XPEL Technologies Corp. (OTC:XPLT) Q1 2016 Results Earnings Conference Call May 26, 2016 11:00 AM ET
John Nesbett - IR
Ryan Pape - President and CEO
Andy Preikschat - Edgebrook Partners
Greetings, and welcome to the XPEL Technologies First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Mr. John Nesbett. Thank you. You may begin.
Good morning and welcome to our conference call to discuss XPEL Technologies’ financial results for 2016 first quarter. On the call today, Ryan Pape, XPEL’s President and Chief Executive Officer, will review the Company’s financial results and provide an overview of business operations and future growth strategies. Immediately after his prepared remarks, we’ll take questions from call participants.
Let me 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. Often but not always, forward-looking statements can be identified by the use of words such as planned, is expected, expects, scheduled, intends, contemplates, anticipates, believes, proposes and variations including negative variations of such words and phrases or state that certain actions, events or results may, could, would, might, or will be taken, occur or be achieved. Such statements are based on the current expectations of the management of XPEL.
The forward-looking statements and circumstances discussed in this call may not occur by certain specific dates or at all, and could differ materially as a result of known and unknown risks, factors and uncertainties affecting the Company, performance and acceptance of the Company’s products, economic factors, competition, the equity markets generally and many other factors beyond the control of XPEL. Although XPEL has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in the forward-looking statements, there may be other factors that could cause actions, events or results to differ from those anticipated, estimated or intended. No forward-looking statement can be guaranteed. Except as required by acceptable securities laws, forward-looking statements speak only as of the date on which they are made and XPEL undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
With that, I will now turn the call over to Ryan Pape. Go ahead, Ryan.
Thanks John. Good morning and welcome to the quarterly earnings call. I trust most of you had a chance to review the first quarter 2016 earnings, which we put out this morning. We’re pleased we had a great start to 2016; revenue growth of 39% for the first quarter to $11.2 million that’s compared to $8.1 million for the prior year and it was a slight increase sequentially compared to the fourth quarter of ‘15. First quarter was slightly stronger than expected. We had absolutely a fantastic last week in March. We give a tremendous credit to our team, both on the sales side but really on the operations side too, because we really moved a lot of products and it was really amazing and great to see. As we’ve seen before, both the months and our quarters can be quite backend loaded. And it’s really interesting thing to see it, and sometime hard to predict, but we’re very pleased with how the quarter turned out.
Internationally, we’re happy, both with our distributors and our own operations in the quarter. Canada performed well. UK had a great March. It shows that that operation is really coming together. And we are now selling more -- at least at the end of the quarter more in the UK per month than we did annually, just a short time ago. So, we are very pleased with it. China and Europe overall have large percentage increases over the prior year, just as we would expect. Rest of the world had really more modest increases. So, we’re still seeing some headwinds there, likely due to the currency and other factors we talked about before, but Canada, China, Europe overall really good growth.
We still intend to open the Netherlands -- distribution presence beginning in July, should be right at beginning of the month. This will leverage our investment in the UK in terms of the team we’ve built in the region. But, it will really better position us for actually going after the Continental Europe market. We have some very interesting projects ongoing there. We’re seeing a lot of demand and we’ve spent quite a bit of time there and our team spent quite a bit of time there. So, we’re excited about that.
Due to the international exposure, we present key numbers on a constant currency basis; I think this gives a better visibility for the operations irrespective of the natural currency environment. Constant currency numbers are non-IFRS measure and they represent the result as they would have been using the prior period’s exchange rates. So, on a constant currency basis, revenue growth is 41% for the first quarter to $11.5 million. So, there’s still -- on a year-over-year basis, there’s still an impact that we see from, really from the strength of the U.S. dollar and then the weakness of Canadian dollar specifically.
Gross profit as a percentage of sales decreased to 29% from 35% in the first quarter last year. There’s typical fluctuation in the gross profit based on margins, mix of international, domestic business, impact of exchange rate. But, we’re also now allocating more personnel expense, cost of goods sold on a going forward basis, given that we have more people in terms of our team, increasingly dedicated to the installation business. So, what’s happened throughout the past year is we’ve added people and personnel expense in a variety of areas and those people are picking on more responsibility and coming up the speed. There we’re [ph] able to handle more of the sales support, technical support, training, design assistance, things that normally our installation labor force would participate in. So, they’re really becoming more dedicated. And so, we’re putting more of that cost into the -- cost of goods or direct cost, as they refer to in the financials.
