XPEL, Inc.

Greetings and welcome to the Expel, Inc. second quarter 2023 earnings call. At this time, all participants are in a listen-only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the call, 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, Mr. John Nesbitt of IMF Investor Relations. Sir, you may begin.

Good morning and welcome to our conference call to discuss Expel's financial results for the second quarter of 2023. 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. I'd like to 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 are not limited to anticipated use of proceeds from capital transactions, expansion into new markets, and execution of the company's growth strategy. Such statements are based on our current expectations and assumptions, which are subject to known and unknown risk factors and uncertainties that could cause actual results to material differently from those expressed in these statements. Some of these factors are discussed in detail in our most recent Form 10-K, including under Item 1-A, Risk Factors, filed with the Securities and Exchange Commission. ExBell undertakes no obligation to publicly update or revise any forward-looking statement, whether a result of new information, future events, or otherwise. Okay, with that, I will now turn the call over to Ryan Pitt. Go ahead, Ryan.

Thank you, John. And likewise, good morning, everyone. Welcome to the second quarter 2023 call. Clearly and obviously Q2 is another great quarter for us, record revenue, gross profit, EBITDA, net income. Revenue for the quarter grew 21.9% to $102.2 million. This is our first ever quarter where we exceeded $100 million in revenue, which is a great symbolic milestone for us, especially for those of us who were here when we had a quarter with $3 million in revenue, so great quarter. The U.S. region had another solid quarter, revenue growing 20.3% compared to Q2 2022 to $59.1 million. That was up sequentially just under 16% and about 15% over our previous high quarter for the region, which was Q3 of last year. New car inventories have continued to improve, benefiting our dealership services business, And OEM production has improved with the OEMs that we're attached to, so that's helped the OEM business. And then new car sales overall have performed well in spite of interest rates, which is good for the business overall and good for the aftermarket and probably illustrates some elements of pent-up demand from the past few years, which many had expected. July was another good month for new car sales, so we see that momentum continuing. I think it's fair to say that we're probably off the fever pitch from a year ago in the aftermarket, but it's really not showing in the results. So all that to say that if we were one year ago, I think you would see even better results than we see today, but hard to pick apart what's happening in the business. So we're very happy with it. All of our regions, really excluding China, had record or near record quarters in the case of Latin America. In most cases, these record revenues significantly exceeded their previous high. For example, the continental Europe finished at 9.7 million for the quarter, which was just under 22% higher than the region's previous high. China performed consistent to our expectations for the quarter. As we've talked about, I think in the last call, revenue was up 2.5% over Q2 2022. We thought maybe it'd be down a single digit, so a little bit better than that, but not significant. But obviously that was an easy comp. for China as we were in the throes of the challenges in the prior year. So that's all to be expected. Sequentially, China was up 22% to 8.1 million, which like I said, is where we expected. The macro news out of China hasn't really changed much. I think it's still mixed for those of you sort of following it. And so our outlook for the region for the rest of the year hasn't changed in that we expect sequential quarterly increases in Q3 and Q4, with total revenue for the year relatively flat to last year, but that improving performance as we go through the year and in the back half of the year, like we've been talking about now for a few quarters. As I mentioned previously, we're in the process of putting our corporate team in China for better visibility to assist the distributor and also for more Asia-focused uh, positioning in general, uh, to give the whole region more, more focused, but inclusive of China and demonstrating, you know, what we think we can grow in China by doing that in China. Um, timing of the China orders versus deliveries will be important in terms of how the final two quarters of the year shake out. Um, you know, that's a continuing dynamic for us where we have larger deliveries that can shift from one period to another as part of a sell in versus sell through dynamic that we don't have elsewhere in the world. Expectations for new car sales seem to be mixed for the rest of the year, really, when talking about the U.S. market. If we take a rather conservative view of that, which we haven't seen in the results, but some are talking about it, along with uncertainty in terms of China deliveries, our expectations for Q3 revenue will be right around or slightly above Q2. However, if business remains more robust, like the first half of the year, and or the timing of the China deliveries are favorable, then we would expect Q3 to be higher than Q2 revenue by several million dollars. So I think there's some uncertainty as to the timing of that still for the rest of the year, but should be solid either way. And our estimated total annual growth for the year right now is around 22%. So we're still in that 20 to 25% range. And the difference plus or minus to that is probably going to be The timing in terms of China's I just mentioned so still set up to have a really good year Now our international expansion remains the top priority and a priority for reinvesting our cash that we're generating We've had tremendous wins in Australia since acquiring our distributor The business is now two to three times larger than it was obviously off of a small base But in under a year and we plan to take our labor programs to Australia within the next year so you kind of see a all facets of our business we think are, for the most part, equally applicable in all regions of the world. So while labor has really kind of dominated the U.S. and Canada, we see no reason to limit it in that way. Other points in Asia, Latin America, India also, these are priority markets for us for deeper investment and engagement using everything we've learned in the other markets where we've gone direct and in China. as a particularly interesting comparison, especially when looking at the strategy for a market like India. So this is an