XPEL, Inc.

Greetings. Welcome to the Expel, Inc. fourth quarter and year-end 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 fourth quarter and 2024 year-end financial results. On the call today are Ryan Pape, Expel's Chief President and Chief Executive Officer, and Barry Wood, Expel's Senior Vice President and Chief Financial Officer, who 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 and Also, a transcript of this call will be available on the company's website after the call. Take a moment now to read the Safe Harbor Statement. During the course of this call, we will make certain forward-looking statements regarding ExpoLink 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 our current expectations. and assumptions which are subject to known and unknown risk factors, and uncertainties that could cause the 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 10-K, including under the item 1A, Risk Factors, filed with the Securities and Exchange Commission. Expeller undertakes no obligation to publicly update or revise any forward-looking statement, whether a result of new information, future events, or otherwise. With that, With that, we'll now turn the call over to Ryan. Please go ahead, Ryan.

Thank you, John, and good morning, everyone. Welcome also from me to the fourth quarter and year-end 2024 call. 2024 was obviously a challenging year for the company. Going into the year after coming off a really solid growth year in 2023, we anticipated some softness after hearing from our customers at the beginning of the year. but macro headwinds and particularly in the aftermarket came fast in the year and impacted the business more than what we anticipated. That coupled with the sell-in, sell-through dynamic in China and our decisions on how to manage it and latent economic impacts in Europe and elsewhere impacted our revenue growth and we finished at $420.4 million for the year, which was just over 6% growth versus 2023. After a slow start in the first half of the year, we definitely saw customer sentiment start to improve, maybe even more so than the business itself, and see a little bit more momentum coming back in. We closed the year of its fourth quarter with revenue excluding China growing at 10.5%. This was in line with what we were expecting. Our U.S. region grew 6.2% in the quarter to 59.1 million, which was at the lower range of what we were forecasting. And a reason for that was our dealership services business had revenue growing around 9%, which if you recall is substantially lower than what we saw in the previous quarter. We still had record high car counts in that business in Q4, and our average revenue per unit continues to increase, and we're still in net more dealerships. However, average units that we protected in some dealerships in that category were declined or was flat to the previous year as inventory has started to return to normal levels at U.S. dealerships. So even where we have a 100% attach rate, this can occur if fewer vehicles were delivered to that dealership this quarter than the same quarter last year when inventory was building. And we definitely saw that in some cases. And if you recall, in that line of business, we're more correlated to inventory than sales. When COVID depleted inventory faster than sales went down, we felt an outsized negative impact from the reduction in inventory. And then as new franchise inventory recovered and built faster than sales, we've benefited from that as well. So now we've got new vehicle supply in the U.S. at about 2.5 million units in December, 71 days of supply. It's really sort of the first time at that level in two years. We're probably at more of an equilibrium point. going forward. So change in inventory is likely to be neither a headwind or tailwind for this line of business for the first time in several years if conditions hold. Overall, dealership business has plenty of takes and puts. New car SAR is still depressed from what some would say is its historical average, leaving room for that to increase as financing conditions and consumer sentiment improves. Same time consumers are upside down and more than one in four have negative equity of more than $10,000. On the other hand, we've seen continued increase from dealerships on our pre-installed options as they're a hard add because our products are tangible and valuable. And this presents the opportunity for continued share gains from competitive soft or paper products like insurance offerings, which some consumers may not find as valuable are increasingly under regulatory scrutiny for what they are and how they're sold and are also subject to cancellation by the customer. So that leaves substantial opportunity to continue to grow in this space. And we're focused on our dealership sales organization and expanding it and continuing to reorganize our sales team in this way. And we want our dealership sales organization to drive business whether preload, whether F&I, with all of our customers who want to do dealership work. We've talked about that at the dealer conference. We talk about that at every opportunity that if we have customers that are interested in dealership work, we're here to support them and ultimately to try to drive business to them. So if you think about it that way, our measure of success is units protected by content