So, it’s not an insignificant number but it also varies based on what our actual installation revenue is, and some of the compensation variable, and that fluctuates from period-to-period, sometimes with sales of products and sometimes it move in opposite direction of product sales just depending.
As we’ve previously discussed, we continue to focus on managing some of the other costs that make up our cost of goods being not just the raw product cost and sales price, but things like logistics costs between our distribution point, shipping expense, net of shipping income, the use of contract versus full time labor. There’s still a lot of opportunity there; those efforts are ongoing and important when you look at the overall margin picture over time.
SG&A expense for the quarter declined as a percentage of revenue to 21% compared to 25% in first quarter of 2015. Obviously some of this decrease is due to us moving some of the personnel cost up to cost of goods like we just talked about. So, we also continue to focus on making sure the overall cost structure is deployed correctly. Some of our other SG&A categories, personnel expense, T&E [ph] specifically we saw really a relatively modest increase over the prior year for the quarter. So, we’re working, not to cut the expense structure for the sake of cutting it, but to make sure that we’re getting a return on it, that it’s managed properly and then it’s applied correctly. And I think we’re doing a good job with that. I think we’ll hopefully in the months to come, continue to do more and make sure we’re spending every dollar wisely.
So, on a net income basis for the first quarter, it’s $697,180 net income after tax that was $0.027 per share; on a constant-currency basis, after tax net income would have been $863,984 for the first quarter. And we still see impact from currency. We obviously have seen a bit of a positive trend relative to the U.S. dollar, U.S. to Canada and U.S. to pound, but still it’s still relatively painful environment.
EBITDA recorded $1.2 million as compared to $1 million for the same quarter last year; on a constant currency basis that increased 16% to $1.3 million, so good progress there. On operations side, we announced partnership with Tint World to offer our products through their franchisees that was announced last month. And what’s really interesting about that is that one of the ways that that happened was really through a grassroots demand from their franchisee network. Their franchisees really wanted our products and our support and they were really instrumental in helping to give that done. And they have 50 plus locations in the U.S. and we know we’ll serve them well. And there’s not a lot of deals like that in terms of franchise networks, but it’s certainly good we could get them and continue to work on that type of business.
We’re making progress on the window film business. We exceeded 10% of revenue with window film products for one month in Q1. So, this is not a linear progression where you expect that every month, that opening orders and initial demand for different things, but it’s just encouraging and it’s what we expect to see. And we continue to push on that and think that it’s part of the strategy to leverage the channel that we’ve built. Window film is the first product to do it, really on top of the pain protection film. And we feel very strongly that it’s important and we’ll be very successful as we move forward.
We talk a lot about the marketing and events and different things that we do. We continue to exhibit at dozens of events; a couple we have upcoming. In June, we’ll be Barrett-Jackson Northeast Auto Auction in Connecticut. We’re going to Bloomington Gold event in Indianapolis. And then last year we did a Goodwood Festival of Speed in the UK. And for those who don’t know about, you should look at really interesting event, and the scale larger than some of what you see in the U.S. But all part of the strategy to apply our same strategy from a marketing standpoint in addition to all the other aspects into these international markets where we operate directly. And there’s just no better way to convert the enthusiasts to go to these types of events into XPEL customers and XPEL enthusiasts and to show them in person what we do. So, we continue to do that.
As we talked about before, we launched a new xpel.com website with a tremendous improvement from what we had before. It continues to perform well. We continue to get feedback and make changes. It’s a relatively short time period to look at, but anecdotally, it seems like just that increased presence and quality of the presence has resulted in increased lead generation for us and our sales team. So, we hope that and it looks like that’s true, and it definitely puts a better foot forward. Related to that was the customer portal, which is entry point for our customers around the world to check their accounts, change settings, place orders and keep copies of invoices and things. That’s up. And we’re continuing to get more traction on that and get more customers using it. This is a way to give them access to what they need; that over time helps control our customer service cost and ultimately should give us better customer satisfaction. Generally I think we can all relate that if you have the option to do something self service rather wait on phone or send an email, you’re going to do it. So, we’re excited about that. And the beauty of how we’ve built that is that it will deploy side by side and simultaneous with anything we do anywhere. So, as we launch the operation in the Netherlands in July, all of that capability will be immediately available to the customer. It’s really a nominal, if any, additional cost to us. So, we really get a return on that as we go forward.
