XPEL, Inc.

Good day, ladies and gentlemen, and welcome to the Expel Inc. Fourth Quarter and Year-End 2021 Earnings Call. At this time, all participants have been placed on the listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, John Danspit, Investor Relations for Expel. Sir, the floor is yours.

Good morning, and welcome to our conference call to discuss Expel's financial results for 2021. On the call today, Ryan Pape, Expel's President and Chief Executive Officer, and Barry Wood, Expel's 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. Take a moment to read the safe harbor statement. During the course of this call, we'll make certain forward-looking statements regarding Expel 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 states 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 ExBell. 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 many other factors beyond the control of ExBell. Although Expo 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 could cause actions, events, or results to differ from those anticipated, estimated, or intended. No forward-looking statement can be guaranteed, except as required by applicable securities laws, forward-looking statements speak only as of the date in which they are made, and Expo undertakes no obligation to publicly update or revise any forward-looking statement.

whether as a result of new information future events or otherwise okay with that i'm now turning the call over ryan go ahead ryan thanks john i appreciate it uh good morning everyone and like john said welcome to our 2021 year-end conference call 2021 was another outstanding year for the company i was very pleased with all that we were able to accomplish for the year revenue grew a little over 63 percent despite challenges with new vehicle availability Our organic growth was still very strong coming in at almost 53% for the year. We closed on and integrated the most acquisitions we've ever done in one year in terms of both quantity and purchase price. We made great progress on growing and expanding our product line. All of these accomplishments have positioned us to have a great 2022. Looking at the fourth quarter, 2021 revenue grew 44.3% to 70.1 million. which was a record quarter and the first time we exceeded 70 million in our history. Q4 organic revenue growth was 27%, which was solid in light of continuing new car inventory constraints, particularly in the U.S. And in the U.S., we had a great quarter revenue growing 69% and 37% on an organic basis in the U.S. Again, great growth. Q4 was pretty poor in terms of U.S. new car sales, similar to what we saw in Q3. many domestic brands down double digits year over year, and our sales mix is becoming a bit more nuanced as our window film and dealership services business expands, and we see more attachment across makes and a range of price points. Historically, we would have had even higher exposure to premium makes, which generally held up better as OEMs prioritized manufacturing those vehicles, like Tesla, which did have a record quarter for deliveries in the fourth quarter. As we talked about on the third quarter call, our biggest acquisitions last year were in the dealership services businesses, which are high-volume installation, principally window films at dealerships. Started with our acquisition in May of permaplate films and then tinting that in October. And as we've discussed before, that business is tied more to new car inventory than the rest of our business and is not skewed at all towards luxury vehicles. We didn't see much change in the new car inventory situation in Q4 as we'd hoped in Q3. And in this line of business, we're only operating at 65% capacity during the fourth quarter. And this translates into approximately 2.6 million in lost revenue for us just from the run rate these businesses were doing prior to acquisition. And that doesn't include any growth that we would have expected in those businesses as we applied our sales team into that line of business. Our labor costs in the dealership services business is variable. So in a declining demand market, we would adjust the overall labor force to match demand. However, in the current environment, which is obviously a very tight labor market and an expected return in new car inventories, it's even more imperative to maintain and support our team And in this case, with the variable pay model, that requires supplemental pay to retain the team, which is temporarily impacting margins. So with our current structure, this is worth about $1.8 million in gross margin and pre-tax income in the fourth quarter that we're staffed to earn, but just missing the unit volume. So for the quarter, this alone cost us approximately 250 basis points of gross margin. So there's little consensus on the new car inventory situation, but our view is that we should still see substantial recovery through Q2, and we're operating under that premise. And if that doesn't occur, we would revisit our overall staffing level at that time. We saw impact from this dynamic in Q3, but then this was now magnified in Q4 as we completed our second acquisition in the space at the beginning of Q4. So as the dynamic changes, we will still see the substantial EBITDA contributions from this line of business we've talked about previously. Outside the U.S., Q4 saw a bit more of divergence in growth rates than we've seen lately, maybe due to varying responses of Omicron. Canada grew around 30%, UK 21%, Asia Pacific only 10%. That was rather disappointing, but we've seen some outsized impacts there. Continental Europe had a strong quarter revenue growing. 