XPEL, Inc.

Greetings. Welcome to the Expel Incorporated third quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, John Nesbitt, with IMS Investor Relations. Sir, you may begin.

Good morning and welcome to our conference call to discuss Expel's financial results for the third 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 prepared comments, we will take questions from our call participants. Take a moment to read the Safe Harbor Statement. During the course of this call, we'll make certain forward-looking statements regarding Expel and its business, which may include, but are not 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 a current expectation assumption, 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 SEC. Expel owner takes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. With that, I'll now turn the call over to Ryan. Please go ahead, Ryan.

Thanks, John, and good morning as well, everyone. Welcome to our third quarter conference call. We saw good top and bottom line performance for the quarter, revenue growing 9.9% to 112.9 million, which is a record high for us. Excluding China, total revenue grew 12.3%. We saw some modest leverage in the quarter, even to growing just slightly faster than revenue, which is good to see and something to expand on, obviously. Our U.S. business turned in another good quarter, revenue growing 9.4% to 64.6 million. And this, along with Q2, they were really our highest U.S. revenue quarters in history, very close to each other. We continue to see some growth in the independent channel. Dealership services and OEM performed relatively well, which is good. I think a good result in this environment where we've seen impact from consumer discretionary spending being challenged, in our opinion. As you recall, U.S. business has some bill issues. curve like cyclicality and seasonality. So Q4 for the U.S. will be lower than sort of the Q2, Q3 highs in revenue, which it typically is. But I think good momentum and expect similar growth rates in the U.S. for the fourth quarter like we saw this quarter. Canada grew 25.7%, so a really good result there. A little bit of benefit from timing, but overall a solid result. And I think, you know, this kind of – epitomizes sort of a little bit of the choppy nature of what we're seeing this year. In Latin America, Asia Pacific, which excludes China, and Middle East continue to show strong growth in the quarter. These markets are less mature, so we expect more growth. And most of that is through our indirect or distribution channel, as opposed to direct sales. And as we've said before, internationally, we will continue to move to a more direct model over time, focused on the top car markets of the world where we think our presence would be helpful. To that end, as we talked about previously, we closed on the acquisition of our distributor in India in August, and that aligned with our own operation that we had been setting up this year. And then our distributor in Japan, which we have just recently acquired. Like our previous distributor acquisitions, you know, Attractive Multiples, sort of 3 to 4x EBITDA. Both of the acquisitions accretive, but really more importantly, they provide us the ability to grow the business faster and then the optionality to apply any or all of our products and services into a given market. So I think really happy to add Japan. This is a market for us by any metric relative to the other countries in which we operate that is underperformed significantly for years. And this is a good way to be able to invest and drive that forward. So very happy to finally get that done. We did see slower growth than what we've been seeing in Europe and UK. It seems to be attributable to some of these macro headwinds. Hard to say exactly what's driving, but I think the Q3 in these markets felt a little bit like Q1 did in the US in terms of sentiment. So something to watch and keep working on. In China, revenue came in at $9.1 million, which was higher than the total the first six months of this year. It was a decline of just under 12% quarter over quarter. But with respect to China, I think we have good news to report in our efforts to streamline our processes, supply chain, and inventory management. We're now at a point where we believe the swings in the sell-in dynamic are past us. As of today, we see a current run rate of approximately eight to $9 million per quarter, you know, nominally less, uh, in Q1 due to Chinese new year. So if you think about that in a sense, it's a 9 million we had for Q3 call it eight to 9 million for Q4, a little bit less than that, maybe seven to 8 million in Q1 and then eight to 9 million in Q2 as an example of how that plays out. Um, our total demand, is still actually higher than that as we have some skews that we will be discontinuing as part of all this work we've been doing so a sell-through in china remains of those skews but they will not be replenished so that's further upside in the second half of next year once those are sold through but we expect anything and everything that replaces them to be sold in ratably using the new processes and what we've been working on this year. So while that means we'll see year-over-year decline for the fourth quarter in China compared to Q4 of last year, which was our highest revenue ever, we'll see substantial year-over-year gains in the first half of next year, where sales were quite low, and then this predictable cadence going forward. So I want to thank everybody on our team involved, both those in our centralized functions and then the team in Asia for working really hard to implement all these changes over the past 12 months. It's going to make a big difference, certainly in terms of how you see the results, but there's a lot more to it to increase our competitiveness and then give us a platform to drive more growth. Additionally, we've made a focus to pursue OEM and 4S opportunities in China this year. We've recently won two small contracts, have more in queue. So we have interest also from some of our existing OEM partners regarding future projects in China and along with other markets like Japan and India. So you can see the connectivity to our broader strategy here. Like we talked about, these