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Operator
Good morning everyone and welcome to the Expell Incorporated first quarter 2024 earnings call. At this time all participants have been placed on a listen only mode and the floor will be open for questions after the presentation. If anyone should require operator assistance during the conference please press star zero on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host John Nesbitt, IMS Investor Relations. John you may begin.
John
Good morning and welcome to our conference call to discuss Expell's financial results for the first quarter of 2024. On the call today Ryan Pape, Expell's President and Chief Executive Officer and Barry Wood, Expell'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 prepared comments we'll take questions from our call participants. 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 Expell 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 which are subject to known and unknown risk factors and uncertainties that could cause to be materially different from those expressed in these 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. Expell undertakes no obligation to publicly update or revise any forward looking statements whether a result of new information, future events or otherwise. Okay with that I'll now turn the call over to Ryan. Go ahead Ryan.
Ryan
Thank you John. Good morning everyone and welcome as well to the first quarter 2024 conference call. I think obviously Q1 was a tough quarter for us. Revenue grew 5% to 90 million. US revenue grew .9% compared to Q1 2023 to 52 million. We saw softness in the aftermarket to start the year. This is a continuation of the trend that we saw starting in late summer which I think we've talked about generally. We're also now going to be lapping the stronger part of 2023 which was the first half. Our customers in the aftermarket are very diverse and it's hard to generalize them as a whole but for context it was not uncommon to see dealers who were down -15% in the first quarter from the prior year period. As we've said before our internal company owned locations are a good proxy for the aftermarket as well and we saw the same type of weakness in those on a -over-year basis in the first quarter. So obviously some customers were down more than others. Some grew depending on their new and lost customers as there always are but the universal theme for many and many that I spoke to personally was a slow start January and February in particular this year and that was really across geographies, mostly folks in the US that I spoke to personally but East Coast, West Coast and in between. In terms of what we're seeing, I think one there is more consensus emerging of just weakness in the consumer overall and this buyer makes up a substantial portion of our aftermarket business where the dealership component in the aftermarket makes up a smaller portion. Kind of seen some of that echoed in earnings season and even in this week but we're our own niche so we're going to feel and experience this in our own way. I think for us there's probably a better consumer credit centric leading indicator for us that we've yet to find but it's probably out there. Secondly, I think the EV adoption over the past few years has likely been a tailwind for the business really for two reasons. You think about our core enthusiast customer who still makes up a substantial portion of our customer base, they began to adopt EVs but more important leads. The EV revolution if you will, it created a new class of enthusiasts and these were not traditionally our customers. They were an enthusiast by virtue of the EV cycle and if that market has cooled, the EV market has cooled, the EV buyers lured to the market now by discounting in this part of the cycle are probably less likely to be our customer in the aftermarket. So in that sense EV sales declines probably hurt us twice, once on volume but also by shifting the composition of those buyers to those that have a lower propensity to participate in the automotive aftermarket in general. So I think it highlights also the continued need to reach all types of consumers including those that would not normally participate in the aftermarket. So programs like we have with Rivian, OEM, other OEM programs, dealership activation for us and for our installers in the aftermarket, these are all things that help do that and is why we're focused on that. We have some data, we actually see this play out on a model level as some of the big global OEMs if they launched their first EV platforms, attachment rates would start high and then they would decline. So showing the enthusiasm for those vehicles even embedded in all of the big global OEMs. And then third, port delays in the US specifically resulted in reduced sales of Porsche and Audi to the tune of 20% I believe is the number in the case of Porsche, which these are two of our top brands for traditional paint protection film coverage by one measure of attachment that we have. So this is E's sort of post quarter and is probably contributing to the stronger April that we saw. Traditionally in our business, it would be unusual to see April with higher revenue than March. That's counter to the normal cycle and the start of the season but that's what we've seen this year. So that said, there isn't one vehicle brand that dominates all others for us when you're looking at any of the metrics we have or a metric of attachment of say how many bumpers by brand do we cover with film. So you have four variables that drive our attach rates as we talked about. You've got the enthusiast nature of the brand first and foremost, the price point of the vehicles, traditional paint protection film is still relatively expensive