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spk01: Good morning, ladies and gentlemen, and welcome to the Expel Incorporated Second Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the call over to your host, Mr. John Nesbitt, Investor Relations for Expel. John, over to you.
spk06: Good morning and welcome to our conference call to discuss Expel's financial results for the 2022 second quarter. 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 will take questions from our call participants. Let me take a moment to read the safe harbor statement. During the course of this call, We will make certain forward-looking statements regarding Exvel 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 by the use of words such as plans, 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 management of Expel. Before 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 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 could cause actions, events, or results to differ from those anticipated, estimated, or intended. No forward-looking statement can be guaranteed. Acceptance required by acceptable securities laws forward-looking statements speak only as of the date on which they are made an expel and takes no obligation to public update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. Okay, with that, I would now turn the call over to Ryan. Go ahead, Ryan.
spk04: Thanks, John, and good morning, everyone. And I'll send my welcome to the second quarter 2022 call as well. We had a very strong quarter, highlighted by our record revenue, gross margin, and EBITDA performance. Revenue for the quarter grew 22%, 83.9 million. It was an outstanding result when you consider the poor but not unexpected Q2 new car SAR in the U.S., the lockdowns in China that occurred in the Shanghai area, and then, more broadly speaking, FX impact to the business from the strengthening dollar. And we had strong performance across most of our regions, 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 pickup in our dealership services business, so that's off of the lows that we've seen on the higher new car inventory, but we're still operating at less than two-thirds capacity 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. Still see strong demand in Canada, in 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. Not so much against the Canadian dollar, unlike in the past, so that's helped us there. 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 $400,000 for the quarter. And we expect worse 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-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 the first part of the quarter and then began to rebound in June. Fortunately, our performance dropped. And other regions, particularly in the US, 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 overall, I think China's 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 currency, the US dollar strength, we saw almost 6.5 million worth of negative impact to our 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 $400,000. So we do get a slight mixed benefit to our gross margin percentage when China represents a lower percentage of revenue as it did in the quarter than So that helped us a little bit. But with the distribution market like China, we get no help from an operating standpoint, no SG&A cost savings. So overall, it's certainly a net negative any time your revenue is down. Overall, improvements to gross margin are consistent with the strategy that we've been talking about. And even with 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 the mixed benefit with China. China should represent an increased percentage of sales, but we still should be able to make that up in the second half of the year. We had no material pricing changes in the first half of the year. So margin and revenue performance is not being driven by pricing. I think a very common question in the current environment. However, we're currently evaluating the second half with respect to pricing, looking at how costs are trending. Obviously, we're not, even with the good gross margin 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. Another big highlight for the quarter reached the highest EBITDA margin in our history, 20.5%, first quarter that we've ever exceeded 20% EBITDA margin. And like we talked about in the other comments, we achieved this result despite encountering approximately $2 million in EBITDA headwinds related to the China lockdowns and then strength of the U.S. dollar over the prior year. So... So you consider that, you know, if those two things hadn't occurred, our EBITDA margin for the quarter would have approached 22%. So it would have been even better. So all the way around, I think it's consistent with what we've been saying. You know, the business continues to grow revenue. We 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 2022 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 China impact in the first half, slower recovery of China in the second, and then strengthening US dollars we've talked about. But it will be a good result. And demand has remained strong. July was an exceptional month, and August is proving to be no exception so far. So we feel very good about that. That said, manufacturers have been more bullish in their expectations for new car production recovery in the second half. So this is a potential upside benefit for us. And we've heard that before. There seems to be room for some optimism that we believe we're set to benefit as this occurs. And if you look at the comments from the manufacturers, I'd say they've incrementally become more positive about the production recovery and the concept that there's pent-up demand by new car buyers in the channel, which we believe. So we expect revenue for Q3 2021. in the $85 million range, plus or minus, which represents improvement in China and increased headwinds from continuing strong U.S. dollar. Q2 and 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 now a factor for us in terms of