projects have a longer sales cycle, but certainly in the case of China, that's further upside possible for next year. And finally, we've been conducting a strategic review of the go-to market in China. separate from these efforts to streamline the supply chain and inventory planning. But we've been conducting a strategic review of the go-to market in China compared to the other markets where we own our own distribution, which as you know, and based on what I just said, that's our preferred approach for a number of reasons. So we're pretty advanced in this process and we expect this review to be concluded soon and then we'll act accordingly based on what that tells us. So I think a lot of good work there. by the team. And I think it's starting to pay dividends. And, you know, if you look at some of the strategic initiatives we've had, which is really first managing our inventory, cash flow conversion to drive free cash flow, which, you know, we've done a pretty good job on or pretty advanced in. Second was really with China and getting the distribution and the sell in, sell through and supply chain dynamics sorted, which I think we're well on track And then we'll, you know, certainly be focused after that on the overall operating performance of the business and what we need to drive further operating leverage over time. So all in all, I think making progress on our core priorities, you know, even in a somewhat more challenging environment, obviously, than a year ago. So with that backdrop, we expect Q4 revenue, probably 105 to 107 million range, 107 million range. That assumes continued solid growth in the U.S. like we've seen and rest of the world, and then obviously substantially lower sales in China pursuant to the changes in strategy I just outlined. So I think overall very happy with that, and we'll look forward to next year and the predictability that that gives us. So really great job by the team here. Growth margin for the quarter finished at 42.5%. I was down 100 basis points from Q2, a little bit of China mix impact there, but this is probably a pretty good run rate for us as we close out the year, maybe nominally less, but should be right there. SG&A expenses grew 23.6% over Q3 2023. As we've previously discussed, we've ramped SG&A up over the past few years in a variety of different areas, which we've talked about, and that was really especially biased last year in Q3 and then in Q4 and then coming into this year worked to constrain those increases much more substantially. So we are lapping some of those expenses now and as we get through Q4. So that's good or some expense increases rather. So modest leverage in the quarter. We expect that to continue. And as I mentioned a minute ago that's certainly going to be a focus of ours as we work through some of these other initiatives. On the product front, we launched our windshield protection film at the annual SEMA trade show this week. Had good feedback. This has been a top requested product at the consumer level, sort of the man on the street level. And we're eager to see if we can make this a gateway product for consumers that we wouldn't connect with otherwise. So if you imagine consumers that don't know about the rest of our product set or perhaps aren't interested in it or don't think they're interested in it, This is another way, if we can reach them with this product, to sort of bring them into the fold. So we'll find out over the next year how effective we can be in doing that. Don't expect it to have a meaningful impact on 2024 revenue as we're just launching it, but certainly that'll be more impact for 2025. Additionally, on the product side, we still plan our soft launch of the color change films in the first part of 2025, likely in the first quarter. So looking forward to that as well. Regarding our OEM business, we continue to see interest here in programs, a variety of programs in multiple geographies. As we talked about on our last call, we launched an initial referral program, collaboration with Tesla, where customers in the U.S. can purchase services from us online, and then they are sent to the local installer near them for the installation. So we're taking a... offline transaction and bringing it online and using the marketing heft of who we're collaborating with to really drive sales. And we think it's a novel approach to this industry. We've been doing this in a small scale, having good results, and we continue to iterate and optimize it. And we see others interested in this. And again, this is a way to further increase the visibility of these products beyond the core enthusiast customer that knows us. You know, when you consider many, many makes of vehicle where we're touching, you know, a very small single digit percentage of them today. So how can we increase that? So happy with how that's progressing. We had a solid cash flow quarter generated 19.6 million. That was good. Starting to see, starting to build cash and, you know, certainly working through, you know, how best to deploy that capital as we've talked about. In addition to sort of the distributor opportunities that we mentioned and that we might consider, we're continuing to pursue a larger expansion into services and products for the dealership space. We have a team engaged on this endeavor. We've done a lot of work on it and making good progress with that strategy. And I think, you know, this remains our favorite doppel allocation strategy based on a couple things, the valuations that we see of potential opportunities, the TAM expansion, these strategies give our overall business, and then the expansion and adoption of our core products that they will lead to. So we think that's pretty compelling. And I expect to talk about that later. Next year. And as we get into next year, but a lot of effort ongoing with that. So, you know, I think a good quarter for us really want to thank our team for the efforts certainly highlighted a couple of them that have made a big impact this quarter and couldn't do it without everybody's efforts. And finally, want to mention that we are hosting Investor Day and facility tours in San Antonio on December 5th, and so hope to see many people there. So with that, we'll turn it over to Barry. Barry, take it away.