55% in U.S. dollar terms, which is highest quarter we've ever had in that region. In China, in Q4, we grew just under 9% Q4 over 2020, which was up sequentially a little over 17% from Q3. So with China, we have the sell-in versus sell-through dynamic from one quarter to the next. We expect China to be relatively flat the first half of the year as they build some inventory and then accelerate mid-year. Our distribution agreement and forecast with our China distributor has strong growth for 2022 over 2021, and we're confident that they'll meet that. We have new products and a focus on both automotive and architectural films, plus a number of projects in the channel working with the distributor in China for dealerships known locally as 4S shops, and that's a big focus for 2022. We continue to develop OEM relationships and work on OEM programs globally, which involve working with car manufacturers to install paint protection film around the time of manufacture. We have two new programs, one in Europe and one in the United States, that are now in a pre-launch mode, so they're not generating revenue yet, although they are generating expenses. One should be our largest program to date, and we hope to talk more about that in the coming months. And then additionally, we've also received a request to double the output from an existing program and that would start, that extra output would start in Q2. So great validation that the concept is well received and that we've been doing a good job. OEM and dealership attachment are important to reaching more of the market for paint protection film beyond the enthusiast buyer. Our view is that a substantial 60% of new car buyers are open to paint protection film if presented with the product as part of the new car buying experience or shortly around that. This is in addition to the enthusiast buyer that's already well represented and knows the product and seeks it out and is the recipient of most of our marketing and advertising. It's part of why you see us investing so heavily in these areas, because we know the opportunity size, in addition to the momentum we already have in the rest of the channel, that this can open up for us long term. And this OEM and dealership attachment is also good for the aftermarket. It increases awareness of the product and helps validate the product. And we know that once someone buys PPF once, they're very likely to buy it again. We know some dealership and OEM sales will absolutely translate into aftermarket customers in the future. And further, as the install base for PPF grows, so does the need for repair and service in the field, both as it pertains to warranty service work out of the OEM business and repair to the installed fleet coming from the collision business. These are independently big drivers for the aftermarket going forward as well. Earlier this month, we held our annual dealer conference, which we last held in 2020. And this was our largest conference in the history. We had a little over 500 customers attending. And for context, that conference that we had in February 2020, we had approximately 300 customers attending. So it was amazing to see this level of turnout in the environment, even with more limited international attendance due to lingering travel restrictions. More than half of the customers attending had never been to one of our conferences before, which is incredible. We'll have a recap of the event on our website, and if you're at all interested in the company, you should watch it. We used the conference to launch new additions to our vision architectural film line, as well as announce a new paint protection film, Ultimate Fusion, which combines the benefits of our existing Ultimate Plus PPF with hydrophobic properties from our Expel Fusion coating. So really excited about this new product. It will launch in April, and that product line will also be accretive to our gross margin profile. This was also the first time that we really had dedicated architectural film dealers attending the conference. who either are or are considering carrying our vision architectural film line. And we want to be the same type of partner for these customers that we are for our automotive dealers. And as we said before, we started the architectural film business within the set of our core customers that do automotive products as well. But a large portion of the market are customers dedicated to these architectural film products, and we want to be their number one partner. So to see them attend the conference, some very well-known people in the industry, was great to see. We also used the conference to announce to our dealers our continuing investment in DAP, our software platform. We've greatly increased the size of our software engineering team in 2021, part of our SG&A structure now, and are working diligently to turn DAP into a platform to run our customers' businesses should they so choose. This is lead to quote, to schedule, to manage, to cash on the back end. And we think it's really important. Our customer base and the profile of that type of customer in the aftermarket remains very under software. And we think we're well positioned to solve this for them and create a lot of value. In fact, we know that this will be another huge value add and another great reason to be an Excel customer. Overall, gross margin for the quarter finished at 35.2% compared to 32.8% in Q4 2020, sequentially down slightly from Q3, which came in at 35.7%. So we experienced some