area of tremendous work for us, and we actually expect to reorganize the company in a substantial way around these priority markets sort of in the next half a year. So we see tremendous opportunity in these. And in a lot of these markets, there's a core business that if we're present, the business comes to us. And then obviously we have to work much harder after that core, but that core exists and it's a very healthy thesis for why we should invest and be direct in many markets in the world. We had a nice gross margin performance in the quarter, gross margin coming in at 43%. I mean, very pleased with the gross margin initiatives that we've had and the results. We continue to see reductions in bill material costs for some of our products, which is one of the biggest contributing factors to this gross margin expansion along with channel mix where we're growing in more profitable channels and then product mix where some of our new products are higher gross margin. We've also been a good partner to our suppliers and that's benefited us in the gross margin line in terms of negotiating discounts and other concessions as the global supply chain continues to recalibrate and we sort of get out of the position that everyone's been in over the past two years. So that's a contributing factor as well. It remains possible that we'll finish the year a bit higher than our forecast of 42%. But we're still holding to that view, not necessarily expecting to end at 43%, although it's possible. We do have expectations of driving gross margin incrementally higher from that 42% in the next years. And this is in part based on the future revenue mix. We've got an increasingly complicated mix of revenue, each with their own drivers. and that's going to be a driver of what that sort of terminal gross margin can be, but we do see it going higher than where it is kind of over the next 24 months, I would say. We continue to see great leverage in the business during the quarter, EBITDA growing 30.5% to $22.4 million, that income growing 32.3% to $15.7 million. These are both records for the company. EPS was $0.15 a share for the quarter, and as Barry will mention later, Excluding costs related to our dealer conference, which was very expensive but also very amazing in the quarter, which without a period compared to the prior year, EPS would have been $0.61 for Q2, so a really good number there. This year, we've really been investing heavily in our team, specifically software, technology, product, and marketing, really in the sort of SG&A line items. And this is to deliver new products and new services over the coming years. So I think you're seeing the overall growth of that cost structure, but we're more than offsetting it with gross margin improvement. And some of that SG&A growth is actually benefiting the gross margin profile of the business as we operate better. But some of it is just net investment that's just offset by the incremental gross margins we're generating. Either way, we found this could be an important year to double down on our investment in these key areas to set us up for the future. And we've not altered any of those plans that we had coming into the year, looking at the macro or anything else. So you're really seeing sort of the full level of investment for us. Some of it is probably shifted towards the back half of the year, second quarter on, just with timing of new hires and things. I think we talked about that on the first quarter call. But that just reflects just the the timing of scaling the headcount and scaling those positions more than it does a lack of desire or a change in decision to make those investments. Barry will talk more about later. We generated almost $27 million in operating cash for the quarter. Inventory levels are not growing like they were. Days on hands are reducing modestly through the year. And then some of the just timing issues, timing items with the other elements of working capital we saw in the first quarter sort of reversed. I think that, you know, this has been a big question over the past few years as we've seen these inventory levels ramp and a question of, well, you know, did they keep growing or how much did they come down? And, you know, we've said that we'd be very happy if they stayed flat or came down modestly so long as we saw some reduction in days on hand. And I think you're seeing that now. And so you're seeing this trend of consuming massive amounts of cash in the inventory reverse to where we're generating lots of cash, even without reducing inventory in a dramatic way. There's one thing we know that we don't want to do in this business is to run out of inventory because the wheels fall off the wagon quickly if that happens. So couldn't be happier about that. We do expect that to continue going forward. Our acquisition pipeline is full. We remain very active on this. And as we get asked, we do expect to be able to utilize all this cash to reinvest in the business and primarily on these acquisitions and to a lesser, much lesser extent on some additional CapEx that we think could drive further gross margin performance. But given the small scale of the acquisitions that make up most of what we consider, which limits the sort of existential risk to the company, we're looking at these acquisitions on an equal footing to internal reinvestment in the business. Because from a practical and financial standpoint, there's little difference. an acquisition strategy predicated on much larger bets, we would have a different calculus because it would be a completely different game. So in any event, we do expect to be able to use this cash certainly out the next 18, 24 months without issue. Speaking of one area we've been investing in, our DAP Next, our new version of our DAP platform, would be completely migrated to the new platform by the end of Q3. And then all the new features that we're adding, which are related to business operations, pricing, marketing, these will all are only being released in this new platform, obviously. Customer response has been great. And we really see this as an important tool to help our customers increase their profitability, to give them the confidence to grow and reinvest in their business as and then to allow us to serve them better. Part of what we're doing here is just setting ourselves up to success, to be the absolute best partner to them in addition to what we can do for their business. So really great quarter for us. Thanks to our whole team. Everyone pushes really hard here, and there's never a down moment, and we've delivered outstanding results, and I'm thankful that I'm thankful to all of you and to all of them for all of your contributions. So with that, we'll turn it over to Barry and then take questions. Barry, go ahead.