revenue. And it's also our greatest time of the year for marketing events, which drives SG&A. But overall, you know, tend to be very similar quarters. Last year, we saw our highest EBITDA in Q2 and then sequential declines in Q3 and Q4. And we talked about, you know, quarterly impacts during Q3 and Q4 last year. But, you know, absent those type of things happening or other one-offs, there's nothing sort of structurally different about Q3 or Q4 versus Q2. So in other words, there's no reason that Q2 should year after year outperform Q3 from an operating standpoint or even outperform Q4. So it's really just dependent on what happens in the quarter. Uh, from the product side, you know, window film business continues to do great through 42%, um, for the, for the quarter up to $60 million, uh, sequentially was up just about 37%. So almost 19% of revenue for the quarter architectural film business makes up about 10% of that, uh, We're about 2% of total sales, so still small, but growing. And we're seeing really good year-over-year growth each month this year as we continue to execute the strategy there and expect that to continue to grow as a percentage of sales and a percentage of window film business overall. Last month, we announced our partnership with Rivian, an electric vehicle manufacturer, to be the exclusive supplier of their factory-direct paint protection film program. It's obviously a great addition to our overall business. OEM program development and a great way to increase awareness of paint protection film in general. And the program will begin by the end of the year. Rivian is 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 their Rivian vehicles and to drive them to our local installers to have installations done on those vehicles that have been delivered. 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, you know, sort of what's possible with some of the go-to-market from these new manufacturers who have even more direct connection to their customer. So it should be a good program there. I want to give a quick update on inventory. We've talked about this for a few quarters. We finished the quarter yesterday. approximately $74 million in inventory, which is relatively flat to Q1. So we expect inventory to peak within a few million dollars of where we are, plus or minus, or I guess it would not be minus, but plus, between now and 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 to build inventory. So that inventory build is 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 intend to use our cash flow on acquisitions. As we talked about before, we took the first part of this year to finalize integration of everything that we 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 we'll integrate into our DAP platform. We've discussed previously that we've got a desire, an 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 part of that. We're active in acquisition pipeline overall, as I mentioned. And this is domestic and international. This includes international distribution where we want to get close to the customer, same things we talked about previously. And then obviously looking at that now, you've got a dislocation in terms of Currency, so if there's opportunity in currencies that have weakened relative to the dollar, certainly we'll be taking a look at that as well. So overall, great quarter. Couldn't be more proud of the team, really executing exceptionally well. And with that, we'll turn it over to Barry and take some questions.
spk05: Go ahead, Barry. Thanks, Ryan, and good morning, everyone.
spk03: Going just a little deeper into our overall revenue performance, product revenue in the quarter grew approximately 14.3 percent to 67 million and grew 20.8 percent to 125 million on a year-to-date basis. Our service revenue in the quarter grew 67.3 percent to 16.9 million and represented 20.1 percent of our total revenue. And as in the prior quarter, this growth was driven by increased demand in our company-owned facilities that Ryan was talking about and acquisition-related labor revenue from our dealership services businesses. On a year-to-date basis, total service revenue grew 80.1% to $30.6 million. And keep in mind that sometimes our product revenue is converted to service revenue when we do these acquisitions such as permaplate and tent net. So what was pre-acquisition was product revenue. Post-acquisition is now service revenue. So this 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 is 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 20.5% of total revenue. And for the first half of the year, total SG&A expenses were up a little over 56% and represented 22.4% of total revenue. And part of this quarter-over-quarter growth is due to increases in travel-related expenses as our team has returned to 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 happy to see these expenses increasing as we think we get great returns on that investment for sure. And sequentially, SG&A expenses were down approximately 2.5% 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 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%. And as I mentioned before, our sequential revenue increase was 16%, so we saw some 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 a net income margin of 14.2%. And an EPS for the quarter was 43 cents per share. Our EBITDA grew faster than net income in the quarter as we incurred new amortization related to 2021 acquisitions that we still need to earn through as we roll forward. And also, obviously, we had 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 percent. 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 is $0.71 per share. Cash flow from ops for the quarter was $1.8 million as we returned back to generating cash as our inventory bill moderated. And we expect this trend to continue as we monetize our built-up 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. But 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. With that, operator, we'll now open the call for questions.
