This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Please stand by. We're about to begin. Good day, ladies and gentlemen, and welcome to the Expel Inc. second quarter 2021 earnings call. After the presentation, there will be a question and answer session. If you should require assistance during the call, please press star zero and an operator will assist you. It's now my pleasure to turn the floor over to Mr. John Nesbitt of INS Investor Relations. Sir, the floor is yours.
John Nesbitt
Good morning and welcome to our conference call to discuss Expel's financial results for the 2021 second quarter. On the call today, we have Ryan Pape, Expel's President and Chief Executive Officer, and Barry Wood, Expel's Senior Vice President and Chief Financial Officer, who 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 now take a moment to read the Safe Harbor Statement. During the course of this call, we'll make certain forward-looking statements regarding Expel, Inc. 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 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 of the management of Expel. 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 risk factors and uncertainties affecting the company, performance, and acceptance of the company's products, economic factors, competition, the equity markets generally, and other factors beyond the control of Expel. Although Expel has attempted to identify important factors that could cause actual actions, events, or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events, or results to differ from those anticipated, estimated, or intended. No forward-looking statements can be guaranteed. Acceptance is required by applicable securities law. Forward-looking statements speak only as of the date to which they are made. An Expel owner takes 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.
Ryan Pape
Great, John. Thank you, and good morning as well. Welcome to the second quarter 2021 call. I think, obviously, Q2 was an amazing quarter for us. Certainly exceeded our expectations going into the quarter. Revenue grew 92% to a record $68.7 million. Sequentially, revenue grew 32.5% from our previous record revenue in the first quarter of this year. Year-over-year growth rate was impacted positively by the COVID impacts of last year, but it was very strong by any measure and even independent of that. As you may recall, the U.S. and most of our other regions other than China saw significant COVID impacts in Q2 of last year. But again, it was strong across the board and strong across all of our regions, even factoring that in. In Canada, we had a great quarter, posting a record $8.9 million in revenue. As we mentioned in Q1, there was about a million of quarterly sales into the dealership channel that were pushed from Q1 to Q2. But even with that, great performance. In continental Europe and U.K., also had record quarters. Continental Europe grew 80% to 5.2 million in U.S. dollar terms, and U.K. grew over 200% year over year, looking at the impact from previous year's lockdowns. I'm really happy with this region, looking for ways to continue to invest both in Europe broadly and then in the U.K. organically and via acquisition. Our Asia Pacific region, which excludes China, Another good spot, past 2 million quarterly revenue in U.S. dollar terms, first time in history. This is still an area that we're very much focused on investing in. We think it's a very small region for us, has a lot of opportunity going forward. Seeing some COVID impact there, if you're following the news. So we watch that, but still very pleased with what's happened there. China had a very good quarter, revenue increasing 26.4% to 12.6 million. It's the second highest revenue quarter for the region. If you recall, China largely recovered in Q2 2020 from the impacts of COVID. China car sales were up over 10% in Q2, so that's certainly helpful. We probably brought in a million dollars or so of revenue into Q2 from Q3 based on timing of shipment, so we'll see that reverse in Q3, but great numbers nonetheless. The impact of COVID travel restrictions has impacted some of our activities that we had planned for China over the past 18 months, as you would expect. So we're really anxiously awaiting further relaxing of those restrictions. Now, I also note increased prevalence of COVID and lockdowns in China. So we'll be watching this closely to see if that has any impact going forward, but clearly too soon to tell at this point. Latin America region grew over 100%, still from a very small base. This is a big area of focus for us, like we've mentioned. We have a very active project to expand our direct sales capability in other parts of Latin America outside of Mexico, where we've had such great success with that. Middle East grew over 300%, huge quarter for us. We did 2.4 million, which is almost half of what we did in all of 2020. So that's been a focus area over the past two years. I'm glad to see really good numbers there. And last but not least takes us to the U.S. region. So revenue grew 112.8% compared to Q2 of last year to $34.3 million, highest revenue quarter ever for this region, and it constituted nearly 50% of our total revenues. In this number is about $1.9 million in new net revenue related to our permaplate film acquisition, and this excludes revenue that we had selling to permaplate film prior to acquisition. So total permaplate film revenue was over $2 million for the month, but in terms of net new revenue, we exclude our previous sales. So most of the growth was organic. Really great results. U.S. continues to to do really well in our home market here. A significant portion of Permaflate Films business is providing labor included installation of window films to mid-range car dealerships with a really high attach