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Operator
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.
John Nesbitt
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.
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?
Ryan Townsend
Thanks, Ryan, and good morning, everyone. You know, as Ryan mentioned, our total revenue grew 7.5%, but I think the China noise kind of masked the solid performance in the U.S., Brian referred to the fact that our U.S. business posted a rather anemic 1.9% growth in Q1. So it was really nice to see the U.S. return to near double-digit growth in Q2. And this was on a tough comp, as Q2 was the U.S.' 's highest revenue quarter last year. So we were certainly encouraged by that. Looking a little bit more detail on the product lines, combined product and cut bank revenue increased 2.8%, where solid U.S. performance, again, was mostly offset with the impacts from China. Excluding China, combined product and cut bank revenue increased 7.8% in the quarter, and sequentially, combined product and cut bank revenue grew 24.1%. Our window film product line revenue grew 8.4% quarter over quarter, 22 million, which represented 20% of our total revenue. Excluding China, total window film revenue grew 18.6%, and sequentially, total window film revenue grew 51.3%. Our Q2 vision product line revenue, which is included in our total window film revenue, grew 29.6% to 3.1 million, and represented 14.1% of our total window film revenue and 2.8% of our total revenue. Our OEM revenue grew 23.6% in the quarter and represented 4.1% of total revenue. And our total installation revenue, which combines product and service, grew 33.9% in the quarter and represented approximately 21% of total revenue. And this was really buoyed by strong performance in our OEM and dealership services businesses. Interestingly, our corporate-owned stores, after normalizing for acquisitions, grew 8%, right around 8%, which was relatively consistent with the overall performance of the aftermarket. As we've mentioned before, our corporate stores sort of act as a good, important check for us, particularly in the aftermarket. Our Q2 SG&A expense grew 20.5% to $28.7 million and represented 26.1% of revenue. However, we did hold our 2023 annual dealer conference in Q2 of last year, so if you normalize for that, our SG&A would have grown approximately 28.6%. And as a reminder, these dealer conference costs primarily impact our sales and marketing expense line in our income statement. Sequentially, our SG&A expense was essentially flat from Q1, but if you normalize for the costs related to our 2024 dealer conference that we held this year in Q1, our sequential SG&A growth would have been right around 6%. And as Ryan alluded to, our expectation is that the fixed cost components of our SG&A should stay relatively flat for the remainder of the year as we're closely monitoring our SG&A spend relative to the overall revenue performance. Our Q2 EBITDA declined 2.7% to 21.8 million, reflecting an EBITDA margin of 19.9%. Sequentially, EBITDA was up approximately 64% after normalizing for the dealer conference in Q1, and our incremental EBITDA margin in the quarter was a little over 51%. Our Q2 net income declined 4.5% to 15 million, which reflects a net income margin of 13.7%. and our EPS for the quarter was 54 cents per share. And Ryan mentioned our strong cash flow performance in the quarter, resulting mainly from our work around reducing our inventory days on hand, and we saw significant improvement in our cash conversion cycle as a result. We did use some of our excess cash to pay down our revolver and ended the quarter in a net debt zero position. And obviously our future deal cadence will influence our future debt position, but we're financially well positioned either way that goes. So all in all, good quarter for us and we're optimistic that the momentum will continue. And with that, operator, we'll open the call up for questions.
Operator
Thank you very much. We now have opened the floor for questions. If you have any questions, please press star 1 on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For any participants using speaker equipment, it may be necessary to pick up your handset before you press the keys. Please wait a moment whilst we poll for questions. Thank you. Your first question is coming from Steve Dyer of Craig Hallam. Steve, your line is live.
Steve
Thanks. Good morning, guys, and nice quarter. Thanks, Steve. I just want to dig in a little bit on your OEM business. First, as it relates to Rivian, I noticed they had a special running throughout the quarter at various times in the quarter where you'd get free expel wrap if you met certain qualifications, bought the certain vehicle, et cetera. Kind of curious what color you could give us around that, maybe the success you're seeing, the thought process around that, and then maybe is that something you'll see you do again?