Thanks, Ryan, and good morning, everyone. As Ryan mentioned, our overall revenue grew 9.9%, and our organic revenue in the quarter grew 7%, so a pretty good result there, we think. Just to add a little more color on the product lines, combined product and cut bank revenue increased 6.8% versus Q3 2023. And excluding China, combined product and cut bank revenue increased 9.3% in the quarter. And sequentially, this revenue grew about 3.9%. Our window film product line revenue grew 20.6% quarter over quarter to $22.6 million. which represented 20.1% of our total revenue. And this was the highest window film quarter in our history, which was good to see. And sequentially, total window film revenue grew 2.8%. Our OEM services revenue grew 9.8% in the quarter and represented 3.2% of total revenue. And our total installation revenue, combining product and service, grew 27.4% in the quarter, and represented approximately 20% of total revenue. And as Ryan alluded to, our SG&A expense grew 23.6% to $29.5 million. And our current view has SG&A and Q4 roughly flat to Q3. If you look at this year's SG&A and Q3 was approximately $1 million higher than Q1, while last year SG&A and Q3 was over $5 million higher than Q1. So we've begun to arrest the growth in SG&A as we discussed at the start of the year. Our sales and marketing expense grew 37.6% in the quarter as we enhanced our marketing efforts to support our increased dealership focus, and our general administrative expenses increased 16.8% quarter over quarter. And sequentially, SG&A expenses were up slightly. We'll have some elevated expenses resulting from our SEMA conference in Q4, but overall, we should be able to stay relatively flat to Q3. Our Q3 EBITDA increased 10% to 21.7 million, reflecting an EBITDA margin of 19.2%. And sequentially, EBITDA was essentially flat to Q2. Our year-to-date EBITDA margin was 17.6%. Our Q3 net income increased 9.1% to 14.9 million, reflecting net income margin of 13.2%. And EPS was 54 cents per share. Our year-to-date EPS was $1.32 per share. We did have a slight uptick in our inventory levels and result in days on hand in the quarter, but we still expect to see a downward trend on that in Q4 and exiting Q4. And our Q4 inventory should be less than Q3 in total absolute dollars. We did pay down our credit facility during the quarter and close the quarter with $21 million in cash on the balance sheet. So obviously we're well-positioned to execute on our acquisition plans. And as we've indicated in the past, we're certainly not opposed to some leverage on the balance sheet. And probably an effective argument could be made that our current capital structure is suboptimal, but we still think we have very solid plans to deploy capital that continues to generate very solid returns for investors. And so with that, operator, we'll now open the call up for questions.

Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we poll for questions.

Your first question for today is from Steve Dwyer with Craig Hallam.

Thank you. Good morning, guys. You talked a little bit about a strategy shift, or I forget the word you used, in China. And I guess aside from sort of trying to get a better dynamic on that sell-in, sell-through, or a better handle on that dynamic, what are some of the other things you're kind of looking at in China?