spk01: Thank you very much. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone keypad at this time. We ask that while posing your question, you please pick up your handset if listening on a speakerphone to provide optimum sound quality. Please hold while we poll for questions. Thank you. Your first question is coming from Steve Dyer from Craig Hallam. Steve, please ask your question.
spk02: 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 break down the biggest drivers, whether it's sort of attach rates or the amount of film going on per vehicle? It doesn't sound like price increases. much to do with that, but sort of what would you attribute it to?
spk04: Yeah, I think it's multiple things. Clearly, attach rate for paint protection film is increasing, has been increasing, and we think will continue to increase. Within the paint protection film business, the trend over time has been more product per vehicle on average. So we used to cover a smaller portion of the cars in aggregate, and that's grown over time and probably continues to grow, then, you know, we have additional products that are allowing us the opportunity for more content per vehicle, be they ceramic coatings and the window film products where we're able to take market share in some of those cases, particularly in the window film business where it's a more established business. So, you know, taking market share into a larger, established, slower-growing business, you know, that lets us – out-earn and out-compete there. And then I think to the extent that we're 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 with a product sale, just simply because the service is priced so much higher than just the product. So I think it's really all four of those things contributing to that.
spk02: Got it. As you look at kind of the dealer base, I guess, you know, first of all, could you remind us sort of how many franchise dealers are selling your DPF? And secondly, you know, what do you think is sort of the realistic opportunity there? I'm kind of thinking about, you know, is there a competitor share you can gain or are there dealers that don't sell, you know, anybody's PPF going forward?
spk04: Yeah. I mean, you know, it's a little bit challenging to determine the number of new car dealerships we reach, you know, directly and then through our whole network. And then what does it mean to reach? Is it touching one car a month or is it touching 100% 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. But also through our aftermarket channel, there is a huge labor force for the new car dealerships. And I think You know, you will find many, many dealerships that don't offer paint protection. And then you'll find many that offer it but do it when asked or 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 much greater unit volume, much greater attachment to units sold. So there's really a long way to go there. And we've seen success doing that, you know, at many different price points. The dealer is involved, and it's not as driven by the enthusiast buyer who's 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.
spk02: 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 was already sort of preloaded with Expel. And was just kind of wondering, is that a trend you're seeing? Is that an incentive that you're providing? Or is that sort of strictly dealers looking for margin enhancements and just sort of preloading it on and basically making people say they don't want it, which rarely happens? Is that sort of a trend you're seeing?
spk04: Yeah, I think you are seeing more paint protection film preloaded on the lot. 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 have an opportunity to do more preloading and do that sort of upfront accessorization. So that might be what you're seeing. But we do see more of that occurring. And yeah, it's typically ultimately motivated by the dealer's profit motive, like anything that they would sell. But what our job is is to help educate the dealers that paint protection film is in fact a better alternative in our view than many of the other things that they sell or preload. You know, there's a lot of warranty and finance products that we don't think offer quite as much value to the consumer as paint protection film. And from a dealership standpoint, you know, those are cancelable products. You know, you can leave a lot and cancel it and a hard ad like a paint protection film that's actually on the car, you know, that stays. So, There's a lot of opportunity there. I think the point that may not be obvious to everyone is that we're not telling the dealerships anything they don't already know, that they can make money by doing other things than selling the car. They obviously know that. What our job is and what we're doing and will continue to do is to say the paint protection film is a product that customers love. Those that buy it once are incredibly 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.
spk02: Got it. And then I guess lastly for me, speaking of sort of preloading, would you anticipate your deal with Rivian 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.
