XPEL, Inc.

Good day, ladies and gentlemen, and welcome to the Expel third quarter 2022 earnings conference call. At this time, all participants have been placed on a listen-only mode, and we will open up the floor for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jen Bellido. Ma'am, the floor is yours.

Thank you. Good morning, and welcome to our conference call to discuss Expel's financial results for the 2022 third 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. I'll take a moment now to read the Safe Harbor Statement. During the course of this call, we will make certain forward-looking statements regarding Expel 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, 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 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 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 on which they are made, and Expel undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. With that, I'll turn the call over to Ryan Pape. Go ahead, Ryan.

Thank you, Jen, and good morning, everyone, and welcome for me also to our third quarter 2022 call. Clearly, we had another great quarter, solid top and bottom line performance. Revenue for the quarter grew 31% to $89.8 million, which was another record quarterly revenue for us. In the U.S., we had good results. New car sales for the quarter were pretty much flat from a year ago, but when you dig a little deeper into the numbers, some of the manufacturers had substantially better results than others, including Tesla as one example, so that was helpful to us. U.S. new car inventories are improving, but they're doing so off of record lows. Some manufacturers saw significant increases in inventory in September from September a year ago, while others didn't. We do see benefit of that in terms of our dealership services revenue and gross margin as these inventories recover. Our stay pay costs for some of our employees decline. And we expect the inventory recovery will continue into the fourth quarter and that that's positive for the business. In China, we saw some incremental improvement in the third quarter from the second when some of the larger lockdowns occurred. Q3 revenues in China grew 39% sequentially, but just 4.1% compared to Q3 2021. While China posted good September new car sales, we still see significant uncertainty going into next year. You can just look at the news today from and based on the current forecast, keeping in mind we have a sell-in versus sell-through dynamic in China, we're probably expecting lower sales in Q4, not to the Q2 levels, but probably 2 million plus less than we saw in Q3 for China in Q4. We saw strong performance in most of our other regions, including Canada, Middle East, and Latin America, which all saw record revenues for each quarter, for each quarter. region rather we've reorganized our sales structure in the middle East and are selling more directly to customers, which is certainly helping our performance there, both in terms of revenue and gross margin. And as in keeping with our overall strategy on how we want to go to market and how we want to position the brand. So like in Q2, we saw increasing strength of the U S dollar against the Euro and pound. And then ultimately in Q3, unlike Q2 against the Canadian dollar, during the quarter, which impacts our revenue and gross margin performance in those regions. So on a constant currency basis, revenue and gross margin were negatively impacted by approximately $2 million for the quarter. That is this year compared to prior year exchange rates. As the vast majority of our product costs are in US dollars, the effect impacts to revenue fall through to gross margin for the most part. So despite that, the strong demand which we attribute to our performance in the market and to increasing penetration rates for products in general, allowed us to overcome these FX impacts. But that would have been, that would have taken us to well over $90 million in revenue for the quarter if we had last year's exchange rate. So really good quarter. Looking to the rest of the year, U.S. revenue typically declines sequentially in Q4 from Q3 due to seasonality with holidays, etc., Conversely, China has historically been stronger in Q4 than in Q3. And as I previously mentioned, we expect China to be $2 million plus lower in Q4 than Q3. So given this and the stronger U.S. dollar to end Q3, we expect total Q4 revenue to be slightly less than Q3 in the $83 or $84 million range. This would put our estimated 2022 annual revenue growth at the higher end of the 25% to 27% range we discussed on our last call. Looking beyond Q4, you know, we watch the macro environment like everyone. And for us, it's a set of takes and puts. Clearly, all things equal, rising interest rates impact new vehicle affordability, which could impact new car sales at some point in the future. On the other hand, the manufacturers have been relatively consistent talking about their view of the market, which is that there's pent-up demand from the past two years of low inventory and high new vehicle markups. So that, you know, that would be an offset to the positive for us. And additionally, we're seeing evidence that as inventories recover, dealerships need to trade down from exorbitant market adjustments to tangible physical ads as a way to generate additional profit. And that's a positive for us as well. So in many respects, we've been competing against an accessory with 100% gross margin in the form of these