Q1 2023 XPEL Inc Earnings Call
Greetings and welcome to the Excel, Inc. First quarter 2023 earnings call.
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I will now turn the conference over to your host Mr. John Nesbit of IMS Investor Relations, Sir you may begin.
Good morning, and welcome to our conference call to discuss <unk> financial results for the first quarter 2023.
On the call today, Ryan Paybacks, Bell's President and Chief Executive Officer, and Barry would 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'll take questions from our call participants.
And I'll take a moment to read the safe Harbor statement. During the course of this call we'll 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 such statements are based on our current expectations and assumptions, which are subject to.
Known and unknown risk factors and uncertainties that could cause our actual results to materially differ from those expressed in these statements. These factors are discussed in detail in our most recent Form 10-K, including under item one a risk factors filed with the Securities and Exchange Commission Nextel undertakes no obligation to publicly update or revise.
Any forward looking statement, whether a result of new information future events or otherwise with that well now turn the call over to Ryan go ahead Rod.
Thanks, John and good morning, everyone welcome to our first quarter 2023 call clearly we're off to a great start in 2023 in the quarter revenue grew 19, 5% to $85 8 million. This was our second highest revenue quarter in history, which is great considering Q1.
There's almost always and historically been our lowest seasonal quarter of the year.
U S revenue grew 22, 8% compared to Q1 2022 to 51 million. This was up sequentially by a little over 7%.
Results seems to coincide with Q1, USR performance, which finished better than most expected rising new car inventory levels were a contributing factor to this better than expected result, and we benefited from that as you discussed in the past we've been mindful of potential impacts of the challenges current macro environments, such as higher interest rate.
So that could impact the new car buyer, but so far new car buyers have proven to be quite resilient and I think we're seeing that in our results and our luxury share of the U S market reached an all time high in Q1, which is a good point for us as well because we continue to over index into that segment of the market. Our China region finished right, where we expected and what we talked about.
With the inventory Destocking and changes coming out of the Lockdown last year revenue declining approximately 25% versus the prior year quarter. So we should reach the trough in China sales in Q1, and we expect incremental sequential quarter on quarter increases for the rest of the year, we're still forecasting annual 2023.
<unk> total China revenue to be pretty flat relative to 2022, given the slow start of the year, having said that.
No we're bullish on the long term opportunity in China, as we discussed last call where with the with the end of the Covid restrictions are moving quickly to get our teams set up and get on the ground in China to support our distributor car dealerships and OEM relationships that we have and we expect that to be operational towards the end of the second quarter.
China was able to host their large dealer conference. So similar to what we did in March that was attended by over 1000 participants and we were able to have our team on the ground for the first time in three years and it was.
Very energetic very positive. So we were happy about that transition and the marketing and the market opening to us.
So it's gonna be a big part of our focus for the remainder of the year. The other regions had strong revenue quarters, as well Europe middle East and APAC.
APAC Latam all record quarters, which was which was great and again for most of these Q1 is typically the lowest quarter of the year so easily.
So all positive results there and we think that sets us up for a strong second quarter. We expect Q2 revenue to be in the 100 million to maybe $102 million range. So that that should exceed 100 million in quarterly revenue for the first time in our history. So that's a nice milestone and this assumes just incremental improvement in China, but still down single digits.
Single digits compared to Q2, 2022 for the quarter overall, our outlook for the year really hasn't changed substantially from our view in February the business. Our business has remained strong in spite of the macro uncertainty in our current do you see that continuing and we're certainly aware of the possibility of some delayed onset pain from this title.
<unk> cycle and the impact on vehicle affordability, but right now we haven't seen it impacting our business.
I in a quarter with a lot of positives, we certainly want to.
Highlight our gross margin performance at 41, 9% as you recall, we guided to around 42% gross margin by the end of the year and we're a little bit ahead of schedule on that which is great and we continue to see some margin benefit from lower China mix as we've discussed in the past and we continue to gain leverage on fixed costs embedded in gross margin.
And then the preponderance of the continued gross margin improvement is mainly the result of our ongoing work around our bill of materials costs, and a little bit of pricing benefit from last year. So even though we're here sooner than we planned and still expect to finish the year at 42% range plus or minus a few basis points, we may bounce around a little bit Q2, and Q3 is.
We get there with the with the different mix of products and different mix of channels, but all in all a.
Really good and very happy about that as a result, Q1, EBITDA grew 43, 9% to $17 1 million, reflecting a an EBIT margin of 19, 9% and a sequential increase from Q4, a little over 29% really nice operating leverage for the quarter there.
Well, we just held our 2023 dealer conference.
It was a huge success, we had 650 customers in attendance from 33 countries. This was the largest conference. We've we've had in our history the energy was amazing.