and so you have an over index as the price goes higher. And then the number produced is obviously significant. I think we cover and protect way more Toyotas than anyone realizes. And that's not because they have the highest attach rate but it's because they produce so many vehicles. And then you have the in selling these products because the dealerships, service centers, dealerships, they can reach customers that we're not going to reach in the aftermarket. And you see quite a divergence in the brands overall in terms of how effective they're doing that. So while the port delays were a US specific item for the quarter, these trends are not unique to the US overall. But as it's our largest market by far, we're going to see it more here where we have a larger existing base of business versus other markets that are still in their infancy where new customers comprise a much larger percentage of the growth. And you've seen that play out if you look at our geographic distribution and results this quarter. The dealership services business continues to be a bright spot. We're seeing growth both in the quarter and car counts and in the ASPs both trending in the right direction. The team's doing a really good job of introducing more paint protection film into our existing relationships and doing that with great service. And again, this is part of the mission to reach customers that aren't going to take their vehicle into the aftermarket. We're evaluating further service opportunities in the dealership channel to build deeper relationships with the dealerships we serve or the dealerships we might want to serve. And you can see how our results here in different parts of the business have performed differently over time. The aftermarket is not the same as the dealership business in terms of the customer base, in terms of the product composition, or even price point. These segments have fundamentally different characteristics for us. Credit access is different in the aftermarket versus in the context of a new car purchase where our products are typically financable. So there are many different variables to consider. Also in the US in April, we reached an agreement with Tint World. This is an automotive accessory window tinting franchise with well over 100 locations to supply their franchisees with co-branded products. This is predominantly tint, window tint as the name might imply, but also some paint protection film and coatings where applicable. Tint World offers a range of services including window tint, vehicle wraps, audio electronics, and others. We look forward to working with them in the coming years and to working to integrate with them over the rest of the year. Looking outside the US, the China region finished at $1.5 million for the quarter. That was obviously a big driver of our overall lower than anticipated revenue growth rate in addition to the US. As we discussed numerous times on our previous calls, we're constantly met in China with the sell in versus sell through dynamic that makes the business lumpy. China had the highest quarter in history in Q4 of last year, so we knew Q1 was going to be lower. Even with that, China still finished about three to four million lower than our forecast was last year. We're making a lot of progress in terms of evolving our strategy and go to market in China with the help of our team on the ground and the reorganization of our business. Look forward to discussing our plans more in the subsequent quarters. We're focused on making significant changes in the -to-market including optimizing the product portfolio and increasing inventory and supply chain efficiency both in and outside the country as well as other changes to the distribution model. Our priority for the first three quarters of this year is to implement all of these fundamental changes and streamline the product lines and inventory. This will continue the lumpiness for now but will set us up well for the future where that lumpiness will be eliminated and the business in-country will grow. Credit to our growing team in Asia
John
for
Ryan
their work there and also in the other markets in Asia even outside China that we're prioritizing. More to come on that but I feel very optimistic about the plan that we have there and we'll talk more about it in the future. The rest of the world outside the US and China had a good quarter growing a little over 30 percent, record quarters in Europe and APAC and Middle East, Latin America. Again, Q1 is typically the lowest quarter for these regions as well. So continued good performance there. Our operation in India is well on the way to being fully established and it's going to provide a lot better support for our customers in the Middle East and our expansion there. So very pleased with how that's going in addition to what we plan to do in the domestic market in India. So good progress. And finally, the OEM business was a bright spot. Revenue was up just around 58 percent year over year. Really kind of at quarter end or subsequent quarter end. Also starting to launch a full stealth, a Mac film option with Rivian. So again, that'll be growth and more awareness for that product as well. The best forecasting tool we have with thousands of individual customers is to look backwards to look forwards. And obviously that makes forecasting complicated in a changing environment because things have to change to look backwards at them. Looking at the state of the market and the trends to start the year, which obviously lowers our internal modeling, it gives us some conservatism I think for the year. So as a result, we're reducing our revenue guidance to 8 to 10 percent organic growth. And our expectation for Q2 revenue is in the 105 to 108 million range. Look, it's a dynamic