XPEL, Inc.

Good day, everyone, and welcome to the Exbel Inc. Third Quarter 2023 Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, John Nesbitt, IMS Investor Relations. Sir, the floor is yours.

Good morning, and welcome to our conference call to discuss Exbel's financial results for the third 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 of the company's financial results. Immediately after the prepared comments, we'll take questions from our call participants. A transcript of this call will be available on the company's website after the call. I'll 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 the current expectations and assumptions, which are subject to known and unknown risk factors and uncertainties that could cause actual results to materially differ from those expressed in these statements. Some of these factors are discussed in detail in our most recent Form 10-K, including under the Item 1A, Risk Factors. filed with the Securities and Exchange Commission. Expel owner 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. Go ahead, Ryan.

Thank you, John, and good morning, everyone, and welcome from me also to our third quarter 2023 conference call. We had another strong quarter, overall revenue growing 14.4% to $102.7 million. This was in line with our expectations for revenue and what we discussed on our Q2 call. Also, as expected, China did have a nice sequential increase from Q2. There was still a 7% decline from Q3 2022, which impacted the quarter-over-quarter growth rate, and our non-China revenue growth in the quarter was 17.4%. Our U.S. region grew 14.5% compared to Q3 2022 to $59 million. sequentially this was essentially flat to q2 which itself was a record quarter our u.s business is now 57 of our overall revenue so its performance serves as a significant driver of our overall results u.s new car sales continue to be solid despite the higher interest rate environment we did see a slight reduction in the rate of growth in our aftermarket channel of this quarter versus q2 but overall You know, Q3 2022 was the peak quarter for last year. And as you know, we watch the front lines of our marketing customers very closely. And our customers tell us their business has been relatively consistent this summer, but probably off the fever pace we saw in Q3 of 2022. I know that each of you covers, many of you cover our business and the industry closely. So I want to take the opportunity to step back for a minute and discuss our channel strategy and how our multiple channels, in our view, complement each other and enable us to reach an expanding customer base. So as many of you know, paint protection film started almost exclusively in the aftermarket. And a consumer had to first find out about PPF, and then he would take his or her car into an independently owned shop to have the product applied. So this consumer still represents a large portion of the channel and of the buyer. Enthusiast buyers dominate this channel, and we estimate an enthusiast buyer to be around 15% of all new car buyers. Over time, as dealerships saw their customers purchase PPF in the aftermarket, dealerships began to move to adopt PPF. And their reason for adoption is simple, to generate gross profit. And many dealerships outsource the installation to the aftermarket, because they don't want to have to hire their own internal staff. And as you know, hiring internal staff in a dealership or a service center model can be challenging. Consumers demand product excellence, and to be effective, dealerships need a technical skill set for installation, yet they may only need a small team of installers, or in some cases, just one person. This reality can make it challenging for dealerships to recruit, train, and staff around time off, absences, and other things. So some dealerships choose to build internal teams and are able to do this themselves successfully and they'll continue to do it. At the same time, there are other businesses that have no retail presence whatsoever who provide PPF services to dealerships. In our case, you're not going to find these customers on our dealer locator or likely even know they exist. We refer to these customers as dealership services. We've acquired several of them over time for paint protection film and window tint And so we're in that business ourselves. As you analyze our industry, it's important to understand that scaling to meet high penetration rates in dealerships is something few of the aftermarket installers are interested in, as this scaling requires substantially more human capital and a constant reinvestment of cash flow into the business. Likewise, you don't really see dealership groups universally scale installation internally across their enterprise in a consistent way. It's typically locally decided and it's very much a patchwork in its implementation. So even still, as dealerships continue to sell more PPF and ultimately create more awareness for PPF, on the whole, this is not disruptive to the aftermarket in our view for several reasons. One, the aftermarket participates in this work by doing work for dealerships in some cases, as I mentioned a minute ago. And then enthusiast buyers, who are still the largest part of this channel, who were the original PPF buyers, will often opt out of the dealership channel and take their new car