XPEL, Inc.

Greetings. Welcome to the Expel Inc. fourth quarter and year-end 2023 earnings 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 with IMS. Sir, you may begin.

Good morning and welcome to our conference call to discuss Expel's fourth quarter and 2023 year-end financial results. 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. A transcript of the call will be available on the company's website after the call. Take a moment to read the safe harbor statement. During the course of this call, we'll make certain forward-looking statements regarding Expo 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. Such statements are based on our current expectations and assumptions. They're subject to known and unknown risk factors and uncertainties that could cause actual results to material to be materially different from those expressed in those statements. Some of these factors are discussed in detail in our most recent Form 10-K, including under Item 1A, Risk Factors, filed with the SEC. Expo learner 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 from me as well. Welcome to the fourth quarter and year end call. Overall, 2023, another solid year for us. Revenue grew 22.3 percent, net income 27.6 and EBITDA 25.6. We closed the year with a strong fourth quarter, revenue growing 34.5 percent to 105.5 million, net income growing 43.2 percent and EBITDA growing 33.6. So a good end to the year. Our U.S. region had a good quarter with revenue growing 16.8% to 55.6 million. Our dealership business continued to be a bright spot for us as car counts have increased and new car inventories have been returning. We'll likely see the preload component of our business to slow modestly as inventories catch up with their pre-2020 levels, probably over the first half of this year. since preload attachment happens as the vehicles are delivered or sit on the lot. However, we'll continue to grow with new dealerships and we've been quite successful at adding content per vehicle and expect that that will continue as well. I think there's no question now that the aftermarket has slowed over the past nine months from its peak that we've seen. But our view remains that as long as consumers are buying cars, particularly in the enthusiast segment that's well served by the aftermarket, that they'll continue to make the decision to buy our products as well. Growth in the aftermarket is driven by net new customers for us, as in new shops, new points of installation or competitive conversions, and by growth of our existing customers. In our larger markets, like the U.S., growth from existing customers constitutes a larger percentage of growth than in the the smaller or more developing markets. And in order for the existing customers to grow, they need to invest in their businesses. They need to hire more employees, expand facilities, et cetera. So if a change in sentiment impacts their decision to do that, that can impact growth rates even absent a macro change in the aftermarket channel. So our job is to do everything we can to encourage and help the customers make those investment decisions that will enable them to continue to grow. And so this is for us, focus on giving them better tools, better software, like with what we're doing with DAPT, training to encourage them to invest in more labor, things like payment systems to make dealership work more attractive, and then obviously marketing to drive more demand. So those are all the things we're focused on to continue to support that channel. Really, you know that where we where we see that phenomenon the most is in the US because it's our most developed aftermarket country in the world alongside Canada probably China region experienced a record quarter in q4 Revenue is sixteen point six million This was three million higher than our previous high for sales into the country in q4 of 2019 as we discussed last quarter we did expect the China to have a strong fourth quarter, but this result was ultimately higher than we were expected. Again, just based on timing of deliveries and sell-in versus sell-through, ultimately. We're still in the early days of our direct presence in China, which we set up at the end of last year, and the resulting changes in our strategy and go-to-market that will occur there. So this was a great quarter. It really doesn't represent impact from what we're planning to do there. This is more kind of the continued dynamic with how we've been operating with the sell-in, sell-through. So we've still got, we've still yet to implement all the changes that we anticipate doing. So we'll see continued choppiness in China as we do that. Still in Q1 where we had record product sold in Q4. Q1 is typically The lowest quarter for China, so our expectation for China in Q1 will be quite low and less than Q1 of 2023 and coming off of that really high Q4 number. So continued noise there for a while. We've done a lot of work on the ground with our team that we haven't been able to do in the past three years. And it confirmed our brand position in China is very strong. We've known that but been able to confirm it firsthand. And, you know, now the objective is to ensure that our share of wallet matches the share of mine relative to our brand for this product line in China. And that is our top priority for the market for this year. Outside of the U.S. and China, we saw solid growth in our other regions. One particular note to call out would be in the Middle East where we grew 100% over the prior year. This is largely a distribution market, not entirely, but largely, so it does have lower margins, and we felt that in the margin