XPEL, Inc.

Greetings. Welcome to the Expel Inc. fourth quarter and year-end conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, John Nesbitt of IMS Investor Relations. You may begin.

Good morning and welcome to our conference call to discuss Expel's financial results for fourth quarter and full year 2022. 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 call participants. Take a moment to read the safe harbor statement. During the course of this call, 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 or phrases, or states of certain actions, Events or results may, could, would, might, or will be taken, occur or be achieved. Such statements are based on current expectations of management of ExPel. 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 is attempting to identify important factors that could cause actual actions, events, 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, accepted, or required by applicable securities laws. Forward-looking statements speak only as of the date for which they are made. Expel 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 Pitt. Go ahead, Ryan.

Thanks, John, and good morning, everyone, and welcome from me to our 2020 year-end conference call as well. Overall, 2022 was a great year for us at Expel. Revenue grew 25%. We accomplished our goal of exiting the year at a gross margin run rate of 40%. Net income grew 31%, and EBITDA grew 39%. We want to always drive operating leverage as we grow, and we were able to accomplish that this year. Clearly, we ran into some unexpected headwinds in Q4 in China, which I'll talk about in a minute, but almost every other region had a very solid quarter led by the U.S., which continues to perform exceptionally well with 31.6% growth in the quarter. Q4 revenue grew 11.9% to 78.5 million. Net income grew 34.7% and EBITDA grew 32.4%. So good operating leverage there. And as we discussed during the last call, our forecast for China in Q4 was less than Q3. And normally Q4 is a strong quarter for China and a slower quarter for the rest of the world sequentially. So we expected lower growth overall for Q4. The sudden reversal of COVID policies and the reopening in China, which we believe ultimately is very positive news, was clearly disruptive to the quarter. In operating the business, we require payment up front from our distributor in China. However, our distributor extends terms in country to our dealers. So the prospect of reduced economic activity, which was widely feared at the reopening, but didn't materialize necessarily to the extent that was feared, could oppose significant cash flow constraints on the distributor. And then similarly, like us, the distributors maintain higher inventory throughout COVID going on three years, concerned both about the broader supply chain issues as we've been, but also the China-specific issue of the threat of unplanned port closures that would prevent product from arriving even if it was available from us. So as a result of this uncertainty and with inventory to spare given the reopening, our distributor requested and we agreed toward the end of the year to eliminate several orders that were planned. And ultimately, it's easier and better for us to absorb that than to ask them to take it under the circumstances. So as a result, Q4 revenue was reduced by approximately 3.5 million from our estimate in Q3. Q4 China sales came in at 6.2 million, which was a 50% decline from Q4 2021. And obviously that's significant considering Q4 has historically been the highest quarter for China, while it's seasonally a lower quarter for most other regions, which normally peak in Q2 or Q3. So all that said, I think there's a lot to be positive about regarding the China market. Removing the uncertainty of these restrictions is good news. As we see it, and our distributors equally positive in their outlook. As an example, they'll now be hosting their large dealer conference this spring, which our team will be in attendance for. And like ours in the U.S., these conferences are historically well attended and important events. and have not been held in a meaningful way since COVID started. It's been difficult for us in conjunction with distributor to decide when is the right time to invest further in the market up to now. And we've had plans to expand our corporate team into China to better support the distributor, to get us better market intelligence, to support the car dealership and 4S groups, and our OEM relationships, which are asking us about China. But with the uncertainty over the past several years, we've not moved forward on those plans, but we plan to now. We've also held off on product introductions in China, like our architectural film in its entirety, for similar reasons. Uncertainty that prevented our distributor from hiring additional staff, from taking on additional inventory, things that you just were unwilling or was unwise to do under the circumstances, but we do plan to execute on those in 2023. So, you know, overall, I'm encouraged about our opportunities here for China in 2023 and beyond, and about our team's ability to re-engage, to travel to support the operation, as we've always done. I plan to visit as soon as practical, and I think we can use this as a great opportunity to go much deeper on the current state of the market and make sure we're providing the distributor and all of the dealers in China what they need. Absent the challenges in China, most of our other regions had solid quarters. As I mentioned, the U.S. market, which is our largest market, continues to be a bright spot. Revenue grew 31.6% in the quarter to $47.6 million. New car inventory continues to improve, and it remains to be seen the ultimate impact of higher interest rates will be on new car sales, but new car buyers seem to still be resilient at this point, most likely because of pent-up demand. And we continue to see new car dealerships trading down from what is 100% margin, market price adjustment, to more tangible products such as ours. And as a result, we've seen some of the highest revenue from