Q1 2022 Xpel Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Expo Inc's first quarter 2022 earnings call.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host John Nesbitt Investor Relations for <unk>, Sir the floor is yours.
Good morning, and welcome to our conference call to discuss expels finance results for the first quarter 2022.
On the call today, Ryan Pape, <unk>, President and Chief Executive Officer, and Barry where IDEXX Bell Senior Vice President and Chief Financial Officer will provide an overview of the business operations and review the company's financial results immediately after the prepared comments, we'll take questions from our call participants.
I'll take a moment now to read the Safe Harbor statement. During the course of this call we will make certain forward looking statements regarding <unk> 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.
Words, such as plans is expected expects scheduled intends contemplates anticipates believes proposes or variations, including negative variations of such words and phrases or 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.
Madison with Exco forward looking events and circumstances discussed in this call may not occur by certain specified dates or at all and could differ materially as a result of 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.
Aldo I spell has 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 or results to differ from those anticipated estimated intended no forward looking statement can be guaranteed except as required by applicable securities law forward looking statements speak only as of the date in which Theyre made an extra undertakes no obligation to publicly update or revise any forward looking statements whether as a result of new information.
Future events or otherwise, okay with that I'll now turn the call over to Ron go ahead Ryan.
Thanks, John I appreciate it good morning, everyone and welcome to the first quarter 2022 call are off to a good start in 2022 for the first quarter. It was a record quarter for revenue and gross margin revenue grew 38, 6% to $71 9 million and we had strong performance in most of our region.
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Sequentially revenue was up about two 5% from Q4, which was good to see given a 29% sequential decline in China due to Lockdowns and many of you know Q1 is seasonally the weakest quarter for us and we havent in every year always exceeded Q4 revenue in Q1.
So we're happy that we did this time and as you recall from our last year.
Year end call, we weren't sure if that would happen this quarter. So that was definitely a positive and happy to see that.
The U S business grew 62, 4% to $41 6 million again, another record quarter for the U S region. The U S Q1, new vehicle Saar was down about 16% versus Q1, 2021 and relatively flat against Q4, we saw some modest volume improve.
That's in our dealership services business at the end of the quarter.
This was encouraging but you know the inventory rebuild that we hope for is still very much a work in progress for the industry and probably pushes beyond Q2 as we'd originally thought obviously, a moving target, but despite the anemic Saar for reasons, we know which is primarily related to.
Our new car inventory shortage, we saw good growth, which suggests we're continuing to see attach rates grow for our products and to take market share. So all in all.
A lot to be happy with the with the U S business against the broader broader backstop.
Our company owned installation facilities in the U S and which really they acted surrogates for what our customers are seeing generally saw record sales in March in fact, almost all of them did all time records and given this we expect continued strong performance in the U S. In Q2 and this the results we see in those locations are.
Really a proxy for many of our aftermarket customers. So we expect the same from them.
We remain in a in a really unique environment, where these retail aftermarket sales continued to do great as indicated by the company owned sales I, just mentioned and what we're seeing from our customers. The dealerships. However, a mixed bag, where where our revenue is more inventory coupled at dealerships, which.
Through our dealership services business, we have more pain, which we know and as we've been mentioning.
When we're talking about the performance of our acquired businesses over the past few quarters.
Some dealerships have been able to use the shortage of inventory to increase the attach rate of our products into their vehicles. So sold but this is mostly for dealerships that were already carrying our products.
But had room to increase the attach rate. So that's been a positive to counter the other negative. However, we're also competing with an invisible accessory at these dealerships dealerships, which is the ability for the dealerships to place market adjustments on top of the MSRP, which bring the dealership record profit.
[noise] out doing anything.
So it's a it's a complicated time to get a full read on the market with these competing inputs, but as you see the results have been good either way and in many respects the good and the bad or are balancing them out to be to be decent for us. So we feel feel good about that for the U S business.
Outside the U S. We saw solid growth in most of our regions, including record revenue for.
The Europe .
K Latin America.
Continental Europe was up sequentially and in both were up a U K was up.
Quite a lot from Q4, so all good numbers there Europe's been doing better than we thought really with the war in Ukraine and knock on effects. There. So we're happy with that and sequentially, Canada was down a bit from Q4, which is certainly normal for the seasonality in that market as most of you know locked down so a return to parts of China.
Covid and this reduced revenue in China for the quarter to $8 9 million.
And we'd already talked about how we thought China would be a bit backend loaded for the year and then obviously you took this turn of events with the with the Lockdowns. Unlike the 2020 Lockdowns. However.
This is not round business to halt around the entire country, which is what happened in 2020.