Really the conferences not about EXPAREL, we're not standing there droning on and on about our products or lecturing people on it it's really about the experience our customers get to improve their business and small format breakout session and interacting with each other so it was amazing and it's one of the most important things we do every year.
We also announced during the conference latest editions to our fusion plus ceramic coating line.
<unk> included a fusion plus aircraft product as well as some incremental products to our automotive fusion plus line. So these these products for our coatings business.
We will continue to slowly expand the verticals, we target as we've discussed our plans to do over the longer term you see marine products and then now this aircraft product and you know we're working towards this incremental vertical expansion over time as well as going deeper in the current verticals like like we did with the launch of additional automotive fusion plus products. So it's been well received.
And we're going to continue to do more of it.
One of the sessions of great importance at our dealer conference was a training and a reveal of our DAP next our newest versions of our DAP platform. We got great feedback there was a lot of excitement about what that means and what is to come we're gonna be retiring the old version in the next three to four months and that will enable us to even further.
All of our development on the new platform, which is really more than just what we've traditionally done with software as it means to to cut and manufacture the product on demand, but really as a tool to help our customers run their businesses better which by extension is is obviously good for them, but then by extension is good for us so.
The retirement of the old platform that'll allow us to put that much more energy are driving that forward. So that's gonna be a big milestone for us sort of by the end of the summer time.
So the conference dealer conference was great overall, and I look forward to doing it again next February <unk>.
Additionally, we completed a small acquisition on May 1st which is the first acquisition. We've done this year was a brown a 5 million dollar purchase of a dealership services business, which will integrate into our overall dealership.
Services segment of the business it will add about $4 million in revenue.
Great addition for us expands our footprint checks all of the strategic boxes. It's immediately accretive and brings you know new product and service revenue as we further expand that dealership services.
Our inventory finished at $84 6 million for the quarter.
Up around 4 million from Q4, which was consistent with our expectations, especially with the reduced demand out of China for for Q4 of last year in Q1 of this year.
And as we discussed in addition to that you know we've had a number of vendor commitments, we've chosen to honor as we work to.
Bring inventory levels down overall, and they continue to take us time to unwind. This but this this should be the peak and we have a solid plan to manage our days on hand down over the coming quarters to optimize cash flow, but still support planned revenue growth in this business. The one thing that we do not ever want to do is run out of product. So.
The the wheels fall off when that happens, but we're making good progress and we will see lower days on hand, as we progress throughout the year.
All in all really great quarter for Us I appreciate all the efforts of our team, particularly the 150 or so that are dedicated their weekend to our dealer conference and put on an amazing show for our customers. So a great quarter, so with that Barry will turn it over to Barry to add a little color on the numbers go ahead Barry.
Thanks, Ryan and good morning, everyone just to cover off a couple more points on revenue looking at the product lines combined paint protection film in Cutbank revenue grew a little over 14% in the quarter and was up sequentially a little over 5%.
Our window film product line revenue grew 29, 9% quarter over quarter to 15 million, which represented 17, 5% of our total revenue and this was up sequentially from Q4 by a little over 28%, so really solid quarter for window film.
Our Q1 vision product line revenue grew six 4% to $1 2 million and this was up a little over 13% sequentially. Our vision product line tends to be seasonal with December January and February as low months, but we have momentum in this line as March was a pretty strong month for us.
Our OEM revenue had a solid quarter growing a little over 50% versus Q1, 2022 to $3 5 million and our total installation revenue combining product and service grew 34 from 34% in the quarter and represented 17, 2% of total revenue.
So all in all really good performance across the board in the quarter.
Our Q1 SG&A expense grew 18, 9% to 21 million and represented 24, 5% of revenue.
Our expense growth was a bit muted in the quarter with the out of period impact from the timing of our annual dealer conference.
The impact was about 800 K in Q1, 2022 so we'll see those a conference expenses hit in Q2 this year.
But even considering that we saw some really nice leverage in the quarter.
Our Q1 net income grew 46, 5% to $11 4 million, reflecting net income margin of 13, 3% and a P. S was 41 cents per share sequentially net income was up just under 37%.
Cash flow from ops for the quarter was point 7 million, which is substantially lower than our EBIT number and one contributing factor is that we had a record revenue month in March where revenue was about $8 million higher than December our DSO has been fairly consistent so it follows that our a R would increase as it did so by about six.
Point 6 million over year end.
Not seen any movement in terms of customer delinquencies, which as a percent of revenue has remained constant so that was one factor and as Ryan mentioned and we did increase our inventory levels by about 4 million. So that had a negative impact as well and finally timing of a PMA payments can impact operating cash flow either way from quarter to quarter and this this quarter that <unk>.
