XPEL, Inc.

Good morning, everyone, and welcome to the Expel 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 hosts, John Nesbitt, IMS, Investor Relations. John, you may begin.

Good morning and welcome to our conference call to discuss Expel's financial results for the first quarter of 2024. 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'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 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. Such statements are based on our current expectations and assumptions, which are subject to known and unknown risk factors and uncertainties that could cause our actual results to be materially different from those expressed in these statements. Some of these factors are discussed in detail in our most recent form 10K, including under item 1A, risk factors, filed with the SEC. Expo owner takes 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.

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. U.S. revenue grew 1.9% compared to Q1 2023 to $52 million. We saw softness in the aftermarket to start the year. This is a continuation of a 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 10%, 15% in the first quarter from the prior year period. And 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 year-over-year basis in the first quarter. So obviously, you know, some customers were down more than others. Some grew depending on their business model, and there were new and lost customers, as there always are. But the universal theme for many and many that I spoke to personally was the slow start of January and February in particular this year. And that was really across geographies, mostly folks in the U.S. that I spoke to personally, but East Coast, West Coast, and in between. In terms of what we're seeing, you know, 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, you know, 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 that's probably out there. Secondly, I think the EV adoption over – past few years has likely been a tailwind for the business, really, for two reasons. If 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 importantly, 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 as that market has cooled, 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 customers, including those that would not normally participate in the aftermarket. So programs like we had 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 launch their first EV platforms, you know, attachment rates would start high and then they would decline. So showing the sort of enthusiasm for those vehicles even embedded in all of the big global OEMs. And then third, port delays in the U.S. specifically resulted in reduced sales 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, you know, 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. You know, 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. You know, 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 effectiveness or lack of effectiveness of the dealership channel 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 U.S. specific item for the quarter, these trends are not unique to the U.S. 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 in 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. You know, 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. You know, these segments have fundamentally different characteristics for us. You know, credit access is different in the aftermarket versus in the context of a new car purchase where our products are typically financeable. So there are many different variables to consider. Also in the U.S., in April, we reached an agreement with Tint World. This is an automotive accessory and 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. Tentworld 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 this year. So really happy with that relationship. Looking outside the U.S., the China region finished at $1.5 million for the quarter, and that was obviously a big driver of our overall lower than anticipated revenue growth rate in addition to the U.S. And 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. And 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 go-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. And 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. And 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. So credit to our growing team in Asia for their work there, and also in the other markets in Asia, even outside China, that we're prioritizing. So 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 U.S. and China, had a good quarter growing a little over 30%, 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. Very pleased with how that's going, you know, 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% year over year. Really kind of at quarter end or subsequent to quarter end. Also starting to launch a full stealth, a matte film option with Rivian. So Again, that will be growth and more awareness for that type of 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 are obviously lower than our internal modeling, it gives us some conservatism, I think, for the year. So as a result, we're reducing our revenue guidance to the year to eight to 10% organic growth. And our expectation for Q2 revenue is in the 105 to 108 million range. Look, it's a dynamic environment. You know, as I mentioned, seeing an April exceed March is very unusual in the typical cycle we have in the U.S. So, you know, 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, you know, we're very much focused on the future and continuing to drive the long-term double-digit revenue growth. You know, we're very mindful of the current state and the cost structure we've built, and obviously we've built that for even more growth. But, you know, our focus remains on setting us up for the continued 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 uh we'll we'll change and we have to be flexible but that's our current view a 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 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. You know, 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. You know, 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. You know, we just didn't see any of that. But I think now, you know, 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 the M&A in this environment. You know, 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 in increased 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, you know, 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 TPU-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 a PPF type background and others. You know, it's unclear how much these will ultimately expand the addressable market for colored films. You know, initially, we do expect to see share gain of these products at the expense of some of the traditional PVC vinyl-based color wrapping films. You know, 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, it's not seen 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, you know, represents growth opportunities for the industry as a whole. So obviously challenging quarter for us. I want to highlight, you know, the areas we're focused on. that we've got our whole team aligned on. We remain very excited about the opportunity ahead. You know, 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.