But the Lockdowns and the ensuing port congestion port congestion will reduce China sales in Q2 by at least $5 million from our original plan and may reduce them from Q1 levels.
It's very fluid situation. So we don't know fully what to expect and I think as you see it.
As you see how the markets react to the news out of China everyday in the oil market no one really knows what to expect so but there will be a continued impact in Q2 from Q1.
And then hopefully we were able to move move beyond that quickly after that.
In the case of the previous Lockdowns.
2020, and things resumed very rapidly coming out of lockdown in China.
So for the regions affected this time, we don't really know whether do you expect that again or not.
But we continue to watch we did launch as we've talked about in the last quarter launch one small OEM program in March this is for a new manufacturer.
Which is great and in Europe , and our larger planned OEM program, which was the second that we were launching has been delayed several months due to supply chain issues with the OEM kind.
No surprise, there and keeping with with a lot of the talk so that's a drag on us a little bit until we start to see revenue from that and in Q2 or Q3, depending on the exact timing. So a few month delay there, but we're still focused on on that line of business is the additional way to grow awareness of paint protection.
Bring paint protection film to consumers that have never seen it before.
So at this point, we would affirm even with China.
The situation of our previous guidance of revenue growth.
The 30% range for the year, and we expect Q2 to be in the $80 million range, plus or minus which is definitely lower than we would have expected in Q1 after we adjust for.
The China Covid impacts I mentioned earlier.
I was pleased with our gross margin performance in the quarter. We finished a gross margin of $27 7 million quarterly high for us in gross margin percentage was 38, 6% and as we discussed in prior calls the combination of product and channel mix.
Has been benefiting us impact from some price increases that were region specific and then improvements in bill of material cost of goods for some of our products. All of this comes together and is contributing to our improving gross margin profile that we've been talking about it. So still expect to see continued improvement in Q2 and beyond this year and.
Still expect to hit 40% gross margin in the second half of the year and that's not changed.
You know that comes with still pressure on gross margin and cost in general just as we see price increases.
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And still have reduced capacity in our dealership services business, which where we have extra labor, which which reduces gross margins.
However, we have seen some improvement in that so when you add that as a negative along with the other work. We're very pleased with the progress in gross margins that we're making and that we're going to be at 40% in the second half of the year.
Our new product initiatives are also up.
Ben advancing quite nicely, we released the ultimate fusion, which is a hydrophobic film it's been very well received in fact started in the U S. And then just now in the past 30 days are we releasing that globally and this is a specialty film that has a superhydrophobic coating, which really can be.
Binds the benefits of our ultimate plus paint protection film in our fusion ceramic coating. You know this is a component of our future product portfolio. It'll you know maybe it's a long term a 10% to 20% of the mix. So it won't dominate that business, but it is a nice addition, additionally, a lot of focus in the past few quarters.
On really launching in earnest architectural film business and expanding the product line. It's a very SKU intensive very wide product line and it's really coming together Q1 revenue doubling from Q4, so really starting to pick up pick up the momentum there.
Some of you May know, that's a business with really two distinct sets of customers for us we've got customers in the automotive space, who really started their business in the window film space in our in both automotive and these architectural films, sometimes people think it's a.
<unk> a distinct set of customers and that's just not not always the case and then there are there are customers who were focused solely on this architectural products architectural film and we've been winning some of those accounts and those are really the higher volume more prestigious accounts and so with the product line expansion that we've been doing in the <unk>.
Focus over the past year, we are now a viable partner for those businesses and starting to see some success with them. So very encouraged by that and that will continue to develop throughout the year.
Our inventory level for Q1, we ended a little under $75 million in inventory.
For those watching the balance sheet. You know this has been over the past two years sort of a $25 million $50 million $75 million over the past 18 to 24 months, So big big increases in inventory and we've been particularly concerned about TPU RASM availability, which goes into making the extra.
TPU film, which goes into making paint protection film and <unk>.
Going into 2022 production on some of this resin was really forecast to be flat for the year for a variety of reasons over 2020. One so into a growing market that has obviously had been and was a concern and then more recently there were concerns that.
The actual production capacity was going to see a reduction over the previous year due various shortages and the broader chemical market and other factors and you know the other side as we've been building inventory others have been building inventory. So you have this.
This overall dynamic in the economy, where you've seen such massive inventory build which is probably contributed to.
Some of the pricing dynamics, we've seen in shipping expense and now everybody is sort of coming to terms with this but.
As a result of a concern with that TPU resin shortage, we plan to aggressively to build inventory to mitigate that impact that's what's been occurring with us really over the past.