<unk> was negative by approximately $2 5 million.
And there's no doubt the increase in our inventory levels over the last few quarters has been a primary driver in our decreased efficiency and our cash conversion cycle, but we expect our days sales outstanding and our days payables outstanding it'll be somewhat consistent in the coming quarters, so given that.
We'll begin to see positive impacts to future operating cash flows as our inventory levels normalize.
Also in April we closed on a new $125 million credit facility. The primary driver in doing this was just to get better terms financial terms. In addition to increasing our borrowing capacity.
This new facility nicely enhances our financial position to execute on all of our strategic initiatives.
And while we expect to be able to fund most of our acquisition pipeline with cash the new facility provides maximum financial flexibility and plenty of dry powder for the foreseeable future.
So again really good start to the year end and we've got some good momentum going into our Q2 looking forward to talking again next quarter with that operator, we'll now turn the call over for questions.
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One moment, please while we poll for questions.
Thank you.
Our first question is coming from Steve Dyer with Craig Hallum. You May proceed.
Thanks, Good morning, guys nice results.
Thanks, Steve.
We talked a bit about this last quarter, but I'm just kind of wondering continue to keep an eye on and sort of a.
And the marketplace one of the questions is as inventory sort of starts to loosen a little bit.
If youre seeing any change just among the preload are the you know the dealers that preload the ramp on the <unk>.
Vehicles here as things get a little looser than.
And maybe that becomes more of a point of negotiation as opposed to a pre loading it and tell you that you've gotta habit.
Sure Yeah, no I think Theres a couple of dynamics there. We we've we've seen it both ways. When you look at where our products are most often pre loaded we see it much more with the window to product line than we do the paint protection film to begin with so that the amount of pre loading at least for substantial coverage paint protection.
Film that we see across the whole network is actually relatively low. So I don't think we have a huge exposure to that and in window film that's a as a preload as really a necessity in many markets. So that should be pretty durable in any environment and then on the flip side you know we've seen definitely seen interest from deals.
In terms of adding our products as the market adjustments that had had been so prevalent have been you know winding down are being substantially reduced so I I don't see significant exposure to ease out.
As that inventory dynamic continues to shift.
That's great color. Thank you.
Just on the acquisition that you made in the dealer services segment I'm wondering if you could just give a little bit more specific as to as to what this company does how you how it integrates with what you're already doing et cetera.
Yeah. So you know when our dealership services, we're doing you know relatively high volume in terms by attach rate.
Installation of paint protection, our window film for car dealerships directly and this is typically the type of business that are our existing aftermarket network isn't is interested in.
With a preload high volume and that's what we did with the permit played acquisition and a subsequent acquisition two years ago and this is really just a another smaller version of a business like that that we can can integrate to do that that work for dealerships.
Okay.
And then I guess, given you know some some marginal revenue there along with the Q1 would be any sort of change to your view on the year of 20% to 25% revenue growth.
No I think we're we're still there and and what we're seeing now.
US on track for that I I don't think our position really has fundamentally changed yeah, we're not inherently more pessimistic about the year nor are we more optimistic than we were two months ago. So I think we're feeling good about the business is still a little cautious just as is everyone is but no fundamental change in our outlook.
Got it alright, I appreciate the color guys. Good luck.
Thank you.
Thank you. Our next question is coming from Jeff Van syndrome with B Riley you May proceed.
Good morning, everyone, Let me add my congratulations.
Just wanted to see if maybe you can update us on where we are with the attach rate at this why I know you've got some moving parts, but maybe just touch on that I think that.
So I mean, yeah for PBF I mean, we you know this this is a a a.
Slow moving but ever increasing rate.
We can tell so.
Depending on how you look at that you're looking at the at the U S. You know you're still talking.
High single digits with some amount of paint protection film attached I would tell you that you know from a quarter to quarter or even multiple quarter sequentially. You know this isn't something we're able to defined probably more accurately than that but we still see the upward momentum of attach rate for the paint protection film product for sure.
Okay. Good.
And then great to see.
Automobile inventory broadly improving ideal or what's where do you think we are in the process of inventory levels on dealer lots kind of normalizing and and maybe could you speak more about what you're seeing in your dealer services business and how you expect that business to trend over the next coming quarters.
Sure Yeah, I mean, I I am hesitant to correlate the overall trend with how it impacts our dealership services business only because for various reasons, where you don't have geographic concentration and even concert concentration around certain makes that perform differently just in terms of the manufacturers ability.
To restock that inventory, but as it pertains to our business directly we've seen a broad based improvement in that for the most part I think probably affecting you know 60, 70% of the dealerships that that we service have seen either a substantial improvement.
