XPEL - NASDAQ

Greetings. Welcome to the XPEL Incorporated Third Quarter 2024 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, John Nesbett with IMS Investor Relations. Sir, you may begin.

Good morning, and welcome to our conference call to discuss XPEL’s financial results for the third quarter of 2024. On the call today, Ryan Pape, XPEL’s President and Chief Executive Officer; and Barry Wood, XPEL’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 XPEL and its business, which may include, but 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 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 Item 1A Risk Factors filed with the SEC. XPEL undertakes 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 will 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. EBITDA 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 continued 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 bell curve like cyclicality or 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 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, continued 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 have been setting up this year and then our distributor in Japan, which we have just recently acquired. Like our previous distributor acquisitions, attractive multiples, sort of 3x 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 we really happy to add Japan. This is a market for us by any metric relative to the other countries in which we operate that has 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 U.K. 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 U.S. 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 6 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 $8 million to $9 million per quarter, nominally less 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, $8 million to $9 million for Q4, a little bit less than that, maybe $7 million to $8 million in Q1 and then $8 million to $9 million in Q2 as an example of how that plays out. Our total demand is still actually higher than that as we have some SKUs that we will be discontinuing as part of all this work we’ve been doing. So the sell-through in China remains of those SKUs, 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 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 if you look at some of the strategic initiatives we have, which is really, first, managing our inventory, cash flow conversion to drive free cash flow, which 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 certainly be focused after that on the overall operating performance of the business and what we need to do to drive further operating leverage over time. So all in all, I think making progress on our core priorities even in a somewhat more challenging environment, obviously, than a year ago. So with that backdrop, we expect Q4 revenue probably $105 million to $107 million range – $107 million range that assumes continued solid growth in the U.S. like we’ve seen in rest of 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. Gross margin for the quarter finished at 42.5%. That 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 previously discussed, we’ve ramped SG&A up over the past few years in a variety of different areas, which we 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 of the expense increases rather. Saw 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 will 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 an 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, when you consider many, many makes of vehicle where we’re touching 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 certainly working through 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 this remains our favored capital allocation strategy based on a couple of 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 next year and as we get into next year, but a lot of effort ongoing with that. So, I think a good quarter for us. I really want to thank our team for the efforts. certainly highlighted a couple of them that have made a big impact this quarter, and I couldn’t do it without everybody’s efforts. And finally, I want to mention that we are hosting Investor Day and facility tours here in San Antonio on December 5. And so hope to see many people there. So with that, I’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 cutbank revenue increased 6.8% versus Q3 2023. And excluding China, combined product and cutbank 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 in Q4 roughly flat to Q3. If you look at this year’s SG&A in Q3 was approximately $1 million higher than Q1, while last year, SG&A in 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’ve enhanced our marketing efforts to support our increased dealership focus. And our general and 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 $0.54 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 closed 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.

[Operator Instructions] Your first question for today is from Steve Dyer with Craig-Hallum.

Thank you. Good morning guys. You talked a little bit about kind of 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 are kind of looking at in China?

Yes, Steve, no, great question. I mean I think that 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. The real goal in China is to ensure that our percent of wallet matches the percent of mind share 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 have also been modifying the product line, making changes to it. We have added products, but we are going to be simplifying too, to have actually a net simpler product line over time. We have had our team in country now working with the distributor this year. I think where we have really been engaged is to look at opportunities in the OEM and for us or dealership space. And these are things where we really need to work with – 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. So, ultimately, 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 are 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, etcetera. Is that a threat or something that you are 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 have seen tremendous change in the composition of the domestic car market there and the domestically produced vehicles. And I think we are 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 the domestically produced vehicles are also an opportunity for us. I would tell you the – two of the small OEM programs that we have started to initiate this year and certainly one other that’s in queue are all domestic brands. So, that historical correlation, certainly, when we started in China, the local demand was just almost exclusively for sort of the European makes. And as that’s changed, 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 things we need to do to be competitive and grow the business in country are sort of the same either way.

Got it. That makes sense. And then as you guys continue to generate cash and add the 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 are sort of tuck-in and some installation and things like that, or is there anything sort of transformative that you have your eye on?

Yes, 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 we want to continue. But there is only so much capital that can be deployed to do that, not very much really. And as we are looking beyond that, I wouldn’t say we are looking at transformational things. It’s a phrase I try to avoid. But I would tell you that we are looking at larger opportunities that could add other services or products to the business that we think are complementary overall. So, that may be a shift relative to what you have 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 we are being quite deliberate in that process, particularly as we consider things that might be a little bit different than what we have done in the past.

Got it. Very good. I will pass it along. Thanks guys.

Thanks Steve.

[Operator Instructions] Your next question is from Jeff Van Sinderen with B. Riley.

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 – Jeff, 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 are prioritizing unit economics over long-term growth. And certainly, when we are 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 are direct. And I think you can look at any macro stats to understand that, that probably shouldn’t be the case. So, getting in country allows us to do that, which we have 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 have got the ability to be a service provider in other geographies, that increases our value to OEMs. You have got places that are space constrained. You have got 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, 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 if you could 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 are seeing in some of these ancillary areas.

Sure. Yes. I think the windshield protection is a very interesting product. There have been other products in market for some time, and they have a number of trade-offs. But one of the net advantages of moving in this space now is that you have seen the cost of windshield replacement just grow dramatically over time as there is more things embedded in the windshields and they become more expensive. And so if you are looking at sort of 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 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 our core products don’t. It’s an attractive gateway product as we talked. So, that’s good. And we will see how effective we can be in leveraging it to that end, but it’s a good addition. To your other point, marine, that’s really in its infancy. We have been growing our number of marine-certified dealers this year. There are specific training and requirements, and expectations we want to set to ensure good service. So, that’s been happening. Architectural has been growing. I think what we have had to do in this current environment is really focus our attention to. So, if you are looking at how many of the other markets and other areas that we can take our products, be it architectural, marine, we have a business doing bicycles and other things. How much can we invest in those in the current environment, I would say less than we would have 2 years ago because now is the time to really focus even more on your core and still pursue those other opportunities. But if you are looking at perhaps some planned investment in some of those that we may have anticipated 2 years ago, we probably curtailed that some. So, they are more on the organic growth and each has a different trajectory, but they could all be meaningful businesses for us over the long haul.

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?

Yes. 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 are 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 are 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 a product – add to the product mix like 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, and obviously, dealership sales, all of these things have the ability to reach a much broader pool of buyers. So, a referral program like this or a dealership program or more marketing, they are not – 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. And I think this referral program, we like it because it can drive business to our installers and folks that 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 getting really good at it, scaling it up and applying it to all the opportunities that we can find.

Alright. Excellent. Okay. Thanks very much and I will pass the line.

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

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