Q2 2022 Xpel Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the EXPAREL incorporated second quarter 2022 earnings call. At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments. After the presentation. It is now my pleasure to turn the call over to your house.
Mr. John Nesbitt Investor Relations for X dollars John .
John over to you.
Good morning, and welcome to our conference call to discuss <unk> financial results for 2022 second quarter on the call today, Ryan Pape, <unk>, President and Chief Executive Officer, and Barry Word X 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 will take questions from our call participants.
A moment to read the safe Harbor statement during.
During the course of this call we will make certain forward looking statements regarding <unk>, Inc. And its business, which may include but are not 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.
The use of 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 the current expectations of Madison was Expo. The 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.
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 risks and important factors that could cause actual actions events or results to differ materially from those described.
Forward looking statements there may be other factors that could cause actions events or results could differ from those anticipated estimated or intended no forward looking statement can be guaranteed.
Sept as required by acceptable securities laws forward looking statements speak only as of the date on which they are made and ex politics no obligation to publicly update or revise any forward looking statement, whether as a result of new information.
Or events or otherwise, okay with that I will now turn the call over to Ryan go ahead Ron.
Thanks, John and good morning, everyone that Austin My welcome to the second quarter 2022 calls as well we had a very strong quarter highlighted by our record revenue gross margin and EBITDA performance revenue for the quarter grew 22% to $83 9 million.
It was an outstanding result, when you consider the poor, but not unexpected Q2, new car Saar in the U S.
The lockdowns in China that occurred in the Shanghai area, and then broad more broadly speaking of FX impact to the business from the strengthening dollar and we had strong performance across most of our regions.
It was certainly evident in our U S region, which grew 43, 4% to a record $49 2 million in the quarter. We did see some volume pick up in our dealership services business. So that's often lows, although that we've seen on modestly higher new car inventory, but we're still operating at less than two thirds.
He has been as has been the case for the past several quarters. Most of our company owned facilities continue to experience strong demand, which generally means our aftermarket customers are also.
Continuing to see strong demand in their shops looking outside the U S record revenue in Canada, Europe , U K and Latin America.
We still see strong demand in Canada, and one of our most mature markets, but proving there's still room to grow there Europe continues to perform even in the face of the negative FX impact to revenue and margin, resulting from the strengthening U S dollar, particularly against the euro and the pound, but not so much against the Canadian.
Unlike in the past so that's that's helped us there.
Now looking at our results on a constant currency basis constant currency basis measuring rates as of Q2 2021 revenue was negatively impacted by approximately $1 $7 million and margin was negatively impacted by approximately $400000 for the quarter and we expect.
Worst FX impact to revenue gross margin in Q3 for sure just with the way rates have moved and then one would assume in Q4 as well.
As we discussed on last quarter's call, we were expecting our Q2, China sales to be reduced by approximately $5 million due to the COVID-19 related lockdown situation in the region and in Shanghai in particular, and we saw just right around that just under 5 million actual reduction from the original plan, China, New car sales were down in the first of all.
The quarter, and then began to rebound in June .
Unfortunately, our performance in the other regions, particularly in the U S offset the shortfall relative to our plan. We think Q2 should be the bottom for China and expect run rates in Q3, and Q4 to start to trend back up to higher levels, but you know overall I think China is a weak spot in the demand picture at the moment.
Just as it continues to have uncertainty going forward with the unpredictable impact of the of the Covid mitigation strategy, so with the impact of China and then the.
The currency.
U S dollar strength, we saw almost $6 5 million worth of negative impact to our overall overall revenue plan. So absent those impacts revenue growth would have been a little over 31% year over year.
We had good gross margin performance for the quarter and we continue to make great progress on our initiatives in this area and we finished the quarter at 39, 3% Great result.
It's even more impressive when you consider what we just talked about strengthening U S. Dollar puts pressure on gross margin.