Yeah, Steve, no, great question. I mean, I think that, you know, we wouldn't inflect our strategy simply to present our results in a more even cadence. That's certainly just a byproduct of running the business. You know, the real goal in China is to ensure that our percent of wallet matches the percent of mindshare we have with the brand. And I think the argument is that we should have room to expand that. And so, I think making sure that the product portfolio is right, making sure that our distribution partner has access to the products they need and that that's not holding them back. I mean, that's important to sell, but we've also been modifying the product line, making changes to it. We've added products, but we're going to be simplifying too to have actually a net simpler product line over time. We've had our team in country now working with the distributor this year, I think where we've really been engaged is to look at opportunities in the OEM and 4S dealership space, and these are things where we really need to work with the distribution partner now to win these opportunities. They can't do it alone, nor can we necessarily, so our team there has enabled that, and that has the prospect to be substantial business in-country. Ultimately, you know, a lot of changes here to set us up for more growth and also sort of just optimization of how we run it, which is going to make it less painful and more efficient for everybody involved.

Got it. Sticking with China, a lot of the European OEMs where I would think you're sort of more highly indexed have kind of talked about the difficulty of selling into China, losing share in favor of the Chinese domestics and EVs, et cetera. Is that a threat or something that you're watching kind of over time just in the spirit of kind of keeping your market share and mind share over there?

Sure. I mean, I think you've seen tremendous change in the composition of the of the domestic car market there and the domestically produced vehicles. And I think, you know, we're very much aware of that. And I think part of our positioning here is to make us more competitive in that environment as well. And then, you know, the domestically produced vehicles are also an opportunity for us. I would tell you the two of the small OEM programs that we've started to initiate this year and certainly one other that's in queue are all domestic brands. So, you know, that historical correlation, certainly when we started in China, you know, the local demand was just almost exclusively for sort of the European makes. And as that's changed, you know, I think it changes the dynamic and certainly makes it more complicated. But I don't think overall that that's actually a net negative for us. I think the You know, the things we need to do to be competitive and grow the business and country are sort of the same either way.

Got it. That makes sense. And then, you know, as you guys continue to generate cash and add to cash and your willingness to put a little leverage on, do you continue to look at acquisitions? And if so, should we sort of think of them like they have been where they're sort of tuck in and some installation and things like that? Or is there anything sort of transformative that you have your eye on?

Yeah, no, it's a great question, Steve. I mean, I think we want to be clear that the acquisition of our distributors is a core strategy and something you want to continue. But, you know, there's only so much capital that can be deployed to do that, you know, not very much really. And as we're looking beyond that, you know, I wouldn't say we're looking at transformational things. That's a phrase I try to avoid. But I would tell you that we're looking at larger opportunities that, you know, could add, you know, other services or products to the business that we think are complementary overall. So that may be a shift relative to what you've seen with sort of the much smaller tuck-ins, and I think that's sort of why you hear us talk about this, but you haven't seen us do anything yet because, you know, we're being quite deliberate in that process, particularly as we consider things that you know, might be a little bit different than what we've done in the past.

Got it. Very good. I'll pass it along. Thanks, guys.

Thanks, guys.

Thanks, Steve. Thanks, Steve.

As a reminder, if you would like to ask a question, please press star 1. Your next question is from Jeff Van Sinderen with B. Reilly.

Hi, good morning, everyone. Just wondering, can you speak a little bit more about the opportunities and plans you have in Japan now that you own that?

Yes, absolutely. I think when you look at the go-to-market we have, I mean, the trend overall has been that where we can distribute our own products, We end up ensuring the full product line is represented. We end up ensuring the product is priced locally sometimes, or priced correctly rather. Sometimes with independent distribution, you get a misalignment of incentives where you're prioritizing unit economics over long-term growth. And certainly when we're operating the distribution, we don't have that issue. So both of those sort of drive the opportunity for just a much bigger business in the traditional part of our business in the aftermarket in Japan. I mean, our revenue in Japan, if we absent this acquisition, would be sort of a fraction of our revenue in Mexico. And I think where we're direct and I think you can look at any any macro macro stats to understand that that probably shouldn't be the case. So getting in country allows us to do that. which we've done for a number of years. And so we expect to see higher margins and then higher growth in country, period, from doing that. I think the newer part of that story and the newer part of that strategy is when you look at our OEM relationships and elements of the service business, where we've got the ability to be a service provider in other geographies that increases our value to OEMs. You've got, you know, places that are space constrained. You've got, you know, complicated logistics with ocean shipping of vehicles and all sorts of other complexities. And I think where we can have a presence in more places and a willingness to offer services in these places, we become a more valued partner. So, you know, that wasn't there with the original thesis for why own our distribution, but it's certainly been added to it over time.