spk04: Yeah, sure, Steve. Yeah, there remains opportunity with OEM. And again, What the OEM channel has the ability to do is to reach buyers today that we wouldn't reach in many cases any other way, either because the dealers aren't offering it or the customer's not aware of it. So especially in Rivian's case, they've been very forward in terms of marketing it, talking about it, branding it as ExPel. So I think they've done themselves a service by doing that, and they've done the broader business of paint protection foam a service by introducing it to a lot of people that didn't know about it. And so I think there's plenty of opportunity to expand upon that when you're looking at this, you know, still small attach rating to 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.
spk02: 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?
spk04: No, there's opportunity for both, I think. When you look at Rivian with an alternate channel, it's allowed them to engage in marketing activities and whatnot direct to the consumer because they're that much closer to them. But, you know, we have other examples now in the OEM channel where we have a product being installed and sold through the dealers. And, you know, there's, again, a benefit to the dealer, too. It's another margin opportunity for them, just as it is the OEM. So it seems equally compatible, you know, sort of irrespective of the new car channel.
spk05: Thanks, guys. Good luck. Thanks, Steve.
spk01: Once again, ladies and gentlemen, if you do have any remaining questions or comments, please press star 1 on your phone keypad. The next question is coming from Jeff Van Sinderen from B Reilly. Jeff, please ask your question.
spk07: Good morning, everyone. Let me add my congratulations on the strong Q metrics. Sounds like there's some encouraging signs in OEM production rates. But can you speak a little bit more about what you're hearing from the dealers, from the OEMs around the inventory outlook and flow that they're expecting as we're thinking about second half?
spk04: Sure, Jeff. Yeah, I think, you know, you have kind of a couple data points. You have, you know, what do 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? And, you know, the feedback is, you know, literally down to, when are the trucks delivered and do the cars show up? And those, I would say, haven't necessarily run together over the past three quarters. Now it seems like maybe they're coming into alignment a little bit more where 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 if you went back to last year, our expectation was that Q2 would see a meaningful improvement in the overall inventory situation. And while I think the inventory ticked up off of the lows for Q2, no one would probably call that a meaningful recovery. But it does seem now that there's kind of room for optimism there for the rest of the year, both by what we're Seeing even in fits and starts at the dealership level and then matching that with the OEM's public comments, I think there will be improvement in that throughout the rest of the year. It seems pretty certain.
spk07: 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. I'm sure that's the case.
spk04: Yeah, absolutely.
spk07: Okay. So we've got some runaway there. So still you're running, I think you said less than two-thirds capacity in 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 or getting, utilizing more of that capacity?
spk04: Yeah, well, I think, you know, 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, you know, the first order of business, hopefully, as that inventory recovers, as we use more of the capacity that we have, and that, you know, is accreted to gross margin, you know, there's some fixed costs there that we can just earn through by doing that. So our plan would be to stay the course and then ideally benefit from that and that segment as inventory recovers.
spk07: Okay, good. And then I was curious on the software that you acquired that I think you said you are melding into the DAP software platform. Maybe you could just touch on what that is. I was curious on that. And then also any other components in that vein that you might want to layer in that you would acquire.
spk04: What was the second part of the question, Jeff? Any more components?
spk07: Yeah, I'm just wondering if there are other components like that that you are eyeing that you might want to acquire as well, or if you feel like you've got everything you need there now.
spk04: Yeah, so we're not quite ready to talk about what we bought and how it integrates in the DAP. Probably need a little bit more time to advance that. But I do think that that's something that we are looking at and open to as a way to build out that platform. We look at the market that we're in and the customers we have as being technology stars. in many ways, and we know this is true even when looking at our own operation and where our own operation is strong and weak and where we need things. So 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 we're growing here. But like we did with that, a little tuck in there, and there's probably some other opportunities for that, certainly ones we would consider going forward.
spk07: Okay, fair enough. Thanks for taking my questions and continued success.
spk05: Thank you, Jeff.
spk01: Okay, there appears to be no further questions in the queue. I will now hand back over to the management for any closing remarks.
spk04: Thanks, everyone, and thanks to the Expel team for doing a great job and look forward to speaking to everybody in the future. Have a great day.
spk01: 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. Thank you for your participation.
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