dealership services we've ever seen in January and February of this year, which is not always the strongest months of the year. So that's good news. Canada, Europe, UK regions saw continued growth for the quarter. Most of the other regions outside of the U.S. did see lower growth on a percentage basis than they did in Q3. Q3 was just red hot across the board, so you feel that a little bit. But overall, very solid performance in really all of those other regions. Our revenue, like Q3, in Canada, U.K., and Europe, It continues this ongoing FX impact that we've seen all of last year due to the ongoing strength of the dollar. So on a constant currency basis, we're valuing this year or last year at prior year's exchange rates. For the quarter, revenue and gross margin were both impacted by approximately $2 million. Latin America region had a great quarter, as mentioned on the call. And we've gone direct, much more direct in the Middle East and eliminated another layer of distribution. We're excited about the opportunities there. There was a quarter, slight quarter over quarter decline in the Middle East, but this was really about timing of large orders into distribution versus smaller orders direct to customers. So as we are prone to do, we know that that model tends to work better for us. And so we're happy to continue to expand that there. Our last acquisitions of consequence were done in Q4 2021, so we've fully lapped those now. So effectively, even in the U.S. business, while you wouldn't know it from 36-plus percent growth, there's a slight drag on Q4 with the dealership-focused tent net one-armor business actually being down versus the prior year, given new vehicle availability and the markets that it serves. So that may have cost us as much as 200 basis points of revenue, actually, in the U.S. or Q4. So, you know, thinking about Q1, we're still seeing momentum, especially in the U.S., despite this uncertain environment. Automakers still seem to be optimistic, even in the face of recessionary fears and rising interest rates. In January, new vehicle sales were off to a good start. And in some respects, you know, January and February for us feel a little bit stronger than the end of the year. So, you know, obviously we'd like that trend to continue. Now, we don't expect much change in China revenue in Q1. Q1 is typically the slowest quarter of the year for China. We have a Chinese New Year holiday. And as they've expressed their desire to return to lower days on hand of inventory on a go-forward basis, that's what we do. So putting that together, we expect Q1 revenue to be in the $83 to $84 million range. That's about 17% year-over-year growth in aggregate, with China down approximately 20% year-over-year, and most of our other regions, like the U.S., obviously growing 20%, 20% plus. One area where I was particularly pleased was our gross margin performance during the year. We've been talking this whole year and even prior about our ability to exit Q4 with a 40% gross margin run rate. We were able to do that. We had a one-time... $400,000 inventory write-off. Otherwise, we would have been right at 40% for the quarter, actually. A couple other points on gross margin. We did put a price increase in some of our regions during the quarter for product, really not for services, which helped offset some of the cost increases we've seen and some of the non-billed material COGS items. And when our China volume is low, historically, it's been more accretive to gross margin percentage because China's a lower margin market for us with distribution. But as China has become a smaller percentage of sales and as the U.S. has continued to have grown, that effect is certainly much less pronounced today and you don't really see it. And we have, over the short term, fixed costs embedded in gross margin, like production labor, the cost of designing patterns for the VAP, equipment depreciation, et cetera, that have to be earned through, especially when you have an abnormally low revenue quarter like Q4. So implicit in that kind of 40% exit run rate is actually some negative impact to gross margin. Otherwise, we would have been even slightly higher in a more normal quarter. So good, great progress, good work by the team. We're very pleased with that. So Q4 gross margin grew 25.7% to 31 million. It's translated, as I said, to gross margin percentage 39.6 and plus that 400Ks right at 40%. We'll also note that our Q4 2021 gross margin percentage was 35.2%, so tremendous improvement in 2022. And our 2022 full-year gross margin percentage finished at 39.4 versus 2021 at 35.7, so obviously a tremendous improvement there. And we still have runway to improve this, really driving from all the things that we've discussed, the focus on cost, product mix, channel mix, et cetera. You know, it's an open question based on where we see the most growth of how high it can go in coming years. But another 200 basis point improvement by the end of 2023 is certainly not beyond the realm of possibility and what we're actually expecting to exit the year on. We see higher SG&A as a percent of revenue this quarter. And lower revenue certainly contributes to that as we have built in fixed costs, obviously. We did incur approximately $300,000 in severance costs. And we also incurred $400,000 in compensation costs related to a previous acquisition. Technically, it was not eligible to be paid on the earn out as the targets were not achieved under the terms of the original purchase agreement for various reasons. However, we accomplished a lot of other things sort of tangential to the So in the spirit of the deal, we thought it was the right thing to do for the business, so we've incurred that expense. We've traded some gross margin for SG&A costs, but we know we can earn through the SG&A over time and in the higher revenue quarters. As an example of how this works, when we do acquisitions such as our distributor we acquired in Australia, shipping expense to Australia that was previously awash in cost of goods because the former distributor paid it, is now fully