performance alongside China this quarter. But we're really executing well, and it's a market we've spent a lot of time working on. We've been focused on evolving our go-to market there over the past 12 to 18 months, seeking the right mix of direct business versus distribution business. I think we're really making good progress. And we'll be managing the region from our operation that we've begun to establish at the end of last year in India with the help of an executive on our team who we've relocated from Texas. So this is another way that we can be true to our strategy of getting close to the customer. And we're already seeing benefits of that and expect that that will continue. Our expectation in Q1 2024 is revenue to be in the 93 to 96 million dollar range. This assumes a low quarter for China, given Q4 as we talked about, and an uncertainty as to the timing of some of these other distribution orders. And like we talked about last year, we're targeting 15% revenue growth for the year. The downside risk is obviously interest rates impacting car sales at some point or accessory affordability. You know, thus far, car sales have done quite well, so we've yet to really see that And as I mentioned, downside risk would be a reduced investment in growing the businesses by our aftermarket customers. On the other hand, China growth, the modifications to our strategy, our plans for the Middle East extending into India, potential positive movement on the interest rate side in terms of vehicle affordability and continued acceleration of attachment rates, along with some large customer wins that we're pursuing, which are quite unusual for us, These all create upside potential for the year above that 15%, as does our inorganic activity in terms of M&A, which we will keep pursuing and expect to grow this year. Gross margin for the quarter came in at 38.8% compared to 39.6% in the fourth quarter last year. So as we discussed, we've been targeting exit the year last year at or near 42%. you know, really made good progress on that. A couple hiccups along the way. And then really for Q4, where we've got these really high distribution sales for China and the Middle East, we felt that. And, you know, the product mix within those distribution sales was probably unfavorable to margin. We've got a number of products we sell in China, as an example, that have varying margin profiles. So we felt that there. You know, our expectation is to be back up in the in a 40% plus for Q1 and then throughout next year. And I was happy with the performance in aggregate, even though it was a little bit choppy, as I mentioned. So we grew gross margin by 160 basis points. We will build on that. And we still believe that we'll gradually increase our gross margin going forward, kind of ignoring the choppiness of the distribution business. We have room to continue to improve that overall profile like we've been talking about. As we look out this year, we're really focused on reducing our days on hand inventory. Obviously, we've had a lot of discussion about this over the past quarters. And this is as we intended to do last year before we were thrown off track in the summer, as we previously discussed. So managing this and optimizing our free cash flow conversion is a top priority. Barry will talk about that a little bit more here in a minute. And then secondly, you know, we've significantly increased our SG&A expense really over the past three years. You know, some of this will begin to lap, such as the introduction of more equity compensation across our team, you know, starting three to four years ago. Obviously, we've been looking to replicate over the long haul what our high inside ownership has done for us in the past. But we've also grown our corporate team substantially with the focus on R&D, quality team manufacturing and our product team over this time. And we expect those to continue to grow, but the rate will moderate going forward. Um, we we've made, you know, large investments in the, in the percentage rate growth for all of those types of headcount ads have been really high in our sales and account management. And some of the operations will grow more in line with revenue. Uh, whereas we would expect what I just mentioned to grow much slower than revenue. And then outside of that, there are two areas that we really want to continue to grow in an outsized manner, you know, at a rate potentially greater than we would grow revenue over time. And that's really our marketing and our DAP team. Marketing specifically, we want to see an increase on a percent of sales basis. You know, when we look at marketing excluding sales as opposed to sales and marketing together, You know, we're just now kind of approaching 3% of revenue to marketing, and we would like to see that expand going forward on a percent of revenue basis. And, you know, fund that by our increasing gross margin and then also more leverage on the other SG&A line items that won't be growing at that rate. And then related to that, in terms of our prioritization, is expanding our DAP team. You know, this is critical. This is becoming a platform that crosses every part of our business, and we want it to be a force multiplier for our customers to help them grow their business and have it be a reason that they feel confident to grow their business. So in short, our incremental SG&A run rate continues, but we'll see these incremental ads from our past trend to moderate as we go forward, and this will help us drive further operating performance in the coming years. A couple of business updates. As we mentioned, we closed on three acquisitions in the fourth