Ryan
Yeah, we have been running a promotion with them for a full stealth or mat wrap. And this is really an incentive that they're offering in conjunction with us. And my understanding is it's been quite well received and helpful to them and well received by the market. So I think we're willing to partner with everybody we work with to do things like that. There continues to be interest in the map film just from really a personalization standpoint. And from my understanding, it's been a good program for both sides.
Steve
Great. And then the OEM referral program, I mean, is your thought on that, that that's going to be sort of ultra-luxury, smaller volume guys, or is the idea there that you're going to be with the big OEMs as well? Kind of still... would love any color as to what you're seeing around OEMs desire or appetite to vertically integrate this versus, you know, continue to run it through the dealer channel like they have.
Ryan
Well, I think that we see it, Steve, kind of all of the above. If you, if you look at every element in the channel, be it the aftermarket, the dealerships and the OEMs, they all have relative strengths and weaknesses, right? So the, You know, the OEMs obviously have a reach to everyone and that's valuable, but you may be limited in your ability or capacity to install the product either in one location or you may not be able to do it through a dealership channel or you may have a service center model like the like you guys do. And so this is really another option to sell the product and reach more people. And it's a it's a way to use, you know, our amazing customer base that want to participate in wholesale work, which is effectively what that is like they might do for a for a dealership, but it through another means of reaching those customers. So I don't look at anything we're doing, including that program, as, you know, this is the way or this is the one way. I think it's another tool in the tool belt to grow awareness and to grow the tan. And I think, you know, you look at the opportunity in front of us and, you know, there are people that we can naturally bring through the aftermarket. There's the enthusiast buyer that's already in the aftermarket that knows to do that. You know, a program like this is a way to kind of bridge the gap for a consumer that really doesn't know about the products and doesn't know about the aftermarket. It's a way to sort of connect them in an indirect means to the aftermarket that's very efficient. You know, it's going to be obviously far less expensive to do than trying to reach them through advertising, and it's coming through a credible source. And so I think there's applications for this for the OEMs like we're piloting now. potentially even through dealerships to pull people sort of back through and get a second bite at the apple for a new car buyer, even though we haven't done that yet. And then for others who have the ability to reach a qualified potential customer of ours to leverage their reach to generate more business for everyone. So it's really additive to what we're doing. It's not saying there's a shift fundamentally in the strategy either way.
Steve
Got it. Thank you. That's helpful. A couple product questions. One, you touched a little bit on stealth, and I love my stealth mat wrap. I think it's awesome. Are you guys seeing sort of outsized traction with that particular product across more than just Rivian? I guess that's the first question. And then the second question, as it relates to the window, is that just window PPF, basically? And then my understanding is most windshields already have sort of the darkest tint they can have. So, I mean, is that primarily just to, for, for rock chips and so forth?
Ryan
Sure. So yeah, to your first question, I mean, we see a continued interest and I would say a growing interest nominally, but it's, it's continued for some time in the map film, the stealth film overall, and, you know, potentially even permutations of that. It's sort of, uh, uh, analogous in a way to those that might want to change the color of their car with, you know, colored films, which we're pursuing as well. But I think it appeals differently. So we continue to see interest in that. And it's not, you know, the Rivian program we're working with them is just one example of that. It's certainly not a Rivian specific phenomenon. We see that across the board. In terms of the windshield film, you know, what we're launching is really designed around protecting the windshield from damage and cracking the chips and things like that, there is the ability already to have a windshield film on the interior of the car for the same reasons you would buy window film for heat rejection and UV rejection and things like that. We're doing so as legal. So this is really to serve a completely different purpose and you know, many people have experienced now that the windshields have become more and more expensive over time, dramatically so, as they have more integrated components. And so the ROI on windshield protection at the consumer level has really increased over time as the cost of those windshields have grown disproportionately, certainly relative to what the cost will be to protect it. So I think there's a there's probably the best value prop for windshield film now than there's ever been. So we're excited to get it out.
Steve
Great. Thank you for taking my questions. I'll pass it along. Thank you, Steve.