With U S dollar denominated product costs everywhere, we sell and the quarter gross margin was negatively impacted by about $400000. So we do get a slight mix benefit to our gross margin percentage when China represents a lower percentage of revenue as it did in the quarter so that helped us.
Little bit.
But you know with the distribution market like China, we get no help from an operating standpoint, no no our SG&A cost savings.
So overall, it's certainly a net negative anytime revenues down overall.
Overall improvements to gross margin are consistent with the strategy that we've been talking about and even with you know so it's sort of all of the noise. There we remain very confident in our ability to reach a 40% gross margin run rate exiting the year. Obviously you see we're very close there for Q2, but we get a mix benefit with China, China should represent.
An increased percentage of sales that was too still should be able to make that up.
And the in the second half of the year.
We had no material pricing changes in the first half of the year. So so margin and revenue performance is not being driven by pricing I think a very common question in the current environment. However, we are currently evaluating the second half with respect to pricing looking at how costs are trending obviously, we're not even with with good gross margin.
The improvement program, we have we're not immune to.
The trajectory of costs that everyone's seeing overall and so we will be making decisions on that in the second half of the year.
Other big highlight for the quarter reached the highest EBITDA margin in our history, 25% first quarter that we've ever exceeded 20% EBIT margin.
And like we talked about in the other comments we achieved.
This result, despite encountering approximately $2 million and EBIT headwinds related to the China, Lockdowns and then strength of U S dollar over the prior year.
So you consider that you know.
Those two things hadn't occurred argument to margin for the quarter would have approached 22%. So it would've been even better so all the way around and I think it's consistent with what we've been saying the business continues to.
CRO revenue.
<unk> work our gross margin.
Plan to completion, and then manage expenses, which are still.
Trending a little bit higher on a percentage of revenue basis than we'd like but you put it together and you can drive operating performance in this business and we are and we expect to continue to do so.
We're estimating 20 twenty-two annual revenue growth to be in the 25% to 28% range. This is a little less than our previous guidance of 30% mainly due to the China impact in the first half.
You know a slower recovery of China in the second and then strengthening U S dollar as we've talked about.
But it will be a good result, and demand has remained strong July was a was an exceptional months. Then in August is proving to be no exception. So far so we feel very good about that.
That said you know manufacturers have been more bullish in their expectations for new car production recovery in the second half citizens potential.
Potential upside benefit for us and we've heard that before but there seems to be room for for some optimism.
That we believe we are set to benefit.
If this occurs.
And if you if you look at the comments from the manufacturers I would say incrementally become more positive about the production recovery and the concept that theres pent up demand by new car buyers in the channel.
Which we believe.
So we expect revenue for Q3, and the $85 million range, plus or minus which represents improvement in China and increased headwinds from continuing strong U S. Dollar.
Two two in Q3 tend to be pretty similar quarters with some takes and puts between them Q3 picks up Europe holiday season.
Europe OEM plant shutdown for sort of the same reasons not a factor for us in terms of revenue and it's also are.
Greatest time of the year for marketing events, which drives our SG&A.
But overall you know very tend to be very similar similar quarters.
Last year, we saw our highest EBITDA in Q2, and then sequential declines in Q3 and Q4.
And we've talked about you know quarterly impacts during Q3, and Q4 last year, but you know absent those types of things happening or other or other one offs, there's nothing sort of structurally different about.
Q3, or Q4 versus Q2, so in other words. There is no reason that Q2 should year after year outperformed Q3 from an operating standpoint, or even outperform Q4. So it's really just dependent on what happens in the quarter off on the product side, you know window film business continues to do great grew 42%.
For the quarter up to $60 million sequentially.
Sequentially was up just about 37% so almost 19% of revenue for the quarter architectural film business makes up about 10% of that.
We're about 2% of total sales so still small but.
Growing and we're seeing really good year over year year over year growth each month.
This year as we continue to execute the strategy here and expect that to continue to grow as a percentage of sales as a percentage of windows when the phone business overall.