headwinds to gross margin during the quarter against this longer-term backdrop of our improving gross margin profile. So first, as I mentioned earlier, the increased cost to maintain our labor force in the dealership services business cost us about $1.8 million. for the quarter in gross margin. This is that supplemental pay I mentioned for our team for revenue that we didn't have. So as we do this work and we see volumes increase, that incremental revenue really will almost fall entirely to the bottom line, up to that total capacity that we have. So that dynamic existed in Q3, and we talked about it then, but it really has grown in Q4 due to Q3 outperforming Q4 in some ways, and the fact that we added more to this line of business by completing another acquisition in Q4. So we added another 30%, 40% to that overall line of business with that second acquisition. Secondly, our requirement to remain fully operational during a facility move in the fourth quarter created some logistical challenges during the period of the move, which required us to substitute a more expensive product for a less expensive product into a lower margin region. This cost us approximately $800,000 gross profit in the quarter. But really, this is a timing issue. And as we use the inventory we didn't use for that, it'll reverse and flush through in 2022. Together, those two things represent approximately 2.6 million of gross profit dollars for Q4. So if we adjust for that roughly gross margin would have been 38.9%. And that's a number we'd be much happier with and where we expect things to be going forward. These negated really the positive impact of some of our pricing changes in certain markets in Q4 that we've talked about before that we made, but we will see them and the benefit of them in 2022. So given all this, our forecast to be at close to 40% gross margin this year remains unchanged. We still have confidence we'll be approaching that 40%, approaching or at that 40% gross margin by middle of the year. As you've seen, our inventory increased for year-end, and we've been using cash on inventory. We've been and remain concerned about supply chain disruption, particularly in TPU resin market, which has been severely constrained globally and remains so this year. And additionally, our new ultimate fusion product is net new additional product, so that requires inventory to launch as part of the inventory growth we have. we expect, or that we will have, we expect inventory to continue to grow in the first half of the year, peaking in early Q2 and then reducing after that point. And at that point, we will have the confidence that we've built sufficient stock to weather any of these disruptions, or we'll learn that the need to build such stock was unnecessary. So either way, we're ensuring no disruption to our customers at the expense of temporarily reduced cash flow and higher than normal inventory levels, but we see no other prudent choice. So to recap, and looking forward to 2022, we see solid double digit revenue growth in the 20 to 30% range for the year, higher growth rates in the second half of the year than the first due to the expected timing of China growth as they work through some inventory and the rebuilding of new car inventory as it impacts our dealership services business that we expect to see in the first half of the year. as well as phase in of revenue for our new and expanding OEM projects, which I mentioned earlier that are in various stages of launch or expansion. We remain committed and confident. We'll see gross margin at 40% during the year. And we see, assuming we see the expected increase in new car inventory, which will certainly help with our labor cost of goods component. This with our evolving product mix, channel mix, and our focus on supply chain optimizations coming from our acquisitions will allow this to happen. Our SG&A cost structure is elevated due to amortization of intangibles against lower than expected revenue from dealership services acquisitions and then lingering expenses related to acquisition integration. So SG&A as a percent of revenue will remain elevated for Q1 in part due to timing of marketing expenses disproportionately hitting in the first quarter of this year, some of our racing events, and then more importantly, significant costs from the dealer conference that I mentioned, which costs us more the more customers attend. But there's no money better well spent than that. And as well as startup costs from these OEM programs I mentioned. So that said, assuming we achieve the revenue growth we expect, and we get the gross margin profile that we know we can achieve, we expect to be at a 20% or greater, even the margin run rate by the end of the year. So all in all, I'm extremely pleased with our performance this year. I like to express my sincere appreciation to the entire Exbel team. The Exbel team really doubled in 2021. Every team member in the company has unyielding commitment to serve our customers. And I know they wake up every day with that in mind. It was a challenging and operationally complex year. managing inventory, concerns about supply chain, facility moves, completing and integrating acquisitions, along with just scaling the business to meet demand, auditor change, SOX compliance, you know, many, many things that the team did. I can't thank them enough. And they stayed true to one of our favorite mottos, and that is that there is no tomorrow. I can't thank them enough. So with that, I'll turn it over to Barry, and then we'll take some questions. Barry, go ahead.