quarter, and then we actually did a very small acquisition last month in January. As we discussed on our last call for the end of the year, one was a chain of six installation locations in Canada. We had a business base in Europe serving some OEM manufacturers And then this year in Q1, we did another small acquisition in Australia to add to our growing business. They're really insignificant revenue, but it adds capability for that operation that's been performing very nicely since we acquired our distributor. So all those acquisitions address the strategic objectives relative to the size, the complexity of of doing those deals, probably high relative to their size and the transaction costs are high, but they're all done to really play to the strategy they were executing rather than just as a means to try and grow revenue or roll up something that roll up the customer base. That's really not the objective of any of those. We see good opportunities to put the cash to work. As we've talked about, we expect more international distribution acquisitions this year. And this is typically folks that are distributing our product in country somewhere else in the world where we see an opportunity to acquire them and invest in that operation. Generally, we're improving margins. Sometimes we're reducing sales price to the end customer, but ultimately growing faster in those markets. So we see opportunity for that this year. These have generally been the highest ROI acquisitions we've done, but they're just limited in terms of how many candidates there are because buying distribution of a competitive product is not a great strategy. So we're sort of limited to our captive customers as we pursue that. So, you know, we'll continue with the smaller acquisitions. We're also looking at some larger acquisitions, larger for us in a relative sense, you know, $25 to $50 million plus purchase price. These could have more significant impact on the business, bring on new markets or capability or scale. So even though our average acquisition size has been quite a bit smaller, we're very much open to incrementally larger acquisitions. And these would have an impact on the business, but they don't change who we are. They're not transformative in a sense that it turns us into something we don't want to be, but very active on that. Our Gapnext, which is the newest version of our Gap platform, this has really progressed. I think we're at 99.9% of customers using the new software. The evolution here really focuses on our customers' businesses and making them more efficient. The initial incremental feature set is around managing leads and optimizing the business that we send to the customers. Working on technician commissions, how do you pay your staff? This is a huge driver of making these businesses scalable, is a labor model that can do that and a compensation model to go with it. So those are the things that are very active now. We continue to receive a lot of great feedback on what we're doing there. We have our dealer conference starting tomorrow and Friday and Saturday here in San Antonio. We've got a great turnout, I think 500-plus customers attending. We hold the event every year. You may recall we held it in April last year. So it's great. We have high interest despite sort of not even a year between conferences. We sort of prefer this February timeline but couldn't do it last year for some reason. We've got a number of new product introductions that we'll be releasing at the conference this And then the bulk of the content is really focused though on showing our customers how they can grow their business. And that's in new markets, um, like Marine, which we've been getting good traction in. And then obviously in dealerships where we want to encourage, um, all of our customers in the aftermarket to do more work for dealerships. We think that's important and to reinforce to the customers that, um, We want them to invest in their businesses. We want them to grow. And when they do that, we win. I like the conference because we really get the voice of the customer. And our team knows that they need to leave the event with lists of items on how we can be better. And there's really no better way to do that than talk to people face-to-face to get that, especially when you've got folks from different functional areas they were able to interact with customers that don't normally have as many day-to-day customer interactions. So that's super important. I know that we get as much out of the conference as our customers do, even though we do it for them, we get tremendous value out of it. So really looking forward to that. And finally, just a little bit of housekeeping, and I'll turn it over to Barry. We did change, a slight change in our earnings cadence today. So consistent with you know, pass, we'll file, we plan to file our 10 K next week, which is in line with when we normally file. We released earnings in advance of that, uh, this week because I'll be traveling in Asia and it wouldn't be practical to have the call and wanted to make sure that I could be here. Um, also want to thank our team for the efforts this year. It's been really busy. Uh, we've, we've accomplished a lot. You know, we, we've, uh, restructured a big parts of the company, both from a operations standpoint and then from, uh, a global business standpoint that's been a lot of work and a lot of change but it's really set us up well for going going forward so i want to thank everybody internally for that so with that we'll turn it over to barry barry take it away thanks ryan and good morning everyone uh just a couple more comments on on revenue