per unit. And that's really the measure of more so than the exact channel, service type, product sale, route to market. The measure of success is ultimately units protected. So we're really excited about how this is coming together for 2025, what we're doing, how we're reorganizing the sales team, the interest we've had from many of our customers in the aftermarket, and then the programs we've put in place to help enable them to be successful whether it's billing solutions through DAP, whether it's financing solutions we've put in place to help close the gap on getting paid from dealerships, and then menu and inventory and other technology integrations. We've put a ton of work into these, and we're starting to see adoption by our customer base at large. We're very happy about that. Our OEM revenue – in the quarter declined slightly as this was impacted by package changes to the Rivian program. So going forward, our factory option with Rivian will shift to a full body mat wrap as part of the stealth package. And then at the same time, we'll be shifting our offering of the full front PPF into our co-marketed referral program, which we've talked about before. So net net, this ultimately gives the consumer more options of what to buy than what we've offered previously. but negatively impacted the quarter while we made those changes. We've talked about the referral program previously and how we're looking to provide more work to our aftermarket installer base through partnerships with a variety of partners, including OEM manufacturers, where we'll sell the product online and then deliver the installations through our network. Continue to have constructive conversation about additional programs, and we've added a number of features to the referral platform to make it even more compelling for current and future partners there. Excluding the impact from shifting the program with Rivian, our OEM business grew approximately 16% in the quarter. And like I mentioned, we continue discussions on a variety of initiatives with the referral program and OEMs at large. Our China region came in at 9.2 million, which was consistent with our expectations. You'll recall that we had the highest China revenue quarter in Q4 of last year that we ever had at 16.6 million. So it makes for a tough comp in Q4 as we discussed in Q3. But as we noted on our last call, we've arrested and made many changes here into the sell-in, sell-through dynamic. So for sort of the new products we brought into the market, this $8 to $9 million run rate should be the baseline from here. Q1 will be less annually with the Chinese New Year holiday season. And then as we talked about, more upside as we get through the other products in China that we're discontinuing where they're still holding inventory. So I think really no changes in terms of what's happening there from what we talked about last quarter. And as we previously indicated, we want to be direct in the key top car markets of the world, and China is no exception. So to that end, we're advancing in our discussions to ultimately accomplish that in China. For the year, we completed distributor acquisitions in Japan, Thailand, and India. As we talked about, as we will talk about, we've added the SG&A load from these operations, but our track record of in-country operations is historically very strong, and we'll see the benefits as we grow past our fixed costs that we've acquired or added post-acquisition. While we've added the cost and the SG&A associated with these businesses, the incremental revenue from these acquisitions is minimal given that we already recognize the product revenue that we sell to the distributors previously. But as you know, we expect accelerated revenue growth post-acquisition like we've seen in other markets where we've done this successfully. So we're in the very early stages of owning these operations in country that we did this year, but we're already going much deeper than we ever would have accomplished in the distribution relationship, and that includes discussions with OEMs, local franchising partners, service, dealership services, businesses, and the like. So we have good results in the quarter in Middle East and Asia Pacific, and you can see the benefit of of the focus we've created with our regional leadership, which for us is now Asia, Latin America, Middle East and India, Europe, and then the U.S. And it's been really important to define that, clarify that, which we worked on throughout 2024, ultimately to drive more P&L accountability within the region, smarter deployment of capital, and smarter investment in SG&A. So with those acquisitions and pending China, we're largely complete with the strategy of acquiring distributors and key markets. So the focus now is our depth in terms of growing our scale and the go-to-market in each market where we operate, taking a market-by-market approach and tailoring the products and services that we offer and recognizing the full potential that our direct presence can give us, including ultimately full operating leverage. in each of those respective markets. I was pleased with gross margin performance for the year, which came in at 42.2%, 120 basis point improvement over 23. We still think we have upside opportunity to this over the next couple years, although the strength of the dollar sort of