directly into the aftermarket, seeking a more bespoke installation from someone they trust. And then third, obviously, the PPF market overall has continued to grow. So net-net, the dealership's offering is increasing attach rates by finding people that would never take their car into the aftermarket. And as dealerships continue to adopt PPF, we've seen interest from OEMs begin to develop. And again, this interest is profit motivated. Installing PPF at or near the point of manufacturer delivery is attractive because the vehicles are located together for efficiency. The downside is you need a substantial physical footprint and human capacity to do a considerable number of vehicles. as installation is still done manually without any currently available automated installation processes. So there's a limit ultimately to the scale that can be achieved in that environment. Additionally, OEM programs are susceptible to being usurped by dealerships who would prefer to internalize their programs and not select the manufacturer's option for the product because they believe they can generate more profit and have more control. And it's important to note again that the original and predominant enthusiast buyer may always prefer their local installer, whom they know and trust, and whose quality and workmanship they prefer. Yet, like dealerships, OEMs still have the ability to reach consumers not captured by any other element of the channel and those that don't know about the product, which is helping to grow consumer awareness overall. So when you look at it in totality, we see the mix of channel activities as healthy and and mandatory to the development of the PPF market. And we don't see direct aggregate cannibalization of the business from one segment to another. As an example, even as you have seen more dealership participation in PPF over the past few years, the aftermarket is bigger than it's ever been for Expel. At Expel, we have various internal measures, including our DAP software, for estimating our vehicle attach rates for our products and the related revenue mix. In particular, we can look at this attach rate as it relates to traditional paint protection, which would be the front end of a vehicle or the full car of a vehicle, separate from, say, mini kits or wear and tear applications that would be additional. So as an example, in the case of Rivian, with whom we have a factory program, our US Expel aftermarket attach rates are higher than many other makes. In this case, the OEM program is incremental and is helping to grow attach rates overall. It's our view that initial buyers of a new model or a new brand, like the recent development of the UV manufacturers, are more likely to skew towards enthusiasts. So we would expect attachment rates to be higher initially, but over time, if there's more mass market appeal, particularly if the price point is more accessible, the buyer profile will change to be more similar with the overall industry dynamics. So put simply, the incremental buyer of this type is less likely to be an enthusiast. This means over time, we might expect to see attach rates go down on a new vehicle as they expand production and their mass market appeal. So today, as an example, our US attach rate into Rivian is substantially higher than Tesla, for example, even excluding our OEM operation. And this is likely due to the early presence of the enthusiast buyer dominating the channel for a new vehicle. That said, as an example, our U.S. Porsche attach rate is substantially higher and actually multiples higher, yet again because a large percentage of that core buyer are enthusiasts and because Porsche has a dealer network that exists and is very effective at selling the product. Other enthusiast-dominated and higher average price point makes follow similar trends. Overall, it will take a range of approaches to continue to expand the markets of paint protection film being on the 15% enthusiasts that I mentioned earlier and into the mainstream. We estimate 25% of consumers will never buy the product, and they probably wouldn't take it for free because the pride of ownership of their vehicle is just not there. Those consumers simply don't care. But that leaves 50% to 60% of the new car buyer, in our estimation, that are open to the product if they learn about it, if they can access it easily before, during, or after the sale process, and if we can meet them with an appropriate price point to provide good value. To do that, we'll take a variety of sales channels and marketing activities to reach this group over time. So I know that's a lot to digest on our US go-to-market, but to summarize, our channel strategy uniquely positions us to be there wherever the demand takes us and is a key part of our ability to drive sustained growth. So turning back to our quarterly results, Most of our other regions had solid quarters led by European region, which posted 43.5% growth over the prior year quarter, and our Latin America region, which grew 58.4% over the prior year quarter. Canada's growth rate was impacted a bit by FX using Q3 2022 exchange rates. Canada revenue would have grown approximately 10% as the Canadian dollar weakened substantially in that time. And as I mentioned previously, China's Q3 performance was consistent with our expectations. and that we saw sequential