XPEL, Inc.

Welcome to Expel Incorporated's second quarter 2024 earnings call. At this time, all participants are in a listen-only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the 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. You may begin.

Good morning and welcome to our conference call to discuss Expel's financial results for the second quarter of 2024. On the call today, Ryan Pate, 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. I'll take a moment to read the safe harbor statement. During the course of this call, we will 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 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 Securities and Exchange Commission. Expel undertakes 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 will now turn the call over to Ryan. Please go ahead, Ryan.

Thank you, John, and good morning from me as well. Welcome to the second quarter 2024 call. Q2 was a record revenue quarter for us, revenue growing 7.5% to $109.9 million. Our U.S. business grew just under 10% to $64.9 million. While this was a significant improvement from the 1.9% year-over-year growth in the first quarter for the U.S., overall, the aftermarket remains off its trend from the prior year, as we discussed in the first quarter. However, while the sentiment was universally negative in the first quarter, the second quarter has been a bit more positive. We saw April up more significantly given some of the headwinds in the first quarter, and the feedback from our customers has definitely been more mixed versus all negative to start the year. So I think that's good. Our dealership business continued to perform well, growing a little over 30% for the quarter. A little apparent impact from the well-discussed CDK software issue, as far as we can tell, but probably some impact. Obviously, there's lots of talk on the macro, consumer sentiment, etc., which we're not going to speculate on. But the first half of last year was stronger than the second half of last year. So going forward, we will lap the slower part of last year. Are China... Business posted revenue of $4.4 million, which was a 45.7% decline compared to the same period in the prior year. The sell-in versus sell-through dynamic continues to hide a lot of the work we're doing there. We launched in the quarter an additional product line that drove our in-country versus sell-in. PPF sales unit volume by our distributor up substantially. on a unit terms basis over the prior year, given the positioning of the product to the mid tier in China, where we've historically not participated. This is a good dynamic for the market. Much like our business, we're working with our distributor to streamline and reduce inventory in country, especially as we modify our product line and go to market. So we'll continue to experience this choppiness this year, but we will ultimately reach a more stable revenue pattern through either our management of inventory in country for the benefit of our distributor or the acquisition of the distributor as we've done in other markets. Overall though, our additional product here serves to increase our China TAM substantially over time. And this is a pattern for other low labor cost markets that we intend to pursue in Southeast Asia, India, and elsewhere. Our rest of the world revenue excluding US and China is 16.1% in the quarter. Continental Europe is 17.2%, which is a little bit lower than we've seen in previous quarters. We see that market a little bit weaker than the previous trend like we saw in the U.S. earlier. But the growth dynamics there are different. The market is still in its infancy, so it'll perform differently than what we see in the U.S. for sure. All in all, we still feel good about our revenue growth guidance of 8% to 10% for the year, although as we remind everyone we're still looking backwards to look forwards. Obviously, the current macro uncertainty doesn't aid the accuracy of that process. But June and July were record revenue months for us. August tends to be a little bit lower due to time off and plant shutdowns in Europe. For Q3, we expect the U.S. to trend slightly higher than Q2, and we expect higher Q3 revenue in China than the entire first half of the year. So assuming that plays out as expected and based on what we know and could obviously change, but that would put us at 112 to 114 million in revenue for the third quarter. On the product side, we're really excited about the launch of our windshield protection films. That's going to be late Q3, early Q4. Product has been the most asked for product from consumers over time. And we're finally ready to meet this demand. And it's a win in two ways. One, more content per vehicle, which benefits us and our installer base. But also, it gives us an opportunity to attract a whole new set of customers who are interested in something else, which is the windshield damage protection. And that's ultimately a referral source for the other products. So really excited about that product launch. The customers we have who have been using it and starting with it are very, very pleased with it. So we have high expectations for that. Also, we've launched a new OEM and partner referral program utilizing our independent installer network. And under this program, the partner will refer their customers to an e-commerce site that we run that allows the end consumer to purchase installation of products on their card directly from us, from Expel. We collect payment, route the job to the nearest participating installer, pay the installer promptly, and depending on the setup, we may compensate to refer through a rebate or other structure. And this can be scaled up or scaled down in terms of