Last month, we announced our partnership with <unk>.
Electric vehicle manufacturer to be the exclusive supplier of their factory direct paint protection film program. So obviously, a great addition to our overall OEM program development and are in a great way to increase awareness and paint protection film in general and the program will begin by the end of the year.
Really it was really excited to promote paint protection film and we just completed a joint marketing campaign to raise awareness of paint protection film among those that have already taken possession of the Arabian vehicles and to drive them to our local installers to have installations done on those vehicles that had been delivered its.
It's been quite successful with a very high interest rate when looking at the number of vehicles delivered and I think an example of sort of what's possible with some of the go to market from these new manufacturers, who have you been more direct connection to their customer so.
Should be a good a good program there.
I want to give a quick update on inventory we've talked about this for a few quarters and finished the quarter approximately $74 million of inventory, which is relatively flat to Q1, I still we expect inventory to peak within a few million dollars of where we are plus or minus I guess, it would not be minus with plus.
Between now and in early Q4, which is probably a little bit later than our previous estimate but regardless.
We remain well positioned to mitigate any of the supply chain risks and we've really seen the bulk of that inventory build so that's a substantial departure just as a reminder, from the first half of this year, where we used almost $23 million in cash almost 23 million of cash to build inventory so that inventory build.
Has effectively stopped and then we will begin to release some cash from inventory, but that's just probably pushed back a little bit further in the year.
Still instead intend to use our cash flow on acquisitions.
As we've talked about before we took the first part of this year to finalize the integration of everything that we had had done last year and reassess our strategy and program and go forward. We did complete a small acquisition of a software business at the beginning of Q3.
Which will integrate into our D. E. P platform. We've discussed previously that we've got a desire and ongoing program to really invest in the software offering and build the best platform. We can for our customers to use to run their business and this will be this will be part of that.
We're active in acquisition pipeline overall as I mentioned.
And this is the domestic and international this includes international distribution, but we want to get closer to the customer same things we've talked about previously and then obviously looking at that now.
You've got a you know a dislocation in terms of.
Currency, so theres opportunity in currencies that have weakened relative to the dollar you know certainly will be taking a look at that as well.
So overall great quarter.
Shouldn't be more proud of the team really executing exceptionally well.
And with that I will turn it over to Barry and then take some questions go ahead Barry.
Thanks, Brian and good morning, everyone going just a little deeper into our overall revenue performance product revenue in the quarter grew approximately 14, 3% to 67 million and grew 28% to $125 million on a year to date basis our service.
Revenue in the quarter grew 67, 3% to $16 9 million and represented 21% of our of our total revenue.
And as in the prior quarter. This growth was driven by increased demand in our company owned facilities, what Ryan was talking about and acquisition related labor revenue from our dealership services businesses on a year to date basis total service revenue grew 81% to $36 million and keep in mind sometimes are.
Our product revenue is converted to service revenue when we do these acquisitions such as permanent play and T'internet. So what was pre acquisition with product revenue post acquisition is now service revenues. So there's there's certainly impacts the growth rate.
In the service category as well.
Total installation revenue combining product and labor increased a little over 106% and represented 15, 7% of total revenue.
This increase was due again to both acquired dealership services businesses in 2021, and the continuing strong demand in our company owned installation centers and overall, our total revenue was up 16, 7% sequentially versus Q1.
And again as Ryan mentioned, we were pleased to see gross margin coming in at 39, 3% for the quarter sequentially gross margin was up 19% from Q1 and our year to date gross margin finished at 39%.
Our Q2, SG&A expenses grew 37% versus Q2 2021 to $17 3 million and represented 25% of total revenue for the first half of the year total SG&A expenses were up a little over 56% and represented 23, 4% of total room.
And part of this quarter over quarter growth is due to increases in travel related expenses as our team has returned.