Six to nine months, so we expect inventory to peak in Q2, although the timing slightly less certain given the lockdowns in China, but generally we expect to release cash from inventory over the second half of the year.
And at that point, we will either have built sufficient reserve inventory to counter any supply shortage or the feared shortages will not materialize because they were exacerbated by others building inventory that maybe they didn't need and either way we'll be in good shape for our customers in terms of ensuring we have ample supply.
And the only difference will be the rate at which we released cash from.
Inventory and.
In the second half of the year that could be.
$20 million reduction plus or minus depending on how that actually plays out so that's our strategy there.
From an EBIT standpoint grew 29, 6%.
$11 9 million.
An EBITA margin of 16, 5% like we talked about before we held our annual dealer conference in February .
Had about 510 employees, which was up from 350 at the last conference in 2020.
We didn't have it in 2021. So there was about a net cost of that about $800000 in Q1 that wasn't present in Q1 2021.
Also had a $400000 project, we completed so that was $400000 in professional fees that won't reoccur in the quarter. So if you normalize for those our EBITDA would have been EBITDA margin would've been approximately 18% and EBITDA would have grown about 42% so that.
Really good numbers there. So we continue to make good progress towards our goal of a 20% EBIT margin by the end of the year and naturally driven in large part through the anticipated revenue growth and then the gross margin objectives that we outlined earlier.
So all in all very solid quarter under the circumstances very pleased with the effort by our broader team everyone's a very creative and working hard to work around all of the all of the different things that we see in the market and doing a fantastic job so with that I'll turn it over to Barry and then we'll take some questions Barry.
Go ahead.
Thanks, Brian and good morning, everyone I'll jump right into the revenue categories. Our product revenue in quarter grew 29, 3% to approximately $58 1 million and within this category paint protection film grew 22, 8% to $44 million.
This was down about three 7% from Q4, primarily because of China challenge that Brian talked about.
Our window film product line grew 61, 1% to $11 5 million, which was a record for us and represented 16% of total revenue and.
And we continue to gain share in the automotive window film segment and as Ryan said, our architectural segment had a great quarter doubling from Q4.
Q1, 2022 service revenue grew 98, 5% for the quarter to $13 8 million and this growth was driven by increased demand in our company owned installation facilities and acquisition related labor revenue from our dealership services business. Our total installation revenue combining product and labor increased a little over 197.
Persona and represented 15, 3% of our total revenue and this is certainly contributing to some of the favorable mix influencing gross margin Ryan was referring to earlier.
Our Q1 2022, SG&A expense grew 81, 5% to $3 7 million and represented 24, 6% of total revenue and sequentially Q1, SG&A expense was up just under nine 4% versus Q4, 2021 and if you normalize for the dealer conference and the and the other one.
Time expense for professional fees the project related professional fees SG&A would have been essentially flat versus Q4 sale.
Sales and marketing expenses increased 86, 3% during the quarter and again normalizing for the dealer conference sales and marketing expenses would have been increased about 63% sequentially sales and marketing expenses were essentially flat versus Q4 again normalizing for the fueling Congress.
Q1, 2022 general and administrative expenses grew 79% to $11 4 million and this increase was primarily due to expenses associated with our new acquisitions.
And primarily the increased amortization costs from those acquisitions sequentially G&A expenses were flat versus Q4 after normalizing for the onetime costs, while we manage and managing gross margins well, we're not immune to inflationary pressures and you see some of that show up on our SG&A, but we're doing our best to work.
Through that.
Q1, 2022, EBITDA increased 29, 6% 11.9 million, reflecting a 16, 5% EBITDA margin.
And again, echoing Brian's point normalizing for dealer conference and cost professional services not recon.
EBITDA would have increased 42, 3% to 13 million, reflecting an EBITDA margin of 18, 1%.
Q1, 2022, net income increased 14% versus Q1, 2021 to some point 8 million, reflecting a 10.9% net margin.
For the quarter was 28 cents per share and if you normalize for the dealer conference and the onetime professional services net income margin would've been approximately 12, 2%.
P S would've been 31 cents per share.
As Ryan alluded to we continue to use cash to maintain elevated inventory levels, primarily to hedge against future supply chain roofs, and as a result, we used operating cash of approximately $4 3 million for the quarter and we do anticipate inventory levels dropping during the second half of the year and.
And finally, we closed the quarter with $33 million drawn on our line and we remain well capitalized to execute on our initiatives in coming quarters and with that operator, we'll now open the call for questions.
Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time we.
We do ask them about posing a question. Please pickup your handset if listening on speakerphone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Please hold while we poll for questions.
Your first question is coming from Steve Dyer from Craig Hallum. Your line is live.
Good morning, guys Ryan on for Steve.