environment. As I mentioned, seeing an April exceed March is very unusual in the typical cycle we have in the US. So we need to understand that. But that's sort of what we're the best we're looking at now in terms of our expectations. And we'll update that as we go. I think while the current environment is incrementally more challenging, we're very much focused on the future and continuing to drive the long-term double-digit revenue growth. We're very mindful of the current state and the cost structure we've built. And obviously we built that for even more growth. But our focus remains on setting us up to continue maximum growth over time. So there's no diminution of the opportunity set in front of us. And we don't want to make short-term decisions that compromise any of our long-term prospects. So excluding the impact from any acquisitions, which we'll talk about from an SG&A standpoint, at this point, we're really more focused in the near term on holding our cost structure rather than trying to reduce it significantly. There's plenty of opportunity for our core business, even in this environment, to grow and to grow into that cost structure. Look, obviously if things change, we'll change and we have to be flexible. But that's our current view. Bright spot for the quarter was gross margin performance finished at 42%, returning to the trend that we expect after lower than expected margin due to the high distribution sales in Q4. And in some respects that outperforms even a little bit because as volumes are down, you become less efficient in some ways with costs that are part of your cost of goods, but over a short period of time are relatively fixed. So I think that's a good number for us. And it's one that we still will look to continue to grow over time. Improving our free cash flow remains a top priority for management and our board. And managing inventory is the primary, not the only way, but the primary way to accomplish that. In the quarter, we've seen a significant reduction in our raw materials and work in progress inventory as those turn into finished goods and then ultimately sold through in the future. And as they're sold through, we'll see our days on hand reduce through the year. So that's a really important step to continue that process of reducing the days on hand. And as you may recall from last year, a lot of those raw materials and work in progress materials were inflated in the second half of last year, which we didn't anticipate going into the year. So that's good progress to see that go down and get work through the channel. It's what we want to see. Obviously, higher revenue in Q1 and in particular, the sales to China that we had forecast, that would help in terms of the inventory situation as well because those products are still on hand instead of being sold. But the plan is tracking for the year. And there's really, I mean, hard to say outside of growing the business as aggressively as possible, that there's something more important to us than optimizing that. Finally, I want to talk about capital allocation. We feel that the best use of our capital remains M&A, does not change in the current environment. We haven't seen multiples compress up to now, but I think it's possible that we might see that change. We've been asked about that many times over the past few years, but as you saw the relative strength of all the businesses in the overall ecosystem, even when we had SAR declines due to inventory and things like that, we just didn't see any of that. But I think now it's possible that we'll start to see that and it would be smart for us to be opportunistic there. But I would like to highlight that we really lasered our focus even further in terms of M&A in this environment. Now is not the time for our attention to wander from the core. I think that's really important to emphasize. First, we have several international distributor acquisitions that we're pursuing this year and expect to complete this year. These acquisitions have been some of our best performing over time and deepening our presence in a market is a way to drive growth even in the slow market or slower market as we're able to take share and increase growth rates when we internalize the international distribution. We've seen it time and time again and we're seeing it in probably the most recent example is the success that we're having in Australia with that strategy post acquisition approximately a year and a half ago. So we'll use that to round out our presence, ourselves in the top car markets of the world. So that's the number one focus. Second, we'll be focusing on the dealership business and ways to invest to grow that further. It's performed well and as I mentioned a couple times, it creates an opportunity to expose more people to paint protection film that wouldn't learn about it any other way. So it's good for revenue and it's good for product awareness. This will predominantly be looking in service businesses directly in our space or even slightly adjacent service businesses targeting dealerships where our products could be added through existing relationships. You're less likely to see us pursue acquisitions targeting additional products or to pursue costly acquisitions or acquisitions of any consequence in other verticals at this time. If there's one thing I want to emphasize, it's the discipline that we're trying to bring to the process both in light of the current overall macro but also increasing our effectiveness at putting more capital to work and doing it more efficiently. And the focus there, intensifying that focus we think is really important to help do that. Speaking of products, we announced a number of tuck-in products into our various product lines during our dealer conference as we