works against us to some extent in the near term. Our Q4 gross margin of 40.6% was off the 24 run rate primarily due to mix as we monetize some slower moving inventory through incentives. We typically do this every year in the fourth quarter and usually it has some impact to gross margins. So this year was no exception. As we talked about on our last call, our growth rate in SG&A is something that we're very focused on. And Our SG&A grew 17.4% to $31.4 million in the quarter. We're working very hard to manage SG&A and focusing primarily on our overhead or corporate SG&A. As the business evolves, we have more fixed SG&A costs we're incurring at the operations or field level, such as building leases to support installation operations and management staff overseeing these operations. That's a dynamic that we have to continue to confront as we go forward and have a broader portfolio of services we're offering. So, in fact, depending on the configuration, the first dollar of service revenue at a brand-new location could have a negative contribution margin due to overhead or startup costs required to get it going, in contrast, obviously, to an incremental product sold off the shelf that's almost all contribution margins. This is part of the evolving nature of our business, and we'll continue to improve how we manage that portion. Our 17% SG&A growth in the fourth quarter, 11 of the 17% was really driven by factors such as that, the acquisition-related SG&A cost that we added, the locations associated with that, and then to a lesser extent, our nominal increase in marketing spend as a percent of revenue and R&D. So we have to be mindful of the realities of the current environment and one that we saw this year with slower growth. And to that end, we've kicked off a comprehensive review of our expense structure in Q3 to ensure we're investing in the right places. And so while that review continues, we've already taken actions in February, including a workforce reduction that will net us about $2 million in annual run rate savings. This largely impacts us at the corporate level. as we reset our needs to current expectations and have to take a more intentional and focused posture on things like remote work and positions created or inherited through acquisition. I think that I will justify investments in SG&A that drive revenue growth in the field all day long. These are truly investments in the future, but investments in our true corporate overhead have to be scrutinized and ultimately reduced where possible. So as we continue the review, we'll take action necessary and available, but certainly not at the expense of the long-term health of the business. We're targeting several million dollars more of corporate costs through optimizing the expense structure with outside vendors and services throughout the organization and through other corporate personnel reorganization by not backfilling certain positions as they become available through attrition. So we see the outlook for 2025 as mixed and more uncertain than normal. So the positive sentiment in the aftermarket seems to have improved. As a company, I think we're executing better than before. than we have in several years as we have more clarity and focus on the things that are important. I think as you see revenue grow slower, it gives you time to reflect more on what you're doing and to ensure you're doing it correctly. The promise of lower regulatory burden in the U.S. is encouraging. And I think, you know, we know and I know more of what I need to do to drive the company forward in 2025 to start 2025 than I did in 2024. And I think a lot of our team would say the same. On the other hand, inflation and interest rates have not moved as expected. And as we would want to unlock more of the new car market, and the aftermarket remains subdued compared to the previous years, certainly in part due to these affordability challenges. Additionally, our business is global in nature. A specter of tariffs and impediments to trade creates uncertainty despite our efforts to put in place mitigations. And the U.S. dollar has strengthened and remained incredibly strong on a historical basis against our common currency pairs, impedes our margin, actually reduces revenue growth rate to some extent, and was obviously painful in the fourth quarter just from a FX realization standpoint. But we've completed our global realignment of management responsibilities, as I mentioned earlier, around our regions. And we have the strongest P&L alignment with our leaders and a mandate to focus on optimizing the expense structure to achieve the results while driving growth and expanding their respective markets. And I think from a management standpoint and how we've organized the business to help drive our future success, we're probably in the best structure that we've ever had. As I mentioned earlier, Appendee China, we're largely complete in our desire to acquire distributors in key global markets where we want a direct presence. 