rate in terms of attach rate of product to new cars sold. In large part, that business is fairly distinct from our existing business. which doesn't index into the mid-range dealerships as often as high-line dealerships. So we really like that model in and of itself, but it also serves as a great platform to take our other products, be it paint protection film and other future products, into these dealerships. Even though we're doing much of the labor ourselves in this permaplate film acquisition, that doesn't need to be the case for all other products. For example, as we work to integrate paint protection film into dealerships that have never sold it before, our independent expo dealers will be in a great position to do much of this work, and it's a perfect fit for them. So what you're seeing from us via this permaplate film acquisition and our other OEM activities is that, in many cases, we have to be increasingly agnostic as to how the product gets on the car. We need the best solution for the ultimate customer, And for us, such as these products can grow in attach rate. So there are trade-offs when we're doing labor, higher gross margins, but increasing operational complexity. But these are all a means to an end to see that the product lines grow. And in many cases where we're doing installation, we generate significantly more gross profit dollars per vehicle. Permaflate film's business is, is more correlated to new car inventory and the arrival of vehicles at car dealerships rather than new car sales, given the high attach rate in that model. So it's actually been impacted even more than the rest of our business from the low new car inventory situation. We're actually only operating today at about 75% capacity in terms of our ability to install these products in volume in that business. So as new car inventories recover, we may see the benefit of that first through this new line of business. Overall, we expect Q3 revenue to fall in a range between our Q2 revenue and a few million dollars less than Q2. It's not likely Q3 revenue will exceed Q2 revenue this year. Q2 was exceptional. I mean, it was red hot in so many ways. We've seen some evidence that customers are increasing stock, ordering slightly more product than the trend would suggest. This, we think, is mostly due to concerns about future price increases or possible product shortages. We've had tremendous planning on our team. We really had little, if any, product shortages across the board. But the same can't be said for the industry overall. Some of our competitors have been in a very tight situation. So we may have benefited a bit in Q2 from that fear, and that helped really take Q2 just over the top. Additionally, new car inventory being low is beginning to impact car sales significantly. In the U.S. for July, we saw new car sales down 8% from June based on lack of inventory. Aside from the permaplate and OEM business, lower inventory in and of itself is not a net negative for our business. And I think the results of this year really shows that. But to the extent low inventory translates into lower new car sales, that's where we'll see some impact or we could see some impact. And we've certainly talked about that, but I think it's possible we'll see that a bit in Q3. Obviously, all that comes against a backdrop of a blockbuster quarter and a great year so far. So just like we speculated earlier in the year, a lower new car inventory environment that results in some cap on sales of new cars really just serves to cap our growth, which still leaves us on a tremendous revenue run rate. and overall performance beyond what we imagined at the end of 2020. So overall, really pleased with the U.S. business. If we see it cool a little bit from the red hot Q2, that leaves us still in a tremendous spot and on a tremendous revenue run rate. Overall gross margin for the quarter finished at 36.7%. compared to 32.8% in the second quarter of 2020. As we've talked about previously, we expect to break out of that kind of historical gross margin range we've been in, 32 to 35%, starting in the second half of the year. And so, you know, we're seeing us start to do that here even in the second quarter. We're in a challenging environment with respect to costs. I think everyone's keenly aware of that in their professional and personal lives. But to the extent we have cost increases, we expect to be able to pass those along where we need to. So Q3, Q4 will be choppy in that way with respect to gross margin, but our guidance of increasing gross margin above our historical range as we exit 2021 is still very much intact. We're benefiting from a product planning that's been a long time in the making in terms of initiatives to improve gross margin. and also a mix of revenue in terms of product and geography that is trending towards higher gross margins. Consistent with recent quarters, we continue to drive tremendous operating leverage. EBITDA margin finished at 19.8% for the quarter. Net income margin finished at 14.8%. Finally, I'd add that we have a robust plan with respect to acquisitions around channel and product. very much consistent with everything we've done in the past and what we've been talking about. So this will probably take us into a small net debt position for a short period of time as we execute on this plan over the next 6, 9, 12 months. But we're seeing great things that fit our business. Maybe a little bit of pressure on pricing, but overall we still think we're able to do these acquisitions on very good terms for the business and in a very accretive way. So with that, absolutely great quarter, really excited, firing on all cylinders around the world. Great, great performance for our team, by our team. And I'll turn it over to Barry, and then we'll take some questions. Barry, go ahead.