present in SG&A as it's an internal transfer shipment. So you see that grow is SG&A, but actually offset in the form of improved gross margin. So all of these things that we do, there's a slight collateral effect where to a small degree we trade gross margin, increased gross margin for higher SG&A expense, but the net effect is still that we can grow the leverage of the business. Q4 EBITDA grew 32.4% to 13.2 million, collecting an EBITDA margin of 16.8%. So good leverage in the quarter, even with all the other things we mentioned that impacted us. Our year-end inventory finished approximately 80 million. This was actually up about 11 million from Q3. A reduced China volume obviously contributed to that. But, you know, there is still momentum in our inventory purchasing. And much as I've pushed the team to reduce this days on hand faster, we've honored many handshake commitments to our vendors who have accelerated their production for us when we were more concerned about supply chain and total inventory dollars over the past few years. So we've been fortunate to have had the support of these vendors to prioritize our business, sometimes at the expense of others over the past three years. you know, down from every component of the product down to the corrugate suppliers, which resulted in us effectively never being out of stock of anything, which is something competitors couldn't necessarily claim. So as we reduce the days of inventory on hand, you know, it's imperative that we maintain the relationships that have helped get us there. So, you know, the team has slowed me down a little bit on that, which just means this just takes a bit longer to work through. But it's the right move. And given the revenue growth we expect this year, inventory probably doesn't go lower than $75 million, but it still means we do not expect to commit substantial cash flow to inventory this year like we did in 2021 or 2022. And we're planning across all product categories for reduced days on hand. So over the course of the year, this should more than offset the increase normally required to support the growth in revenue, albeit on a slightly slower schedule than we had initially hoped. We've had really good success with the acquisition of our Australian business. Revenue is now trending at more than double from the prior year period when looking month over prior year month. We've also reduced selling prices in the country by double digits on our paint protection film to better align with the market price and drive growth over unit economics, which sometimes distributors can prioritize. So it's a great example of where our direct approach pays dividends And again, we're looking at a market like Australia, which is a fraction of the revenue of Canada, but only 10 million fewer people. So I think we see why this will be successful. So with that, we're looking at several other countries with similar dynamics to enter for 2023 with a similar strategy in mind. We intend to complete a number of acquisitions in 2023, similar to those we've done before, especially as we're reducing costs our days on hand in inventory and stop committing our cash flow to working capital at the same rate we have. We released a new version of our DAPP platform, DAPP Next. This is in beta to all of our customers now. As we talked about previously, this is a rewrite of our core DAPP system that will support more of the business operations of our customers with the goal of making them more efficient and providing incrementally that much more value to them. So updates roll out weekly and will continue going forward. Much of the work as part of this beta release is around updating the core functionality and then move on to more of the new features as we go forward. But the team's done a great job and a lot of effort put into this and a lot more to come. We've done some things in the fourth quarter that are painful today, as I discussed, but they're the right thing for the business long term, and we wouldn't have it any other way. Overall, I think there's a lot to be positive about this coming year, even in light of sort of the macro uncertainty. As I said, all of our regions continue to display momentum, especially the U.S. There's positive news coming out of China as we get through Q1, and we should start to see a lot of good things happening, particularly product expansion plans there. Our architectural window film business continues to grow. We have a long runway in that product segment. OEM business, which is about 3% of revenue today, had a good year setting up for a great 2023, and we have a variety of expansion opportunities within the current book of business and then new projects that are contemplated. Much of our view into the future is extrapolating trends we see in the present, which is a limit to our forecasting. But at this point, we're looking at 20 to 25% organic revenue growth for the year. As I mentioned earlier, we fully lapped our significant acquisition. So there's no inorganic component to our growth at this point without considering future acquisitions that we may do this year. course anything can change we've had a good start to the year and as I mentioned earlier we expect gross margin to improve around 200 basis points throughout the year to get us to that sort of ending run rate again of 200 basis point improvements and we expect SG&A in the 22% range that's plus or minus a percent probably this should give us significant leverage and drive earnings growth for the year while allowing us to invest in the business substantially we're increasing our our marketing spend on a percent of revenue basis, but we can do that within that range and still generate significant leverage for 2023. So overall, fourth quarter notwithstanding, I'm very pleased with our performance this year. The teams worked incredibly hard. You can imagine the number of moving pieces with everything we're doing. And I really thank them, and we're excited about this coming year. So with that, I'll turn it over to Barry, and then we'll take some questions. Barry, go ahead.