participating installers, geographies, and products quite easily. We've launched our first pilot program using this system with a new OEM to us, and we have interest behind it from several others. The program has utility beyond the OEMs with other industry partners that are in a position to refer automotive buyers to us. And our team's done an amazing job launching the program. We look forward to building on it, evolving and talking more about it in the future. But this is another way to increase the pool of people we can reach who wouldn't normally participate in the aftermarket. So it's something we think can be quite valuable for the network over time. Another bright spot for the quarter was our gross margin performance, 43.5%. Obviously, we get a little help with customer mix, but continue to be pleased with the execution on the plan to increase margins over time. We'll see some downward pressure on margin when China returns to more normal levels, as we do with our other distribution markets, but our view is we should be able to offset most, if not all of that, and continue to have room to improve that over time. SG&A expenses grew 20.5% during the quarter to $28.7 million. And as I mentioned on the last call, we're focused on containing the growth of SG&A. We're focused on, you know, optimizing and better utilizing the dollars we're already spending rather than cutting it. And that remains our position today. We have plenty of SG&A line items we've invested in over the past few years. including things like product quality, manufacturing teams, our investment in HR, people and systems necessary for the growth of our service business. And we expect to see leverage on these by reducing those line items on a percent of revenue basis over time. So, absent some serious macro deterioration, we will overcome the burden of those now through additional revenue growth, both organic and inorganic. We see a very clear path to do that going forward into the future. Again, not trying to undo the good work we've done via SG&A reduction. Another highlight to the quarter was our cash flow performance came in at almost $26.9 million, which is just higher than Q2 last year, which was by far our highest cash flow quarter in history. So, you know, kind of a long time coming and very important. We've made progress on inventory in terms of absolute dollar and days on hand reduction from Q1 in the start of the year. And barring any unforeseen issues that come up in the future, we should be able to continue to generate solid cash flow from quarter to quarter. And we will be most focused on our days on hand inventory number going forward versus the absolute inventory dollars. And over the balance of this year, our ongoing work in China will aid our inventory turns and cash flow conversion over time as well. That sell-in, sell-through dynamic is not only challenging from a revenue pattern, but it's very inefficient from an inventory and supply chain standpoint as well. On acquisition front, we did close two acquisitions recently in June. We closed on the purchase of Protective Film Solutions, or PFS, based in Orange County, California. PFS, amazing brand. It has been an amazing brand ambassador for Expel. But separate and above from how they're traditionally known in the automotive space, PFS has developed a substantial marine model. for protection and application of a variety of products into the marine channel. And we intend to make that available in a structured way to our installer base over the next year for our installers that see that as a viable part of their business. We see marine as another adjacent market, a complementary market worth developing. And this is the first part of the investment to help kickstart that. Ryan Townsend, who's the principal of that business, has joined us as our our director of marine to spearhead the initiative. And, you know, as you know, it's all about the team in terms of what we can accomplish. So we're glad to grow in that direction. Just this week, we closed on a small acquisition of our distributor in India. At the end of last year, we established our own operations in India, as we previously talked about, and our distributors business will merge in with this operation. And as we discussed in the past, we want to be direct, in direct presence in the top car markets of the world, and this acquisition helps us further check that box. We expect to complete another four or five distributor acquisitions in key markets in Asia and Latin America over the next year. As we complete these, we will have a direct presence in the majority of the top 20 car markets in the world. Certainly, we're adding incremental SG&A and operational complexity to do so, but our direct presence in these markets continues to give us a multitude of advantages in our go-to market. Obviously, when we're selling directly to our customers, we can more easily tailor the product offering, supply chain elements to be the most efficient, and offering to our OEMs, inclusive of global warranty service, is only benefited by our international presence and separately we're actively looking to expand by decentralizing some of our european-based oem operations into other countries through our international subsidiaries either in dedicated facilities or in ports and this wouldn't be possible without our presence so this decentralization may let us be more competitive it could improve quality and ultimately can increase capacity where real estate is an issue by getting closer to the customer. So good quarter for us. And again, I want to thank our team for all their hard work. None of it would be possible without them. And with that, we'll turn it over to Barry. Barry?