Conducting more in person meetings, and providing more outbound training and holding more marketing events and we think this is important after the last two years of limited in person contact and we're actually we're actually happy to see these expenses increase as we think we get great returns on that investment for sure.
Sequentially SG&A expenses were down approximately two 5% versus Q1, but we did have some one timers in Q1 related to our dealer conference. So if you normalize for that SG&A expenses would have been essentially flat sequentially and this this nicely plays into our bottom line performance.
Q2, 2022, EBITDA increased 26, 6% versus the prior year quarter to approximately $17 2 million, which again was a record for the company and on a sequential basis EBITDA increased 44, 9% as I mentioned before our sequential revenue increase was 16%. So we saw.
Awesome, great leverage quarter to quarter.
And as Ryan mentioned, we achieved these results despite China headwinds and the challenges related to the strengthening U S. Dollar. So if you normalize for all that Q2, EBITDA would have grown a little over 40% versus Q2 2021 and on a year to date basis, our EBITDA grew 27, 8%.
Q2, 2022, net income increased 16.8% versus Q2, 2021 to $11 9 million, which reflects the net income margin of 14, 2% and an EPS for the quarter was 43 cents per share our EBIT grew faster than net income in the quarter as we incurred new <unk>.
Amortization related to 2021 acquisitions, and we still need to earn through us as.
As we as we roll forward and also obviously, we have additional interest expense on our debt that we incurred to fund our inventory build.
So normalizing just for the FX impact net income would have grown a little over 21%.
And on a sequential basis net income grew 52, 5% versus Q1.
On a year to date basis net income grew 15, 7% and our year to date net income margin was 12, 7% and our year to date EPS here.
<unk> 71 per share.
Cash flow from ops for the quarter was $1 8 million as we returned back to generating cash as our inventory build moderated and we expect this trend to continue as we monetize our buildup of inventory in the coming quarters, our debt level also moderated during the quarter and our debt level could go up or down in future.
Quarters, depending on the excess cash that we generate and the timing of any future acquisitions are regardless, we're very well positioned financially to execute on our plan.
So obviously very pleased with the quarter and we're excited about the rest of the year that operator, we'll now open the call for questions.
Thank you very much ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your keypad.
We also are posing your question you please pickup your handset.
Speaker phone to provide optimal sound quality.
While we poll for questions.
Thank you. Your first question is coming from Steve.
Craig Hallum, Steve Please ask your question.
Thanks, another great quarter guys congratulations.
Thanks, Steve.
When you look at how much you're outgrowing new car sales, particularly in the U S. I mean could you sort of breakdown the biggest drivers, whether it's sort of attach rates or the amount of pill film going on for.
So it doesn't solid price increases has much to do with that but sort of what would you attribute it to.
Yes, I think it's a it's multiple things clearly attach rate for paint protection film is is increasing has been increasing and we think we will continue to increase.
Within the paint protection film business the trend over time has been.
More product per vehicle on average so used to cover a smaller portion of the of the cars in aggregate and that's grown over time and probably continues to grow.
Then we have additional products that are allowing us the opportunity for more content per vehicle b. They are starting the coatings and.
The window film products, where we're able to take market share and some of those cases, particularly in the window film business, where it's a more established business. So now taking market share into a larger established slower growing business.
Lets us.
Out earn in and.
Outcompete there and then I think you know to the extent that.
So we are in the service business increasingly via acquisition and other things that has.
The ability to drive.
Dollar content and dollar denominated growth.
You know in excess of what you would get just where the product sale just simply because the services price so much higher than just the product. So I think it's really all four of those things contributing to that.
Got it as you look at kind of the dealer base I guess.
First of all could you remind us sort of how many franchise dealers are selling your P. P F.
And secondly, what do you think is sort of the realistic opportunity there.
About you know is there is a competitor share you can gain or other dealers that don't sell anybody's P. P F <unk> going forward.
Yeah I mean.
It's a little bit challenging to <unk>.
Chairman the number of.