Operator
Thank you very much. Your next question is coming from Jeff Van Sinderen of B Reilly. Jeff, your line is live.
Jeff
Good morning, everyone, and let me add my congratulations on strong metrics, especially after some toughness in Q1. I guess considering new product launches, the new OEM referral program, can you speak a little bit more about what's baked into your revenue guidance as far as what you see as the key underlying components there to drive growth for the remainder of the year?
Ryan
Yeah, Jeff, I think that, you know, our method of projecting forward is, you know, looking at our current customer performance, you know, which obviously varies dramatically customer to customer, just based in large part on their own growth desires, plus the overall dynamic of the market, plus our expectation for new customers and then projecting that forward. In terms of new product, the referral program, We're not really baking in much for those because they're in their infancy and the other products yet to be launched. So I think those, relatively speaking, are upside for us. But given that they're new and they're sort of time limited in how much we'll get, they're probably not apt to move the needle substantially.
Jeff
Okay, fair enough. And then if we could circle back to China for a minute, if you don't mind, just maybe any more color there around what you're seeing, the new product launch, and then where else might you take that new product?
Ryan
Yeah, I think, you know, what our work around the world has shown us is, you know, the dynamics in markets that are low labor costs are different. And these are more the emerging markets, China, Southeast Asia, India, perhaps spots in Latin America, are aflip from the rest of the world. And the rest of the world, labor is the number one element of cost of goods of the installed product. In some of these other countries, that's not necessarily the case. And so having a bifurcated product strategy to be more competitive in the markets where labor cost is lower and the resulting installation needs to be priced accordingly to the market requires a differentiated product strategy. And so I think credit to our team who we dispatched around the world now into Asia and India over the past year for really helping to formulate the strategy going forward. So I think in China, there is an existing business that is more along those lines where we've catered only to the most premium segments. And, you know, we recognize that there's more opportunity there for us to go much deeper in the market. And this is really the first step to do so. But not the last step. And then I think, you know, all of our lessons from China and these other markets will be repeated and influence our decisions earlier in life. You know, if you look at what we're doing in India, where we have a direct presence in India now much earlier in life than are looking at acquisitions and, uh, in other Asian countries to a similar vein. So I think, uh, it, it, it puts us on the track for making the China business, uh, hopefully substantially larger over time. And then also a good lessons there that we can adopt and adapt in other markets that are earlier in their development cycle than China is.
Jeff
Okay. Then I wanted to turn to a vehicle coverage question on PPF or whatever type of film. You're obviously expanding that potential with the new windshield film. I guess I'm thinking about how the stats are looking on how much film you're getting on given vehicles. I'm not sure exactly how you look at that or crunch those numbers, but Is there a way to sort of look at the attach rate broadly and say, hey, we're getting more parts of the car covered, more parts of the vehicle covered? Just wondering if we're seeing trends there, particularly in the U.S.
Ryan
Yeah, Jeff, I mean, we are. So over time, the trend has been certainly more PPF film per car in the aftermarket, you know, covering more. And then for us as a company, the trend has been more content per car overall as we've added new product lines over time. And I think that that stands to reason whether it's window film or ceramic coating or now windshield film. On the other hand, though, in the dealership space, we're also focused on getting some amount of paint protection film on more units, even if it's a smaller amount. which is actually sort of counter-cyclical to what you're seeing in the aftermarket because we know that if we can get smaller amounts of film on today, they have the potential to grow to be more content per vehicle in the future. So we're kind of, you could say if you look at the business overall, we're kind of working it opposite ways. One is about more content per vehicle and one is about more vehicles with less content. But if you have that vision over a long enough period of time, you can kind of see where they might merge in the middle eventually. So we're actively doing both, I think, to your question.
Jeff
Okay, great to hear. I'll take the rest offline. Thanks for taking my questions.
Ryan
Thanks, Jeff.
Operator
Thank you very much. Well, we appear to have reached the end of our question and answer session. I will now hand it back over to the management for their closing remarks.
Ryan
I want to thank everybody for joining us today and thank our team for a lot of hard work this quarter. Have a great day.
Operator
Thank you very much, everyone. 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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