Okay, great. And then I know you mentioned the windshield protection product. It sounds like that's just getting out there. I guess anything else you can add on strategy there, if it makes sense. And then also maybe you can touch on, we don't really, I feel like we don't talk that much about architectural, although I know you did talk about window and then marine and I guess just kind of developments you're seeing in some of these ancillary areas.

Sure. Yeah, I think the windshield protection is a very interesting product. You know, there have been other products in market for some time and, you know, they have a number of trade-offs. But one of the net advantages of moving in this space now is that you've seen the cost of windshield replacement just grow dramatically over time as there's more things embedded in the windshields and they become more expensive. And so if you're looking at sort of the the ROI or the cost effectiveness of a windshield protection, like you have much better results today because the product, the cost of the product, you know, it doesn't cost more, but the cost of the windshield sure does. So it increases the market for that. And we like it because it does appeal to people that, you know, our core products don't, you know, it's an, it's an attractive gateway product as we talked. So that's, that's good. And we'll, we'll see how effective we can be in leveraging it to that end, but it's a, it's a good addition. To your other points, you know, marine, that's really in its infancy. We've been growing our number of marine certified dealers this year. There are, you know, specific training and requirements and expectations we want to set to ensure good service. So that's been happening. Architectural has been growing. You know, I think what what we've had to do in this current environment is really focus our attention to. So if you're looking at, you know, how many of the other markets and other areas that we can take our products, be it architectural marine, you know, we have a business doing bicycles and other things, you know, how much can we invest in those in the current environment? I would say less than we would have two years ago because now is the time to really focus even more on your core. And, you know, still pursue those other opportunities. But if you're looking at perhaps some planned investment in some of those that we may have anticipated, you know, two years ago, we probably curtailed that some. So they're more on the organic growth. And, you know, each has a different trajectory, but they could all be meaningful businesses for us over the long haul.

Mm-hmm. And I realize it's still early days with the program you have with Tesla, but just wondering, I mean, are there ways that you could, or I guess plans to expand that further perhaps to other OEMs or how are you thinking about that at this point as far as growth opportunities?

Yeah, the referral program we have that we have out in collaboration with Tesla is something obviously we want to grow with them, but it has application with other channels, with other manufacturers, with other influencers, and we're having some discussions on those. One of the challenges of this business is how do we bring a larger portion of the new car buyer into the mix to buy any of our products? And where you're an enthusiast buyer, you know about products like this, that's great. We do exceptional, but then that's a small percentage of the total pool of new car buyers. And so if we can add to the product mix things like windshield protection that might appeal to some, but then find other ways to reach these buyers in collaboration with manufacturers, through marketing efforts and lead generation, which we really have ramped up and are really doubling going into next year, obviously dealership sales, all of these things have the ability to reach a much broader pool of buyers. A referral program like this or a dealership program or more marketing, one is not better than the other. One is not preferred, but they all have great opportunity to expand the number of people that we can reach. I think this referral program, we like it because it can drive business to our installers and folks that you know, wouldn't necessarily go to an aftermarket shop normally through a referral program, we can drive them to one. So I think that's super powerful and it's just a matter of, you know, getting really good at it, scaling it up and, you know, applying it to all the opportunities that we can find.

Right. Excellent. Okay. Thanks very much. And I'll take the rest offline. Thanks, Jeff.

We have reached the end of the question and answer session, and I will now turn Nicole over to management for closing remarks.

I want to thank everybody for your time today. I look forward to speaking next quarter, and have a great day.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.