New car dealerships, we reach directly and then through our whole network and then what does it mean to reach is that touching one car or a month or a touching 100% of the of the units sold monthly.
But you know that we have some connectivity directly and indirectly into several thousand new car dealerships in the U S.
But I think that there's tremendous opportunity to grow.
The number of dealerships offering paint protection and that doesn't mean that we need to sell to them, we will and we might.
Also through our aftermarket channel there are the huge labor force for the new car dealerships and I think you know you will find many many dealerships have gone off for paint protection and then you'll find many that that offer it but do it when asked will do it.
You know on occasion and the opportunity is to obviously offer it if you're not and then offer it with greater conviction and and much greater unit volume much greater attachment to units sold so there's there's really a long way to go there and we've seen success doing that.
At many different price points, when you get the dealers involved and it's not as driven by the enthusiast buyer who is conventionally about the product in the aftermarket you can get attachment into a much broader range of vehicles and we think that that's really important to do.
Yeah, I was going to ask I mean, I bought a vehicle this quarter during the quarter and ironically or maybe not so ironically it came about.
Half of the vehicle is already sort of pre loaded with EXPAREL and was just kind of wondering is that is that a trend you're seeing is added incentive to your provider and we are providing or is that sort of strictly dealers looking for margin enhancements and just sort of pre loading it on and.
Basically making people say they don't want it which rarely happens what is that sort of a trend you're seeing yes. I think I think you you are seeing more paint protection film pre loaded on the lot.
When you when you look at the environment, we're in with the shortage of new car inventory, we talk a lot about the takes and puts that occur in that environment.
One is that dealers having.
An opportunity to do more pre loading and do that sort of upfront accessories Asian, so that might be what youre seeing.
But we do see more of that occurring in yards typically ultimately motivated by the dealers profit motive like anything that they would sell but.
What our job is to help educate the dealers that paint protection film is in fact, a better alternative.
Our view than many of the other things that they sell or preload, you know theres a lot of warranty in finance products that we don't think offer quite as much value to the consumer paint protection film and from a dealership standpoint, you know those are cancel products.
It could leave a lot of them cancel it and harte added like a paint protection film that's actually on the car and you know that that's that states. So there's a there's a lot of opportunity. There I think the you know the point that that may not be obvious to everyone is that you know we're not we're not telling the dealerships anything they don't already know that they can make money by doing.
Other things in selling the car. They obviously know that what our job is and what we're doing and we'll continue to do this and say you know pay protection film is a product that customers love.
Those that buy at once are incredibly are likely to buy it again, and it's a real tangible product with demonstrable value and therefore, it's a better thing to sell with these new cars than maybe some of the other things you're offering.
Got it and then I guess lastly for me speaking of certain Freeloading would you anticipate your deal with ribbon is going to be sort of one of the only OEM ones you do or do you feel like there's a big opportunity there going forward. Thanks.
Yeah sure Steve Yeah, there remains opportunity with OEM and and you know what with the OEM channel has the ability to do is to reach buyers today that that we wouldn't reach in many cases any other way either because the dealers arent offering into the customer's not aware of it so.
So, especially in radians case, they've been very forward in terms of marketing it talking about it branding it as <unk>.
So I think they've done themselves are serviced by doing that and they've done the broader business of paint protection film are serviced by introducing it to a lot of people that didn't know about it and so I think there's plenty of opportunity to it.
Expand upon that when Youre looking at this you know still small attach rate into the total new car sales and looking at ways to grow that so this would be.
Not the last one of those to look at doing.
I guess as a quick add on to that then would you have to typically do that with a manufacturer that doesn't sell through the dealer channel just given sort of the conflicts there.
No. There's if there's opportunity for both I think when you look at Arabian with an alternate channel.
All of them to engage in marketing activities and whatnot direct to the consumer because there.
That much closer to them.