Hey, Ryan.
I don't think I caught it but so China it sounds like sell in to the country a bit disrupted because of the port issues and everything going on there but.
Can you comment on sell through I guess, how to sell and compare to sell through and then secondly, how do your inventories look at the country level at your distributor.
Yeah. So I think that you you're seeing and the dynamic there as you correctly mentioned is that when we're talking about large quantities going to China, you've got sell in you might have inventory on a boat inventory on an airplane and then theres inventory in country and then sell through to the end customers and the sell through is obviously disrupted and.
Provinces that had been in lockdown.
Clearly, so Shanghai and some other places.
So you've got disruption there and then as a result, you know we we.
We have less product going in country just in anticipation of.
Meeting less product in the in the immediate term due to those locked down so in that sense. It impacts it impacts both the sell in and sell through with the Lockdown scenario.
How do you feel about inventory in country at the moment.
Well I think we we ended the year at a little a little higher inventory than we had say in Q3. The distribution there had and I think we talked about that so that that dynamic is really unchanged not higher nor lower given that we already had been reducing.
Shipments in even in Q1, so I don't think the inventory dynamic has changed.
The real change is just the sell through as a result of the key areas in provinces that have been locked down.
Good switching over to the U S. I mean industry challenges here are pretty obvious you mentioned many of them, but our math implies ex pellets, taking accelerated market share here in the U S. I guess anything you can attribute that to more recently and then secondly, do you think that outperformance relative to new vehicle sales can continue as the.
The volumes increase or is there not necessarily a kind of one for one type comparison to new industry vehicle sales.
Well I think you know our icy surfaces has been for a long time really twofold. One if you look at our paint protection film as a product category now as an industry, that's growing and the attach rate to new car sold is growing and that there is more cars with some amount of paint protection film and then within the business the amount of film.
Per vehicle has been increasing over time too so.
Secondly content per vehicle, increasing an attach rate increasing and so.
That's what his whether it's now or whether it's.
During the early days of Covid and in 2020.
That's what's led US continuously part of what has led us to continuously outperformed the underlying market because we're seeing that growth in attach rate and then separately in terms of market share.
We do take market share, we still believe in paint protection film, but were certainly take market share in the window film and automotive window Tinting space and so that in the same way as the growing attach rate of paint protection film that kind of runs counter to the cycle that we're in and it's what allows that.
Category to grow even when.
Vehicle sales drop and and really to grow even in an excess of that amount. So I think both of those have been true in both of those still are true and that's I think a big part of why we.
<unk> outperformed in a substantial way the U S Saar for.
For the past three quarters now I think since we first saw the Saar weakness in Q3 of 2021 that dynamic is has held and so we think that you know even with all the uncertainty that's there that trend continues and at some level no matter, what the macro sort of throws at June so.
From that standpoint, we feel pretty good.
Just following up on the window film comp can you remind us what the approximate mixes of new versus used vehicle applications for window film and then maybe how that compares to paint protection film.
Yeah. So for us the vast majority is still new even for the window film, we've not put out any specific numbers, but the vast majority is new but the applicable 80 of window film into the used car market. We do see is substantially greater than paint protection film.
And to the used car market only because from the moment that you apply a window film on a vehicle you get the full utility of the product even if that happens later in life with paint protection film.
There's.
The decaying declining use if you don't apply it while the vehicles, new because it's being damaged the whole time. So there's more there's more potential and the used vehicle market for window film that paint protection film, but it's still overwhelmingly new cars, which is really just primarily due to our route to market, which as you know premium installers in the.
Aftermarket and dealerships there, they're much more tied to new cars than than used cars, which you might see in some of the lower end.
Aftermarket shops that are our bread and butter customer so for us that skews it overwhelmingly towards new car.
Great and just one clarification, then I'll turn it over the others, but.
Just to confirm you said $80 million revenue for Q2, and 30% growth for the year on revenue Yeah, We're still looking at 30% growth for the year, even with the China impact obviously, if that situation deteriorated going into the year that might change that but still feeling good on that overall in and Q2 around $80 million that would be down from from where we were.
We're with China, and we talked about China, having maybe a five $6 million cut so that would've been 86, maybe 87 plus.
Before reductions in China for Q2, so 80 around $80 million yes.
Great. Thanks, Ryan Good luck guys.
Right.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press Star then one on your phone at this time.
Your next question is coming from Jeff Van syndrome from B Riley Your line is live.
Hi, Good morning, everyone. Let me just say congratulations on strong numbers, especially in the face of a lot of.
Just general headwinds out there.
Can you speak more about what youre seeing and hearing around car dealer inventory levels I guess forward expectations. There, how you see that sort of developing.