Improvement in their inventory situation or a complete improvement and that's been a positive for us this quarter. We've seen in that segment. Some of the highest numbers. We've had both from a car count standpoint, and then from an overall revenue standpoint, so that trend has certainly been good for us and I think as we you know as has the rest of the 25 two.
40% of those dealerships sort of that we service kind of get back in that situation that'll continue to be positive for us.
Okay. Good and then I Wonder if you could speak a little more a little bit more about the DAP software paid back on that what's left to be done on the new the new software initiative as you.
Basically end of life the old software.
Well I would say in terms of what less left what is left to be done you know as anyone who's ever been involved in a software project knows it never ends so.
It will never end so it will never be done, but I think in terms of some of the core things that we're trying to do too.
<unk> help our customers with.
Options for process to be more efficient.
For compensation and commission to make sure they're paying people right and then ultimately we want to create a platform to enable more pricing discovery about what are the cost of these installation should be the industry has a very simplistic pricing structure today, and maybe that's fine or maybe its not though without the.
The technology and the data behind it you don't know so from that standpoint, you know were talking you know me.
Many iterative cycles here left to go to bring that value. So right now we're really focused on the incremental wins in that shifting people to this platform, but theres going to be work to do on this for years to come to hit exactly all the things that we wanted to do.
Okay fair enough. Thanks for taking my questions and continued success.
Thanks, Jeff.
Thank you. Our next question is coming from Tim Moore with E. F. Hutton you May proceed.
Thanks, and congratulations on a strong gross margin but.
But can you continue execution of the plan.
My questions are already answered, but let me start off with.
I heard you correctly that the OEM sales were up 50% sequentially and can you maybe update if that was driven a bit more about rehbein wipe. It came from kind of a European smaller OEM relationships, we have over there.
Yeah. So it was a 50% over the prior year Q1, 2022, and it's really a combination of things certainly revision is a contributor of that as that program.
Produced its first revenue in October and then you know we've been working to scale that no. Each month on month sequentially. After that so that is a driver of that but.
But at the same time, our other programs have all grown as well in terms of their efficiency or vehicle counts or as a manufacturing log jams who've been released that's put more vehicles through the system too. So it's a it's really a mixed bag, but certainly review and is now contributing to that on a year over year basis, where there where there wasn't revenue in the prior year.
Great that's helpful color.
To follow up on window Tinting.
It seems like some investors are overlooking that growth profile I know, it's a smaller revenue base, but.
It's been very consistent with the growth rate.
How are you may be trying to prove the attachment rate and do.
I assume you have dedicated teams for the Windows side to drive sales growth were they broken up from the <unk>.
Yes, so our bifurcation there is really about the automotive products and then our architectural window films.
Where we do have dedicated team on the architectural side in terms of automotive that's handled by our core team and really you look at we've got the three core product lines paint protection window film coating business and our goal is to drive content per vehicle across all of those and in various channels in <unk>.
<unk> way is sometimes a sale of one versus the other is easier the the window film business for automotive obviously is more established there are more people that familiar with it. So there are times, where we're leading with that and then trying to come back in with paint protection film and in coatings or or anything else. So it really it really depends but.
You know our our job is to get as much dollar share content on as many cars as we can that's job number one and then you know less important to that as you know our ideal split among the different product types and so I think you've seen that with the windows 10, as one where we're able to provide good service and good value in and.
Win market share in a slower growing and much more established business and that is either.
The cause of the paint protection film business, and the coatings business or it will ultimately be a driver of the paint protection film in the coatings business, depending on the order in which it happened.
Great. That's helpful. Ryan and my last question is I was curious you know how fast as maybe the ceramic coating ground during the past few quarters.
So those are that news announcement last week for the poor new coating options. You know maybe you can just talk a little bit about ceramic coating.
Yeah. It was still on a small base. So we've seen you know growth you know generally far in excess of our overall growth rates right. So it's a much higher growth product on a on a smaller base you know that's one where we think more product differentiation can.
Can actually help grow it faster you know not all of the products we sell are necessarily.
Equally benefited by extensive product differentiation, but in terms of the ceramic coating, we actually think that it that it will be as it intersects the installation characteristics and sort of the customer preferences. There. So you know the the expansion that we did even within automotive ignoring sort of the aircraft component is one.
And that we really think will be a catalyst to continue the high rate of our sales growth. We've seen there because we have more options for more people on on how we get the product on the car. So yeah, we're really happy about that.
Thanks, Ryan and Barry and I look forward are you just seeing you at the conference. This week in New York, that's it for my questions.
Thanks, Tim.
Thank you we have reached the end of our question and answer session. So I would I would.
Hand, the call back over to management for any closing remarks.
Yeah. Thank you all for joining us and thanks to our team for a great quarter and we'll speak to you soon bye bye.
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