XPEL, Inc. (NASDAQ:XPEL) Q1 2023 Earnings Call Transcript May 9, 2023

XPEL, Inc. beats earnings expectations. Reported EPS is $0.41, expectations were $0.37.

Operator: Greetings, and welcome to the XPEL, Inc. First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. John Nesbett of IMS Investor Relations. Sir, you may begin.

John Nesbett: Good morning, and welcome to our conference call to discuss XPEL’s financial results for the first quarter of 2023. 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’ll take questions from the call participants. I’ll now take a moment to read the safe harbor statement. During the course of this call, we’ll make certain forward-looking statements regarding XPEL, Inc. and its business, which may include, but not be limited to, anticipated use of proceeds from capital transactions, expansion into new markets and execution of the company’s growth strategy.

Such statements are based on our current expectations and assumptions, which are subject to known and unknown risk factors and uncertainties that could cause our actual results to materially differ from those expressed in these statements. These factors are discussed in detail in our most recent Form 10-K, including under Item 1A Risk Factors filed with the Securities and Exchange Commission. 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. Go ahead, Ryan.

Ryan Pape: Thanks, John, and good morning, everyone. Welcome to our first quarter 2023 call. Clearly, we’re off to a great start in 2023. In the quarter, revenue grew 19.5% to $85.8 million. This was our second highest revenue quarter in history, which is great considering Q1 is almost always and historically been our lowest seasonal quarter of the year. U.S. revenue grew 22.8% compared to Q1 2022 to $51 million. This was up sequentially by a little over 7%. Results seems to coincide with Q1 U.S. SAAR performance, which finished better than most expected and rising new car inventory levels were a contributing factor to this better-than-expected results, and we benefited from that. As we discussed in the past, we’ve been mindful of potential impacts of the challenges current macro environment such as higher interest rates that could impact the new car buyer.

But so far, our new car buyers have proven to be quite resilient. I think we’re seeing that in our results. And the luxury share of the U.S. market reached an all-time high in Q1, which is a good point for us as well because we continue to over-index into that segment of the market. Our China region finished right where we expected and what we talked about with the inventory destocking and changes coming out of the lockdown of last year, revenue declining approximately 25% versus the prior year quarter. So we should reach the trough in China sales in Q1, and we expect incremental sequential quarter-on-quarter increases for the rest of the year. We’re still forecasting annual 2023 total China revenue to be pretty flat relative to 2022 given the slow start of the year.

Having said that, – we’re bullish on the long-term opportunity in China. As we discussed last call, where with the end of the COVID restrictions, we’re moving quickly to get our team set up and get on the ground in China to support our distributor car dealership and OEM relationships that we have. And we expect that to be operational towards the end of the second quarter. China was able to host their large dealer conference similar to what we did in March that was attended by over 1,000 participants, and we were able to have our team on the ground for the first time in three years, and it was very energetic, very positive. So we’re happy about that transition the market opening to us. So it’s going to be a big part of our focus for the remainder of the year.

The other regions had strong revenue quarters as well. Europe, Middle East, APAC, LatAm, all record quarters, which was great. And again, for most of these, Q1 is typically the lowest quarter of the year seasonally. So all positive results there. And we think that sets us up for a strong second quarter. We expect Q2 revenue to be in the $100 million to maybe $102 million range. So that should exceed $100 million in quarterly revenue for the first time in our history. So that’s a nice milestone. And this assumes just incremental improvement in China, but still down single digits, mid-single digits compared to Q2 2022 for the quarter. Overall, our outlook for the year really hasn’t changed substantially from our view in February. The business – our business has remained strong in spite of the macro uncertainty and our current view sees that continuing.

We’re certainly aware of the possibility of some delayed onset pain from this tightening cycle and the impact on vehicle affordability. But right now, we haven’t seen it impacting our business. In a quarter with a lot of positives, we certainly want to highlight our gross margin performance at 41.9%. As you recall, we guided to around 42% gross margin by the end of the year, and we’re a little bit ahead of schedule on that, which is great. We continue to see some margin benefit from lower China mix, as we’ve discussed in the past, and we continue to gain leverage on fixed costs embedded in gross margin. And then the preponderance of the continued gross margin improvement is mainly the result of our ongoing work around our building materials costs and a little bit of pricing benefit from last year.

So even though we’re here sooner than we planned, still expect to finish the year at 42% range, plus or minus a few basis points. We may bounce around a little bit Q2 and Q3 as we get there with the different mix of products and different mix of channels, but all in all, really good, very happy about that. As a result, Q1 EBITDA grew 43.9% to $17.1 million, reflecting an EBITDA margin of 19.9% and a sequential increase from Q4, a little over 29%, really nice operating leverage for the quarter there. We just held our 2023 dealer conference. It was a huge success. We had 650 customers in attendance from 33 countries. This was the largest conference we’ve had in our history. The energy was amazing. And really, the conference is not about XPEL.

We’re not standing there droning on and on about our products or lecturing people on it. It’s really about the experience our customers get to improve their business in a small format, breakout session and interacting with each other. So it was amazing. And it’s one of the most important things we do every year. We also announced during the conference latest additions to our Fusion+ ceramic coating line, which included a fusions aircraft product as well as some incremental products to our automotive Fusion+ line. So these products for our coatings business – we’ll continue to slowly expand the verticals we target, as we’ve discussed our plans to do over the longer term. You’ve seen marine products and then now it’s aircraft product, and we’re working towards this incremental vertical expansion over time as well as going deeper in the current verticals like we did with the launch of additional automotive Fusion+ products.