And then also how that's influencing your outlook for kind of a ramp in from a plate and net segment.
And I know this may be tough to answer but.
When do you sort of expect those to be running at levels, where you are utilizing capacity at a more acceptable level.
Sure Yeah. So I think you have kind of two ways to look at that you could look at the you know what the industry talks about and what the manufacturers talk about in terms of their manufacturing output and then you can look at you know what do we actually see it.
In the in the World that we live in which obviously doesn't.
Doesn't overlay all makes and all manufacturers equally so we see kind of one thing and then you hear another.
So I think that the the the.
The prognosis in terms of more inventory.
It was probably more bullish last year, then you get into this year and maybe other disruptions and things so there's a.
Wire harness shortages due to Ukraine in your various different factors, but I think the consensus overall view is we still see.
Any improvement in that inventory situation through the rest of the year, where maybe Q2 was a turning point now maybe the industry view is more of that that's been pushed out to Q3 or beyond so it still improving but maybe not at the rate at an industry level that.
That we thought earlier in our case, we're exposed to certain vehicle makes and models and have concentration that doesn't reflect the broader industry. So at any moment for us it could be better or worse, depending on what that concentration is and what we saw.
At the end of March we saw.
Through the the dealership services business that truly reflects deliveries of vehicles the dealerships more than sales and we saw some of the the highest in higher numbers than we had seen a higher than say December and in many cases, where December is typically a.
A good was a good month, so we've seen pockets of improvement.
It's just hard to say if that's a trend.
Trend or just a flash in the pan, but we definitely have seen some positive signs there at the end of the quarter. So I think realistically we're looking at this in.
Kind of a Q3 timing we've had we've had pockets of the country, where our labor was fully utilized and we are actually.
Done some hiring and that could be both from increased delivery rates of vehicles to dealerships and also just where we've where we've won and added new accounts. So that's been good but I think that realistically that is later in the year before we could fully put that.
That installation capacity to work.
Okay. That's helpful. And then I wanted to ask you I know, obviously theres a lot of things are evolving and moving parts, but.
With the attach rate improving in the U S are there any trends to speak to regarding full wraps versus partial ramp just wondering if theres any sort of underlying trends there as you get bigger yes.
Yeah, the the trend.
Really it's been the trend for paint protection film Forever has been to more and more coverage over time and.
So where you used to see years ago small relatively small amounts of Phil just on the leading edge of the vehicle or a partial hood on a on a high end vehicle like Porsche.
Now that the covering part of the Hood on a portion of it really in the aftermarket or even in the dealership space. There's just completely unheard up so that grew and has grown to say cover the entire front end of the vehicle and then you have more consumers who have been covering the whole car for a variety of reasons, so that trend very much.
Continues and and even continues to go down market as you see more mid range vehicles get any attachment and paint protection film.
Those are through the aftermarket we've seen the coverage on those continue to grow. So it really is twofold. It's it's paint protection film content per vehicle and paint protection film attach rate and both have had and continued to have positive trends that we're a beneficiary of that.
Okay, and then sort of as a follow up to that.
To use the R word but.
Yes.
It is on People's minds. So I'm just wondering do you think that the.
The partial versus full rap.
Mix might change in a U S recession, or even a global recession or are yeah. Our view on that is no and the our belief is that.
If youre going to buy paint protection film B or buying a new car and if you're buying a new car in a bad environment or in a recessionary environment. Our belief is that you are still.
Virtually is apt to buy our product with the car if you're buying the card now if you don't buy the car, it's a new card product, primarily youre not going to buy our product, but if you're if you're buying a car we believe you're going to still buy the film.
And that you're probably not going to alter the coverage substantially to save a few dollars because you know as a percentage of that new car value.
It's a very small percentage and adjusting the coverage doesn't move the needle on that materially so.
So from that standpoint.
We were we're coupled to the Saar rate in some level in a in a recessionary environment. But then you have this increasing attach rate that continues which which gives us a level of disconnection.
Which is what you've seen in the past three quarters, where you.
The Sars and then a negative trend, but we.
Performed quite well some of that is that we over index until the luxury segment, which has done better with inventory shortages.
Then some of the rest of the market, but still you've seen that that decoupling gear and we would expect that that exists.
Exists in and any type of environment, we might see in the next couple of years.
Okay.
Thanks for taking my questions I can take the rest offline continued success.
Okay. Thank you Jeff.
Thank you that concludes our Q&A session I will now hand, the conference back to management for closing remarks. Please go ahead.
I want to thank everyone for participating today and look forward to speaking with you again next quarter. Thank you.
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.