mentioned previously. These are largely things to round out the portfolios that we have and to ensure we've got a broad product set for any of our customers in the respective disciplines. But we'll be operating with discipline this year on future product additions relative to our free cash flow goals. As you can imagine, adding too many new products reduces efficiency of that inventory as those things are novel. We are planning to expand into more colored film options this year in addition to the black that we've offered for some time. There's nearly a dozen colored PPU-based wrapping films either in the market or planned for launch by a variety of suppliers in the business. And these are those with a typical vinyl or PVC background and those with PPF-type background and others. It's unclear how much these will ultimately expand the addressable market for colored films. Initially, we do expect to see shared gain of these products at the expense of some of the traditional PVC vinyl-based color wrapping films. What's less certain is whether this will translate to appreciable growth of the color change business in the aftermarket. But as the product installation becomes more similar to paint protection film, it actually opens up the opportunity for a larger portion of the aftermarket to participate, we believe. So as we talked about previously, using colored films to replace paint does not seem to be viable at scale today, maybe if ever. But the improved durability of a PPU-based color wrapping film versus a vinyl-based film presents options for more accessorizing in the aftermarket dealership and OEM channels. Certainly opens up options there like doing contrast roofs with film instead of multi-step paint process they have to do. So all of this represents growth opportunities for the industry as a whole. So obviously, challenging quarter for us. I want to highlight the areas we're focused on and that we've got our whole team aligned on. We remain very excited about the opportunity ahead. The potential for these products is as strong as they've ever been. And we're excited about that. So with that, I'll turn it over to Barry and then we'll take questions.
Barry
Thanks, Ryan, and good morning, everyone. Just to start out, I wanted to provide a quick reminder on the seasonality of our business. In all regions, excluding China, Q1 is typically our lowest quarter of the year. Q2 and Q3 can trade off being the highest quarters and then Q4 is less than Q2, Q3, but higher than Q1. And this holds true in China, except that Q4 tends to be their largest quarter. So given all that, comparing revenue sequentially versus Q4 is really not near as meaningful as it is in other quarters. Looking at the product lines, combined paint protection film and cut bank revenue declined about 1% in the quarter, again, owing to the China performance and lower US demand. Our window film product line revenue declined .9% quarter over quarter to 14.5 million, which represented .1% of our revenue. But excluding China, the total window film revenue grew 10.3%, which is still a decent performance even in a seasonally lower quarter. Our Q1 Vision product line revenue, which is included in our total window film revenue, grew .1% to 1.8 million. So again, good growth in a low seasonal quarter. And as Ryan mentioned, our OEM business continued to post strong results with revenue growing just under 58% versus Q1 2023 to 4.6 million. Our total installation revenue combining product and service grew .7% in the quarter and represented approximately 22% of total revenue. And as Ryan mentioned previously, many of our corporate stores revenue declined versus Q1 2023. So the total installation revenue was certainly buoyed by our dealership services business and OEM business. Our Q1 SG&A expense grew .2% to 28.6 million and represented .8% of revenue. Included in Q1 SG&A was approximately 1.6 million in net costs from our annual dealer conference that was held in February this year, but held in Q2 last year. And if you normalize for that, our SG&A would have grown approximately 28.6%. Sequentially, after factoring in the dealer conference costs in Q1, SG&A grew 1.3%. And certainly our expense profile looks outsized in a down revenue quarter, but as Ryan alluded to, we're actively managing our costs where we can and really trying to thread the needle between the right trade off of managing costs versus continuing to do right by our customers. And we've gotten and continue to get an ROI on our SG&A spend in the form of improved gross margins and we want to continue that for sure. So we'll continue to monitor this, but our expectation is that our SG&A run rate will remain largely intact for the remainder of the year, especially in light of the improving revenue momentum. Our Q1 EBITDA declined .5% to 11.7 million, reflecting an EBITDA margin of 13%. And normalizing for the dealer conference costs again, EBITDA would have declined 22.1%, and EBITDA margin would have been 14.8%. Our Q1 net income declined .7% to 6.7 million, reflecting an income margin of 7.4%. And our EPS was 24 cents a share. But again, normalizing for the dealer conference costs, net income margin would have been 8.8%, and EPS would have been 29 cents per share. And Ryan talked about our inventory earlier, so I don't have much to add to that other than it did impact our cash flow from Ops, where we posted a use of cash of approximately 5 million. Again, our expectation is to return to positive operating cash beginning in Q2 as we work down our days on hand as we discussed. So tough quarter for sure, but we're well positioned to continue to work through these macro challenges and get back to solid double digit growth. And with that, operator, we'll now open the call up for questions.