growth over Q2 of this year, but still a 7% decline over Q3 2022, which was the highest quarter for last year. The Q4 forecast we've received from our distribution in China is positive, and assuming we can ship all the product as forecast would indicate our Q4 revenue from China would be one of our highest quarters in recent years. Of course, things can change, and they have in the past, but we're optimistic that this will be a good quarter for China. I also want to update you that we remain on track to have our initial team in country at the end of the year as we assess a variety of aspects on our overall go-to market in China. And of course, one of our goals as we work on this project is to eliminate the lumpiness of our China business in terms of sell-in versus sell-through. And as we're doing with China, we're also establishing our first facility in India, which will be open at the beginning of the year. and looking at a more direct approach for that market as it develops and as it's in its infancy. As we've discussed in the past, our U.S. business does have some seasonality in Q1, which is our lowest quarter, Q2 and Q3 trade-off being our highest quarters, and then we typically see a drop-off in Q4. Given that and our expectations for China, as I mentioned earlier, assuming we can deliver on the forecast, we expect Q4 revenue to be in the 98 to $100 million range. which would put our annual revenue growth rate toward the lower end of the 20% to 25% range we've discussed this year. On margin, our gross margin for the quarter finished at 40.4%, which is a bit lower than our year-to-date run rate. We did have around $1 million of one-time adjustments in inventory for the quarter. And as we've moved off our supply chain concerns we've had coming into the year and years prior, and we've improved the manufacturing throughput, we have remnants and offcuts and other material that is more commercially challenging to process that no longer needs to be retained as a safety stock. And so that's part of the adjustment that you see here. Our processes in this area will continue to improve and already has. So perhaps some of that adjustment is probably out of period. And if you normalize for that, our gross margin would have been a little less choppy from quarter to quarter this year. But I certainly don't want to take away from the big picture where our improving gross margin profile has been terrific. So nothing's changed in terms of our outlook related to the opportunities for that gross margin expansion. We still expect to close the year at or near 42% gross margin and still expect our gross margin profile to continue to expand in 2024 and then beyond. In other business updates, we closed on two acquisitions in the fourth quarter with a combined purchase price of around $13 million. One was a Canadian-based installation chain of six locations that came to market. The other was a European-based business installing product for two OEMs at a small scale. Both of these will nicely complement our go-to-market strategy that we've discussed, and these should add around $11 million in full-year 2024 revenue. We also have two acquisitions to close in the remainder of the year, one in the US and one in Australia. to supplement our direct model in that market that started last year with the acquisition of our distributor. Our acquisition pipeline remains healthy, and we expect to deploy all of our excess cash into this strategy, and we still think that this is the best use for our cash. The acquisition strategy focused on three core targets. First, we're looking to expand our distribution to other key markets globally where acquiring our distributors might make sense. Our Australia acquisition from last year that I mentioned a second ago is a great example of this, where we have 3x the revenue we had prior to the acquisition, highest margin profile in the system, and we can directly execute on all facets of the go-to-market in-country. As we've discussed before, the closer we are to the end customer, the more successful we are in that particular market as product awareness propagates. Secondly, we're looking into the channel for things like dealership services where we can invest in a part of the market that we don't think is well served, to tie into my remarks earlier. And finally, we'll always look at adjacent product or service lines to complement our current portfolio as a possible acquisition target. One example of an adjacent market is colored films. We get asked a lot about this. Today, you'll see vehicle wraps used for marketing purposes and for color change. Historically, that market is driven by vinyl films. And now over the past few years, you've seen the presence of more TPU-based color films, where TPU is what paint protection film is made of. And this is obviously more similar in its construction to paint protection film. There are probably a half dozen to a dozen TPU-based color products on the market today, and then a dozen or two dozen or more sort of cast vinyl products, which have been the traditional mainstay of that business. Wrapping an entire vehicle with colored film via vinyl or TPU has some of the same challenges as a PPF installation, given the current manual application process. It's a bit more difficult to install than PPF in some cases because you may want to