market adjustments that dealerships have been able to impose over the past two years. So a reversal from that trend is also a positive for us. Overall, our view remains the same, that those predisposed to buy new cars are still going to buy our products for their car in almost any environment. And we see that time and time again through the repeat rate at which we see people buy our products from one car to the next. And alongside that, our products continue to be attached to a greater percentage of new cars each month. So that dynamic in no way decouples us from the world around us, but it does give us some margin And then especially when you add to that within the space that we're in, we're executing very well. And our business has continued with the same momentum in October. We continue to make good progress on our overall gross margin initiative, which came in at 39.8% for the quarter. Really a good number when you've seen costs increase in certain areas and then the FX impact, which I mentioned before, which is a direct hit to margin. If we were on a constant currency basis or using last year's exchange rate, it would have been over 40% gross margin for Q3. We haven't taken any pricing this year, although we will begin to phase in some pricing adjustments in the order of 3% to 4% towards the end of the year and the rest of the year. It won't impact all markets and all currency pairs equally. Obviously, there's some areas that have a lot more pain than others with the U.S. dollar, particularly where we have distributor markets. where they bear the brunt of that FX risk. But we will start to do that in the balance of the year. We did finish, as I mentioned, right under our 40% goal for gross margin. So to exit the year, we're right on track to hit that goal like we've been talking about. So very happy about that. We finished Q3, $18.9 million in EBITDA, reflecting a 21.1% EBITDA margin. Both of these are records for the company. Sequentially, EBITDA grew 10.2% and 66% quarter over quarter. So really pleased with this. Q2, Q3 are the strongest quarters of the year for us typically. And then Q4, depending on what happens in China, you can see Q2 and Q3 come out so similar in a positive way. And Q3 beating Q2 is really what we want to see. We're seeing SG&A run higher as a percentage of sales. And in some ways, we're overperforming on gross margin as a result of some of our SG&A investments. So there's a little bit of a trade there. But either way, I think we're pretty happy with that because we're seeing good leverage in the operation, as you can see with that operating margin that we posted this quarter. There are a lot of good things happening in the business beyond just the good numbers this quarter. We're making a large investment in software. We have our next version of our DAP software that will begin rolling out to customers in December. And as we mentioned before, this is the platform upon which we'll be adding a lot of new features for all our different customer types to really extend what we're offering deeper into their business and to provide them that much value for being an Expel dealer. Our vision line has been doing quite well. We've also been able to secure some accounts, some national retailers for work using our national footprint in the U.S. and the amount of our dealer network to do work all around the country. So, you know, hope that trend continues, but that's a promising opportunity for us. And then lastly, our previously announced paint protection film factory direct program with Rivian began accepting orders and started last month in October. As we previously mentioned, the launch of that was delayed, but it has now started. So really excited about that. And we're happy to showcase one of those vehicles in our booth at the SEMA show last month in Las Vegas. On the acquisition front, we closed the acquisition of the paint protection film business of our Australian distributor in October. It's a great example of the continuation of our overarching get close to the customer strategy, as we've discussed many times before. We're already seeing great progress and momentum in Australia in a short time since we acquired the business. And we know from our history that under our leadership and our willingness to invest, we can grow the market in Australia to be many, many times its size. today performs at a fraction of another market relatively close in size, which is Canada. So we hope to close that gap over time. We continue to have other acquisitions in the pipeline, including some that we would have hoped to close already this year, but for one reason or another haven't closed yet, so continue to work on that. We'll continue to monitor the macro. Our acquisitions have been modest. Our cadence is measured. Our debt load is low. So we don't really expect significant change to how we go forward with that at this point. We're still interested in pursuing these acquisitions and putting our cash to work. And obviously, we'll be on the lookout if that outlook needs to change, but it certainly has not changed at this point. So all in all, really good quarter for us. Thanks to our whole team. I think, you know, outside of some underlying positive trends, you know, have to attribute a lot of the success here to just excellent performance by our team. There's really no other more fundamental explanation than that. So thank you to all of them. So with that, we'll turn it over to Barry and then take some questions.