Operator
Thank you very much. At this time, we'll be conducting our question and answer session. If you would like to ask a question, please press star one on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. For anyone using speaker equipment, it might be necessary to pick up your handset before you press the keys. Please pause a moment whilst we poll for any questions. Thank you. Our first question is coming from Jeff Van Cinderen of B Riley. Jeff, your line is live.
Jeff
Thanks and good morning. I wonder if you could give us your expectations for gross margin. Your activity in Q1, maybe for Q2 and for the rest of the year, anything we should be factoring into that and then operating expense expectations for Q2 and the remainder of the year, just maybe giving us a better sense of how to model those.
Ryan
Sure, Jeff. Thanks for the question. I think a goal last year was to really exit the year at around that 42% gross margin and we started the year there. That's where we want to be or higher. I think that in gross margin, we still have opportunity to improve that over time as we've talked about. What weighs against that is that you do have costs that are part of cost of goods that over a short period of time or midterm period of time feel more fixed. That probably challenges us a little bit to go much higher than that in the near term, but we still have that opportunity. The flip side is there was nothing really that unique about Q1 that would prevent us from maintaining that level. I think on the SG&A question, as Barry mentioned, we really don't intend to go backwards in a meaningful way in our overall SG&A at the run rate that you see. We want to make sure we're doing that efficiently, make the right trade-offs we need to do, and prevent that from growing and certainly excluding some type of acquisition impact or something else that could impact that one way or the other with the expectation that we'll see growth and we'll grow into that cost structure. Now, of course, if the environment were to deteriorate further in some way, we might take a different view, but we're really working to hold the SG&A and get the most out of what we're spending rather than we are trying to reduce it in total dollars, if you will.
Jeff
Okay, that's helpful. Then I just wanted to hit on one of your comments in the compared remarks. I know you spoke to what you saw in your own dealer units and you saw in folks that you sell product to, your partners out there, if you will. I think you said 10 to 15% declines, order of magnitude was not unusual in Q1. Just sort of juxtapositioning that with the improvement you saw in April, maybe you could speak to your level of confidence in getting to the 8 to 10% growth in revenues for the year.
Ryan
Yeah, well, I think frankly, we saw much better growth within that segment in April versus the aggregate we saw in the first quarter. That's quite a change within that segment. Now, April is one month and if you've got some sort of hangover effects from the first quarter, maybe April outperforms May and June. Frankly, we don't know, but we've seen more growth than we saw declines in the first quarter. Candidly, when you look at the data that we have, that's as far into the future as we can see. I think that is a positive trend, but maybe one month doesn't the trend make.
Jeff
Okay, fair enough. Then just order of magnitude. I realize you guys are selling to a lot of different, you're getting film in a lot of different car brands, vehicle brands. Order of magnitude, were there any 10% size or 10% or larger vehicle brands in Q1? Maybe you can speak a little bit more about what you're seeing in the EV brands. I know you mentioned Rivian, how much and which brands impacted your business the most and anything you could say on concentration of those brands.