disassemble part of the vehicle to ensure all painted surfaces are covered so you don't have any gaps or seams in coverage. However, given the cost, quality, and difficulty of full car installation, including the lack of a reliable automated installation capability, and the need for repairability of what's installed in the fleet, it's unlikely, in our opinion, we'll see films replace paint en masse anytime soon, if ever. It's more likely they'll continue to be used as they are now for bespoke colors not offered through a manufacturing process, for things like contrast roofs, for graphics and marketing, and then for select vehicle parts that are painted offline today and integrate it into a final build. Many of our aftermarket installers came to paint protection film business from the traditional colored wrap business because they found the PPF business more attractive and a larger potential customer base. So we've had a wait and see approach to this market relative to our overall priorities and its future with us, even though it's probably one of the next most adjacent markets in terms of product. In that context, should we decide to participate in it, the colored wrap business should be seen as something that can expand the TAM of Expo, not something that threatens to reduce it. Across all our product lines, our suppliers are very important to us, and we've developed an extended base of raw materials and converting suppliers, in particular for our paint protection film business over the years. Even as we've diversified that manufacturing using the asset light model, and outsourced manufacturing model that we've used since inception, we've had a strong and longstanding 15-year relationship with Entratech. Earlier this year, it was announced that PPG had formed a joint venture with Entratech around colored film products Entratech had developed over a period of many years. We welcome the PPF joint venture with Entratech, and there are many possible opportunities for collaboration with PPG. We're actively discussing ways in which we might do that with their senior leadership. Next, let me turn to our leadership team here and provide a brief update. As many of you know, Matt Moreau has decided to retire from the business after serving as our senior vice president of sales and product. He joined the company in 2015 after we acquired his business in Canada and has held positions of increasing responsibility ever since. He will be missed. We wish him all the best. also excited about two additions recently tony remus has joined us as our vp of revenue and have commercial revenue and strategy responsibility including our partnerships and tony has a wealth of automotive industry experience including time running a top 50 dealership group and then later an automotive venture capital so he's a great addition to the team and finally we brought on tim steiner as our vice president of people and culture And we have nearly a thousand employees now and growing as we operate on the diverse business model. It's a critical role, really excited to have her on board. And our culture centers around doing what's best for the customer with a no tomorrow attitude. And Kim will be integral in helping drive that even further across the organization. We're also working on a number of internal changes to reflect our organization, both around key operating functions, but even as importantly around key regions, Asia, as we mentioned earlier, and Middle East and India going forward, to ensure that we've got leadership in the region and that we have a sufficiently decentralized decision-making process to remain the agile company that we have been and need to be. Finally, we just attended the annual SEMA show, which is the largest aftermarket automotive event of its kind and one of the largest trade shows in existence. I'm really proud of our amazing display there, which you may have seen on social media through the X Belt House, which showcased all of our products in an innovative way. I know our presence there was universally well-received. We've got a lot of other great marketing initiatives going into 2024, including additional sponsorships and targeted marketing programs to drive more of that non-enthusiast car buyer to the market for paint protection film, as I discussed earlier. And then additionally, we have a new global platform launching next year, a global web platform launching next year with enhanced e-commerce for selling car care products to increase the number of touch points we have with our customers over the lifetime ownership of their vehicle. Before turning it over to Barry, Just want to take note, obviously, there's been quite a bit of external noise and conjecture during the quarter. This noise has been built on a great deal of speculation. We're on track for a strong year and remain focused on providing outstanding service to our customers. And I've never been more optimistic about the long-term opportunity for our business. You know, Expel, we are a strong and industry-leading business, and our strength is based first on having the best team in the business, and then on the fact that we have a very diverse business, diverse by geography, by customers, by channels, and by product lines, and an intense focus on executing the go-to-market strategy. So with that, we'll turn it over to Barry.