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.