Ryan
Yeah, I think as we've talked about today and in the past, the distribution of this business is likely a lot wider than people might think. There's this idea that all of the revenue is concentrated in one brand or two brands or something. That's really not the case. I think we talked about the type of make related concentration last year, 5% or less. What I think is maybe not obvious that we continue to work to try and explain better is you have all of these tradeoffs. You've got makes with huge volume like Toyota, but they have much lower attach rates. Then you have brands like Porsche that have much lower volume but much higher attach rate. The same is true with all the other brands. But when you put that together, you can have various measures of attachment. There's many ways to think about it, content per vehicle versus some film per vehicle or versus using the bumpers as a proxy. We have all of this. But where you have these top brands that all by some of these measures all have the same aggregate volume, now the attachment rate is fundamentally different. I really just can't stress enough that there isn't a single point concentration risk into any one vehicle in this business. They all trade against each other. When you get to enthusiast vehicles, we'll see higher attach rates in some brands than others that are ultimately meaningful to their results. We'll see BMW attach rates by the measures we have that far exceed Mercedes. There isn't one thing driving that. There isn't one outsized brand. They all have their part in what we're doing here. If we had outsized concentrations in any one make or one segment, we would talk about that.
Jeff
Thanks for providing all that. That's helpful. I'll jump back in the queue. Thanks,
Operator
Jeff. Thank you very much. Just a reminder there, if anyone has any remaining questions, please press star one on your phone keypad now.
John
I'm not seeing
Operator
anyone else come into queue at this moment. I will now hand back over to management. Apologies, we've just had someone join the queue. It's from Steve Dyer of Craig Hallam. Steve, your line is live.
Steve
Hi, guys. This is Matthew Robb. I'm for Steve. I guess I'll just start with China in Q1. Obviously, it was much weaker, under $2 million. Can you talk about what you see in Q2? Thinking about the revenue guide, it seems like it's much more second half weighted. Is that kind of the right way to think about that?
Ryan
Well, I think it is in the sense that we have this sell in versus sell through dynamic that we've talked about, ad nauseam. Our goal is to eliminate that this year and to then have the ability to recognize our revenue in China as it occurs. That's part of what we're trying to accomplish there and part of what we're trying to change to actually enable us to see even more growth in China. That could take a number of forms in terms of what we do, vendor managed inventory type process or others. All of that is part of what we're working on in China. When you've got the bulk of the product for China coming from the US, you've always got lots of material in transit. You've got lots of inventory held at different points. That creates this lumpiness until you can actually sell through it. That's what we're going to change. Our quarter to quarter, our sales into China really have almost no relationship to what's happening on the ground.
Steve
Okay, makes sense. Interesting commentary on the colored film. Can you explain what sparked that move? You guys have been cautious in the past. Just curious why the change?
Ryan
Well, I think you're at an inflection point here to say does the application of colored films now fit more in with our business model if you can use a technology and installation profile that more of our customers are familiar with? The incumbent products, the non-TPU based products are fundamentally different in their physical characteristics, if you will. That leap from a technician or an installer standpoint is a further leap because it's not the same to install. As you see the movement and the momentum around using a TPU based colored film, that brings it more into the realm of our current customer base and the labor that we've trained and the existing market. It creates an opportunity for that. The products itself, if you're using TPU as a substrate, they have the possibility of being more durable, the possibility of better optical properties and a better appearance. That's attractive. I think at the same time where we're being candid about it is that I don't know at a consumer level that it fundamentally changes the number of people that want to change the color of their car. That's still something that is a bespoke option and not inexpensive. It probably appeals to a fairly narrow portion of the buyer. As you're looking at other programs around accessorization and customization at the dealership level or the OEM level, there will be more opportunity from that. The time is right to further advance that. I think from a product line standpoint, you have to be mindful around things like colors. Maintaining many colors requires a lot of inventory and colors come in and out of style, particularly in the aftermarket. That's probably part of our conservatism and approach on that historically. I think you're going to see some reordering of the industry and the aftermarket relative to colored films over time just by virtue of this bifurcation and the technology that's used. I think ultimately that can play to our strengths. That's why expanding that beyond black is something that's worth doing.
Steve
That's it for me. Thank you very much.
Operator
Thank you very much. We will now be handing back over to management for any closing comments.
Ryan
I want to thank everybody for joining us on the call today and thank our team for working really hard to set the business up for success. I look forward to speaking with everyone again.
Operator
Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
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