So it’s been well received, and we’re going to continue to do more of it. One of the sessions of great importance at our dealer conference was training and a reveal of our DAP NEXT, our newest version of our DAP platform. We got great feedback. There was a lot of excitement about what that means and what’s to come. We’re going to be retiring the old version in the next three to four months, and that will enable us to even further focus all of our development on the new platform, which is really more than just what we’ve traditionally done with software as a means to cut and manufacture the product on demand, but really as a tool to help our customers run their businesses better, which by extension is obviously good for them, but then the extension is good for us.

So with the retirement of the old platform, that will allow us to put that much more energy driving that forward. So that’s going to be a big milestone for us sort of by the end of the summertime. So the conference, dealer conference was great overall, and I look forward to doing it again next February. Additionally, we completed a small acquisition on May 1, which is the first acquisition we’ve done this year. It was around a $5 million purchase of a dealership services business, which will integrate into our overall dealership services segment of the business and will add about $4 million in revenue. Great addition for us, expands our footprint, checks all of the strategic boxes. It’s immediately accretive and brings new product and service revenue as we further expand that dealership services.

Our inventory finished at $84.6 million for the quarter, up around $4 million from Q4, which was consistent with our expectations, especially with the reduced demand out of China for Q4 of last year and Q1 of this year. And as we discussed, in addition to that we’ve had a number of vendor commitments we’ve chosen to honor as we work to bring inventory levels down overall. And it continued to take us time to unwind this, but this should be the peak and we have a solid plan to manage our days on hand down over the coming quarter to optimize cash flow. But still support planned revenue growth. In this business, the one thing that we do not ever want to do is run out of product. So the wheels fall off when that happens, but we’re making good progress and we will see lower days on hand as we progress throughout the year.

All in all, really great quarter for us, appreciate all the efforts of our team, particularly the 150 or so that dedicated their weekend to our dealer conference and put on an amazing show for our customers. So great quarter. So with that, Barry – I’ll turn it over to Barry to add a little color on the numbers. Go ahead, Barry.

Barry Wood: Thanks, Ryan and good morning, everyone. Just to cover off a couple more points on revenue. Looking at the product lines combined paint protection film and cutbank revenue grew a little over 14% in the quarter and was up sequentially a little over 5%. Our window film product line revenue grew 29.9% quarter-over-quarter to $15 million, which represented 17.5% of our total revenue. And this is up sequentially from Q4 by a little over 28%, so really solid quarter for window film. Our Q1 vision product line revenue grew 6.4% to $1.2 million, and this was up a little over 13% sequentially. Our vision product line tends to be seasonal with December, January and February as low months, but we have momentum in this line as March was a pretty strong month for us.

Our OEM revenue had a solid quarter growing a little over 50% versus Q1 2022 to $3.5 million. And our total installation revenue combining product and service grew 34% in the quarter and represented 17.2% of total revenue, so all in all, really good performance across the board in the quarter. Our Q1 SG&A expense grew 18.9% to $21 million and represented 24.5% of revenue. And our expense growth was a bit muted in the quarter with the out of period impact from the timing of our annual dealer conference. The impact was about $800,000 in Q1 2022. So we’ll see those conference expenses hit in Q2 this year, but even considering that we saw some really nice leverage in the quarter. Our Q1 net income grew 46.5% to $11.4 million reflecting net income margin of 13.3% and EPS was $0.41 per share.

Sequentially net income was up just under 37%. Cash flow from ops for the quarter was $0.7 million, which is substantially lower than our EBITDA number. And one contributing factor is that we had a record revenue month in March where revenue was about $8 million higher than December. Our DSO has been fairly consistent, so it follows that our AR would increase as it did so by about $6.6 million over year end. We’re not seeing any movement in terms of customer delinquencies, which is a percent of revenue has remained constant. So that was one factor. And as Ryan mentioned, we did increase our inventory levels by about $4 million, so that had a negative impact as well. And finally, timing of PMA payments can impact operating cash flow either way from quarter-to-quarter.

And this quarter that impact was negative by approximately $2.5 million. And there’s no doubt the increase in our inventory levels over the last few quarters has been a primary driver in our decreased efficiency in our cash conversion cycle. But we expect our day sales outstanding and our day’s payables outstanding to be somewhat consistent in the coming quarters. So given that we’ll begin to see positive impacts to future operating cash flows as our inventory levels normalize. Also in April, we closed on a new $125 million credit facility. The primary driver in doing this was just to get better term – financial terms in addition to increasing our borrowing capacity. And this new facility nicely enhances our financial position to execute on all of our strategic initiatives.

And while we expect to be able to fund most of our acquisition pipeline with cash, the new facility provides maximum financial flexibility and plenty of dry powder for the foreseeable future. So again, really good start to the year and we’ve got some good momentum going into Q2. Looking forward to talking again next quarter. With that operator, we’ll now turn the call over for questions.

Q&A Session

Operator: [Operator Instructions] Thank you. Our first question is coming from Steve Dyer with Craig-Hallum. You may proceed.

Operator: Thank you. Our next question is coming from Jeff Van Sinderen with B. Riley. You may proceed.

Operator: Thank you. Our next question is coming from Tim Moore with EF Hutton. You may proceed.

Operator: Thank you. We have reached the end of our question-and-answer session. So I’ll now hand the call back over to management for any closing remarks.

Ryan Pape: Yes, thank you all for joining us and thanks to our team for a great quarter and we’ll speak to you soon. Bye-bye.

Operator: Thank you. This concludes today’s conference. And you may disconnect your lines at this time. We thank you for your participation.