John
Thanks, Ryan, and good morning, everyone. Obviously, Q2 was just an outstanding quarter by almost any measure, just starting even with our revenue growth of 92% to $68.7 million, which was a record. And as Ryan alluded to, we had a relatively easy comp due to the impacts of COVID last year. And as you may recall, we saw revenue declines in several of our regions, including the U.S. in Q2 last year due to COVID. But even with that, our Q2 performance still exceeded our expectations. And most of this growth was organic. There's approximately 2.2 million of acquisition-related New net revenue in the quarter from our recent acquisitions, including permaplates, so it was just a great grassroots performance for the company. And on a year-to-date basis, our revenue grew 87.9%. Product revenue grew 89.5% to approximately $58.7 million in the quarter and 89.4% to $103.6 million for the first half of the year. And in this category, paint protection film grew 86.6% to $45.2 million in the quarter and grew 84.1% for the first half of the year. And our window film product continues to outperform growing 86.1% to $11.1 million in the quarter and doubling to $18.2 million for the first half of the year. We also saw a record quarter in our other revenue category, which consists of our fusion product line, plotter sales, and tools and accessories to support film installation. So this growth makes sense given the performance in the film lines. Q2 2021 service revenue more than doubled for the quarter and grew 79.3% for the first half of the year. Total installation revenue from our company-owned installation centers and our OEM segment grew 124.2%. I'm sorry, 124% represented 9.3% of our total revenue for the quarter. And on a year-to-date basis, total installation revenue grew 92%. Once again, all installation businesses posted strong performance in the quarter. Gross margin for the quarter grew 115.1% to $25.2 million, and our gross margin percentage finished at 36.7% compared with 32.8% in Q2 2020. The gross margin in Q2 2020 was heavily impacted by lower direct sales due to COVID, but still we're very pleased with our margin performance in the quarter. And absent any extenuating macro factors, we expect to continue to improve our margin performance in the coming quarters. Our gross margin grew 97.6% during the first half of the year to 43.5 million, and our first half gross margin percentage finished at 36.1%. Our Q2 2021 SG&A expense grew 90.6% versus Q2 2020 to $12.6 million and represented 18.3% of total revenue. For the first half of the year, total SG&A expenses were up 54.8% and represented 18.5% of revenue. Sequentially, SG&A expenses were up approximately 29%. And about $0.8 million of our Q2 SG&A expenses were associated with the permaplate film acquisition, so clearly we're continuing to gain operating leverage in the core business. And as a reminder, we'll continue integrating permaplate film throughout this year to be on our targeted EBITDA run rate of approximately $6 million towards year-end, and we're making great progress on that. Q2 2021 EBITDA increased almost 140% quarter-over-quarter, to approximately $13.6 million, reflecting an EBITDA margin of 19.8%. And this was another record quarter for us from an EBITDA perspective. On a year-to-date basis, EBITDA grew 176.1% and represented 18.9% of revenue. Q2 2021 net income increased 156.3% versus Q2 2020 to $10.2 million, reflecting a net income margin of 14.8%. and EPS for the quarter was $0.37 per share. On a year-to-date basis, net income grew 205%, reflecting that income margin of 14.1%, and our year-to-date EPS is $0.62 per share. Cash flow from ops was solid for the quarter, coming in at $10.1 million, and our CapEx for the quarter was higher than normal for us, primarily due to costs associated with the build-out of our new warehouse facility in San Antonio. And as Ryan mentioned, our permaplate film acquisition during the quarter was by far our largest acquisition we have done in our history, and we were able to utilize all cash for that acquisition. We remain very active on our acquisition pipeline, and given our new $57 million credit facility and our ability to generate cash, we're well positioned financially to execute on this pipeline. So obviously, very pleased with the quarter, and we're excited about the rest of the year. And with that, operator, we'll now open the call up for questions.
Operator
Thank you, sir. And ladies and gentlemen, if you'd like to ask a question at this time, it is star 1 on your touch tone telephone. Please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star 1 at this time if you'd like to ask a question. We'll take our first question from Steve Dyer with Craig Hallam.
Steve Dyer
Thanks. Good morning, guys. Thanks for taking the question. Wondering, you know, obviously new car sales pinch point given inventory, but does not seem to be slowing you guys down in the least. Do you feel or do you have any evidence that take rates are increasing on the vehicles being sold or a greater percentage of, you know, square feet or square inches on the vehicles?
Ryan Pape
Sure. Yeah, Steve, thanks. Yeah, I think the macro trend for us for a long time has been take rate or attach rate to new cars sold has gone up in terms of number of units attached, certainly in most all the markets that we're in. And then within that trend over time has been certainly on paint protection film, more coverage, more material per car. So those are the two biggest factors that have had us sort of disconnected from the overall cycle for a long time. I think that You know, like we're talking about, you know, seeing July sales down sequentially from June. I mean, I think we've probably hit the point where, you know, we feel and our dealers feel a little bit the pressure from inventory. Thought maybe we'd see that last quarter some, but we didn't see it at all. So maybe we're seeing a little of that now, but that's still with a backstop of more cars getting film on it and more film per car. So we see that a little bit, but it's certainly not a driving factor for our business, the inventory pinch.
Steve Dyer
Got it. Thanks. And then you talked a little bit about maybe some pre-buying or some inventory bill just, I guess, fearing or trying to get in front of a price increase. Have you talked about or thought about taking a price increase in the back half of the year? It doesn't seem like your cogs are impacted at all, but everything else seems to be going up in price.