2025 is a pivotal year for us to refine and implement our strategy to deploy capital in the business to drive future growth. As we've talked about, the primary interest of ours is further developing our services business. mainly but not exclusively in the new car dealership space, where we think a larger presence can bring more opportunity for our existing products alongside CAM expansion into other products and services. We've gone very deep in this process to analyze all the targets and the strategies and are working through that now. The challenges to accomplish this include the fragmented nature of that business and of these targets to achieve meaningful scale, probably more fragmented than we would have hoped, but not such that it's not viable, and then unrealistic expectations around purchase price. That said, there's substantial opportunity in this strategy to implement this before returning cash to shareholders becomes the primary objective. We just had our dealer conference last week. We had over 700 attendees. This was an all-time – record of attendance, 38 countries represented. You know, very interesting to see in the current dynamic that we would have such record attendance. And what was interesting is, relatively speaking, the conference was later to book up, more back-end loaded, and that probably just speaks to maybe some of the uncertainty that exists in the overall space. But the sentiment was positive. I would describe it as much more positive than 2024 at the same time. 2025 off to a good start for folks. And I think, you know, hard to say whether that means their business is demonstrably better than 2024 or they just have more confidence that it's not deteriorating or that there aren't more challenges coming. different opinions based on who you talk to. But the sentiment was good. The feedback was good. We unveiled what's our number one objective for 2025 as a company at the conference, and that's really to redouble our efforts to ensure we're always providing amazing service. We serve many types of businesses. No two customers of ours are alike. across many product lines now and in many geographies. And our commitment is to ensure that we redouble our efforts to provide excellent and efficient service. And remote work, Slack messages and the like, these can often be an impediment to getting things done quickly for customers as they need it. And more than one example of turning something that could be done in minutes into something that takes days. And we're focused absolutely on eliminating that and being as efficient as possible in our delivery of excellent service. So that was our commitment and launch to the customers at the conference. And that's percolating through the company and our initiatives for this year. Our launch of the windshield protection film has been going quite well. We've received good feedback on the product thus far. Customers seem to be excited about the upsell opportunity. As we mentioned before, we hope to start consumer marketing around this product a little bit later this year to unlock its potential as a gateway product because it does appeal to some consumers that are not typically already in our ecosystem. We're making really good improvements to our architectural film program. We've got some technology-enabled selling tools requested by dealers that are in the process of rolling out an extended glass breakage warranty program launching in Q1 or the beginning of Q2. Again, something very much requested by the growing customer base there. And then the addition of dedicated surface protection films for things like countertops and related, which is really part of the strategy overall to drive more of the protection angle in that vertical over time. As we may have mentioned before, we're also planning to launch our colored film portfolio starting in Q2. This is a TAM expander for our business, and we're focused on ways to add value for our customers around this and DAP and elsewhere. I'm looking forward to that. And then finally, our investment in DAP as a platform development to help run our customers' business efficiently continues. We're delivering customers their leads and deals in DAP, and we're focused on operational components to benefit them, things around work orders, scheduling, commissions, and now our warranty submissions are integrated into DAP, and then scheduling, followed by more consumer-facing items such as quotes and things like that. So we launched the first companion mobile app in the app stores to DAP, and the development on that continues. And we really want to reach as much feature parity between traditional DAP desktop and the mobile app as we can, as makes sense. And we received a lot of positive feedback from our customer base at the dealer conference and a lot of additional asks and requests, which we're putting into queue. So as always, I greatly appreciate the effort of our team. You know, one of the benefits of having our dealer conference as it is in part a global employee conference as well. And it's not often we can bring together many different groups, you know, that are in different parts of the world pushing to drive the business forward. And so it's really an amazing time to do that in a very, dense and high intensity time. And I can tell you that everyone's working exceptionally hard and, and they understand, you know, what we need to do and our mission and how we need to serve customers well. And I'd be remiss without recognizing our marketing team who, who always does a great job in putting that event on. So, you know, busy start to the year. Thanks our team for their efforts and we will turn it over to Barry. Barry, go ahead.