You know we have other examples now in the OEM channel, where where we have a product being installed and sold through the dealers and so there's a again a benefit to the dealer too. It's a it's another margin opportunity for them just as it is the OEM. So it seems are equally compatible you know sort of irrespective of the of the new car channel.
Thanks, guys. Good luck.
Thanks, Steve.
Once again, ladies and gentlemen, if you do have.
Any remaining questions or comments, please press star one.
Keith.
The next question is coming from Jeff.
From B Riley.
Question.
Hi, Good morning, everyone. Let me add my congratulations on the strong key metrics.
It sounds like there are some encouraging signs in OEM production rates.
Can you speak a little bit more about what youre hearing from the dealers from the Oems around the inventory outlook and flow that they're expecting.
As we're thinking about second half.
Sure Jeff Yeah, I think you know we you have kind of a couple of data points. You have what are the Oems talk about publicly and what does that mean in aggregate and then what feedback do we get from all the dealerships that we see in and you know the.
Feedback is you know.
Literally down to when are the one of the trucks delivered and do the car show up.
And those I would say.
Haven't necessarily run together in over the past three.
Three quarters.
And now it seems like maybe they are coming into alignment a little bit more aware and we have reports from dealerships getting sort of increased fill rates increased delivery rates and that seems to tie a little bit more into what you hear the manufacturers talk about so you know if you went back to last year, our expectation was that Q2, we'd see a mean.
<unk> full.
Improvement in the overall inventory situation and you know while I think the.
Tori ticked up off of the lows for Q2.
No one would probably called out a meaningful recovery.
But it does seem now that there's a ton of room for optimism there for the rest of the year boat by by what we're seeing even in fits and starts at the dealership level and then and then matching that with the Oems public comments I think I think there will be improvement in that throughout the rest of the year it seems pretty certain.
Okay, good but it seems like that's probably a multi quarter thing right. I mean, we're not going to get back to normalized inventory by end of this calendar year and I'm sure that the new antenna yeah absolutely.
Okay.
So we've got some runaway there so it's still you're running I think you said less than two thirds capacity and dealer services.
I guess my question, there anticipating more inventory to come in probably no change you need to make there or I guess, how are you thinking about.
Kind of getting.
Capacity are getting utilizing more of that capacity.
Yeah, well I think the question was even a few quarters ago did we expect that the.
Inventory to recover such that we could maintain that capacity and we were pretty adamant that we believed it would and that we wanted to do that so the first order of business hopefully as that inventory recovers as we use more of the capacity that we have and that you know.
It was accretive to gross margin you know there are some fixed costs. There that we can just earned through by doing that so you know our plan would be to stay the course, and then ideally benefit from that in that segment as inventory recovers.
Okay. Good.
And then I was curious.
On the software that you acquired that I think you said you are.
Now moving into the DAP software platform, maybe you can just touch on what <unk> just curious on that and then also any other components in that vein that you might want to layer and that you would acquire.
Any more color what was the second part of the question, Jeff anymore component I'm just curious yeah.
Just wondering if there are other components like how sure you are eyeing that you might want to acquire as well or if you feel like you've got everything you need to know.
So we're not quite ready to talk about what we bought and how it integrates in the VIP probably need a little bit more time to to advance that but I do think that you know that's something that we are looking at and open to as a way to build out that platform. We we look at the.
The market that we're in and the customers we have as being technology starved in many ways and we know this is true even when looking at our own operation and we're our own operation is strong and weak and where we need things. So there's there's a lot of benefit that we can bring.
And most of that will be from our internal efforts and the team we have and the team are growing here.
But you know like we did with that little tuck in there and there's there's probably some other opportunities for that certainly ones, we would consider going forward.
Okay fair enough. Thanks for taking my questions and continued success.
Thank you Jeff.
Okay, there appears to be no further.
Questions.
To the management for any closing remarks.
Thanks, everyone and thanks to the Expo team for doing a great job and look forward to speaking to everybody in the future have a great day.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day.
Participation.