Ryan Pape
I think I lost the last part of your question, Steve, but yeah, we'll be looking at pricing in the second half of the year. We're seeing different costs increase, as everyone is, from product to logistics to everything in between. So it certainly hasn't had a significant impact in the in Q2, and to the extent there is impact, you know, we plan to mitigate that through increases in the channel as necessary. So, you know, pricing is certainly a factor across everything that I think everyone's doing, but it's not one that we expect to have a detrimental impact to the margin or operating performance of the business at this point.
Steve Dyer
Last one for me, and then I'll hand it over. You talk about continuing to be active on the M&A front. Permoplate, I think, was on the larger side of what you've done. As you look at your funnel, is there anything sort of bigger yet, or would you anticipate continuing to be sort of tuck-ins and sort of more easily integrated acquisitions?
Ryan Pape
Sure. So, yeah, in what we're working on in the next six to nine months, there's nothing in there individually that's larger than that permaplate film acquisition. So a lot of tuck-ins may be still larger for us than our historical average, but between that and the size of permaplate, that's really kind of where we're focused right now.
Steve Dyer
Great. Thanks, guys.
Ryan Pape
Thanks, Steve.
Operator
And once again, ladies and gentlemen, if you would like to ask a question, it is star 1 on your touchtone telephone. Star 1 at this time, please, to ask a question. We'll go next to Jeff Van Sinderen with B. Reilly.
Jeff Van Sinderen
Good morning, everyone. Just wondering if you could give us a little more color on what you're seeing in China and the near-term outlook there.
Ryan Pape
Well, I think our view is China's been very strong. The car business in China has been strong. We've been doing exceptionally well. So I think, you know, from that standpoint, things have been going great in China. I think what we're watching is just more lockdown pressure with increased COVID prevalence there. There's been a lot of talk about that, and I think that creates some maybe near-term uncertainty that we didn't have before. But that's really purely speculation at this point. I think aside from that, we've had great results and the overall dynamics there have been quite positive.
Jeff Van Sinderen
Okay, good. And then anything new to add on the integration of permaplate? I know you touched on it a bit, but just wondering if there's anything you've found there so far that was either positive or negative that was maybe, I don't know, positive surprise, negative surprise. And then any thoughts on how, I guess, if your strategy has evolved at all based on what you've seen so far?
Ryan Pape
No, I think, you know, operationally, it's the largest acquisition we've done, but also largest acquisition by far in terms of number of people. So we're pretty well advanced on our plans to integrate. There's operational and financial integration, which is really great. gone exceptionally well and is largely complete in many ways. And now we've got the task of just integrating our sales teams that's really all in the U.S. so that we've got the coverage that we need to take our product into all of these potential customers and make use of the whole team that we have now. And that's really ongoing and will be throughout the rest of the year. I think it's demonstrated that our team are quite capable of handling what was a larger acquisition for us. So I think that certainly gives us confidence going forward as we look at other opportunities. You know, if we get to ones that are at that size or larger, it was really good from that standpoint. I think it is a related business, but it is different in many ways going and selling a high-volume service to a lot of mid-range car dealerships. That's not something that we've done a lot of, but we very much think it's an important part of the strategy and an important part of our kind of multi-channel approach to how we go to market. So the team has been great, a lot of really, really good people on board. So I think we've been very pleased with how that's going.
Jeff Van Sinderen
Okay, terrific. And then if I could just squeeze in one more, just wondering, I guess, how you're thinking about architectural over the next couple of quarters.
Ryan Pape
Yeah, we didn't talk about that a whole lot today, but we've been going through a whole process of integration this first half of the year with our Veloce acquisition. We've got significant enhancements to the product line. The product line's grown quite a lot, and that's in the process of being – rolled out, and then some added elements of how we go to market there. Obviously, we've got the channel of installers and the backbone of our business that many are familiar with, but that line of business adds other go-to-market in terms of how we sell the product, other potential referral sources, other potential influencers to drive that business, and so adding those into our to our plan where that's different from what we've done historically, that's been a key area of focus for us this year. So, you know, we're still seeing, you know, that, that revenue double, double upon double, you know, and, and hit records every month. So I think very pleased with, with that on our path to where we're going with it.
Jeff Van Sinderen
Great to hear. Thanks. And best of luck in Q3.
Ryan Pape
Thanks, Jeff.
Operator
There appear to be no further questions at this time. I'd like to turn the call back over to management for closing remarks.
Ryan Pape
I'd like to thank everybody for making time today and thanks to our team who's done an amazing job this quarter. It has to be said that when you increase your revenue year over year the way we have, that's a lot of work and a lot of things that have to be done and done well every day to make that possible. So Very much thanks to them, and look forward to speaking to everyone next quarter. Thank you.
Operator
Ladies and gentlemen, that does conclude today's conference. We appreciate your participation. You may disconnect at this time, and have a great day.
Disclaimer