I think with the acquisitions, we did this year with the permanently films in the stent that one armor.
Those were <unk>.
Relatively unique businesses there arent a lot of those type of businesses with that scale and that and that business model around so obviously, we acquired those.
Not a whole lot of other ones like that.
But I wouldn't I wouldn't define our strategy going forward to say, it's going to be dominated by.
Installation.
Just kind of where we've been focused this year.
Like we said in the prepared remarks.
We've had discussions with these businesses going on.
Over two years and it was really a strategic decision for us to say, we want to expand the platform to get into more mid range dealerships, whereas historically, our paint protection film business, It's more high line and as part of growing paint protection film and also window film and other things we needed a plan.
For them to do that so these acquisitions helped us do that strategically.
But then what were looking at after that.
It'll be more broad based than just installation.
Got it very helpful. Thank you guys and good luck going forward.
Thanks, Steve.
Your next question is coming from Jeff Vinson Darrin from B Riley.
Your line is live.
Hi, Good morning, everyone and let me say congratulations on the strong performance.
Kind of a multipart question here. If you can bear with me you mentioned supply chain and pricing pressure I'm wondering if you can elaborate on that bit more maybe dynamics of what youre seeing.
Steps are taken to mitigate and then the outlook for that pressure hopefully to ease and.
Then I guess any metrics around that in order of magnitude for your inventory levels to trend.
<unk> FY 'twenty two.
Sure, Yes, so I think that.
Jeff like like many people I mean, youre watching what's going on with pricing.
Really across the board and its.
Pretty unpredictable and pretty broad based and trying to then.
Assumptions on.
Where does that go I mean, even even simple things like.
The pricing of corrugate and other things that might go into the boxes for products I mean, <unk> seen big big spikes in those or even more entry level labor and just and just the hourly wage increases so I.
I think we've seen that.
We saw that certainly in the quarter.
We expect to continue to see that in some respect, but then at the same time in that environment that we're in.
Pushing forward, our own price increases too to offset that so I.
I don't know that I could say.
What the trajectory of that is maybe any better than anyone else going into next year. I mean, I think it's been pretty pretty volatile and pretty hard to.
Pretty hard to predict because it's been pretty hard to forecast. So it's certainly something that we're that we're watching there from a pricing standpoint from overall supply chain standpoint, there have been.
Shortages in the chemicals business and feedstock that goes into different components of the products that have been.
Pretty widely discussed this year and then even into next year still.
We're still being advised these shortages and things that go into the the resins that go into the GPU and the sort of structural problems that have emerged so.
Our approach has been that let's let's build the inventory to protect ourselves from this and so certainly we'll continue to do that.
Like we talked about going into year end and then even while were in the fourth quarter here still make decisions on what we're planning for after that.
Yeah.
We know that things can fall apart very quickly if you don't have.
Don't have enough product for your customers.
And we saw that with a number of our competitors over the past year. So I think not not saying that inventory won't even go higher than that into 2022.
Some of that it needs to just to grow commensurate with our sales since we've seen such a large increase in sales over the past year. So some of that is really to be expected and then beyond that really what do we what do we plan for based on the risks that we see as we currently see.
Okay. That's helpful. And then if we could just touch on Opex for a moment.
In Q4, what we should expect in there maybe.
Youre thinking about Opex leverage next year, excluding incremental acquisitions.
Yes, I mean, we've seen like Barry talked about.
Integration expenses for the acquisitions and then actual just direct.
Acquisition expense in terms of legal and other things that go into that in Q3, and we will have some of that in.
In Q4.
But we've trended a bit higher on.
SG&A percent of of revenue, but we.
We still feel good about the.
18% target.
We're budgeting towards.
Is giving us the ability to.
Fully invest in the business and grow and do more things.
While allowing for maximum leverage to the bottom line. So that's still the target I think as we get through some of these more near term expenses that we've had relative to these acquisitions looking into next year. So I think thats a good target for us and then add to that the growth gross margin profile.
All that we still see as is.
Favorable and on track with what we've.
What we've been talking about this year in spite of the price cost increases.
That puts us in a position to.
He had a really good operating performance going into next year, even even in spite of the current environment that we're in.
Okay, great to hear and then if I can squeeze in one more.
Just maybe any.
Thing else you can say about the plan to evolve the MLA <unk> excuse me and related segment to drive the PPS business, maybe any initiatives planned in 2002 that are not going to give away competitive things.
And I guess any milestones we should look for that.
Well I think that our primary focus up to now has been just on simply getting the business integrated and functioning well.
But then the the goal for next year and certainly for this year two is where we can to begin trying.
Trying to integrate.
Some amount of paint protection film into those customers that we've acquired via the <unk> and the other thing that one of our acquisitions and that could be <unk>.
<unk> coverage paint protection film than what we might do today in the aftermarket and what we might do today and highlight dealerships, but the goal is can we get some paint protection film attach rate into those dealerships that maybe have none today and what's the easiest way to start that.
For one of these dealerships that has come in through that business model. It could be small wear and tear type coverage it could be a variety of things, but try and get in there with something through those relationships and then grow that over time and that's going to be.
It's going to be our focus for that business going into next year.
Okay, great. Thanks for taking my questions and best of luck.
You got it Jeff Thanks.
We have no further questions from the lines at this time I would now like to turn the floor back to management for closing remarks.
Okay.
To thank everybody for joining us and.
For bearing with me today with my Raspy voice, but great quarter lots of good stuff going on and a lot of thanks to our team.
For all the work they've been doing it's been an incredibly busy time operationally and everybody has done a really great job. So thanks for joining us and look forward to speaking with everybody again next year.
Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day.
Thank you for your participation.