On the corporate front, yesterday, we announced appointment of Barry Wood as our new CFO, effective June 1. Barry’s got 30 years of accounting, finance, operations experience. We really look forward to welcoming him to the team. He’ll succeed Chris Coffee who’s leading XPEL’s. She is going to pursue other opportunities. Chris has made valuable contributions over eight plus years. With XPEL, we’ve grown tremendously; we’ve done a lot we never imagined. So, we thank her for that and we wish her well. She’ll be staying into June for transition to Barry. So, we appreciate that. And we previously added a new controller position at the end of March. So we have a really solid team in that area going forward.
Finally, just to update on the lawsuit filed by 3M and its affiliate in District Court of Minnesota that alleges that our XPEL ULTIMATE paint protection film has been and is infringing on patent that they have. We recently filed an answer with the court as we previously stated, we deny that ULTIMATE infringes on the patent. We do not believe that the patenting question is valid. And we know that for many the lawsuit gives the elephant in the room. And we continue to get questions on it. We’ve gotten feedback. And it’s obvious that many people look at this a very simplistically as a ruinous event for the Company, but we just do not, we simply do not. We of course take it very seriously but don’t let the simplistic message of our defense being that we’re saying don’t infringe; we don’t believe the patent is valid, be mistaken for a lack of strength or conviction. We have an enormous effort around litigation. And we really do not believe we infringe and we really do not believe the patent as valid. So, we have a multi-part strategy, we will defend it vigorously. We have the capability, the will and the ability to prevail.
There are expenses associated with it. First quarter was probably $40,000 or $50,000. We expect that will probably double in the second quarter. But, it’s what’s necessary. And we think we’re very well positioned. So, related to that, our answer’s on file. We reiterated our position. There’s just still not a lot else we can say publically in terms of strategy or particularly, we know there’s a lot of questions. And so, I would just continue to ask to respect that in the Q&A portion of the call; it’s really for our benefit, mutual benefit.
So, we think we got a great start to the year. Our team is very focused on the task at hand, just as we have been for many years. So, with that we are ready to open up for some questions.
[Operator Instructions] Your first question Katie Page [ph] from Northwest Management. Please go ahead.
Could you elaborate a little bit more on the window film product and why that’s important and logical for your broader product line product strategy?
Sure. So, I think when you look at the business traditionally, while we have different lines of paint protection film and related products, primarily we are a one product Company; it’s all related to that. So, when you look at our customer base and our customer base is independent installers of products; it is new car dealerships; it is international distributors. More often than not, that’s not the only product that they need. And there is a number of things they need, a number of things they use in their business. And as we look at it, the most common products that they use in addition to paint protection film is window film. And there is a lot of reasons for that; it’s a new car product a lot of times and it’s often sold at the same time. And so, we think as we want to leverage this channel, we leverage the customers we have, which are ultimate the ultimate distribution points, we leverage our infrastructure to sell and distribute and deliver products. You want to take other products in that can fit through all of that with the least resistance and in more efficient manner. And the window film does that. And it’s a large market; it’s an established market. There are leaders in the market but it’s also fairly fractured. And we think we can be very competitive in terms of product and price and performance. And it’s something that a lot of customers I think can get their needs met. We think that they would rather buy from us through our channel for the different benefit that gives them. And so, it’s just a natural and logical fit for that first major extension of the line.
Our next question comes from Jason Hershman, [ph] who is a private investor. Please go ahead.
Let me start off with the question a little bit more about the Tint World. Is this exclusive deal and is the PPF sold into Tint World under their brand or is it under XPEL?
It’s not exclusive; they have another supplier that they can continue to buy from. It’s really at the franchise deal level where they make that decision ultimately. And to that end, it’s incumbent upon us to go and reach out all the franchisees and wind that business. And I’m sorry. What was the second part of your question?
The second question was, if it’s not exclusive, I presume paint protection film you sell can then branded under your XPEL brand [Multiple Speakers].
Correct, yes. It will be branded as XPEL and those franchisees are eligible to be listed on our locator and participate in our marketing activities as they meet those same type of requirements we put on all of our other customers.
And the second question is regarding the changes to your gross margin. Is there any way to estimate how much of the change in the gross margin in Q1 was due to this categorization and how much is due to the other effects including currency and maybe some competitive discounting?
Sure. Yes, ultimately there is; I don’t have a breakdown for you because there is a lot of moving pieces and they don’t all often move together and they vary. The labor component, it’s not insignificant on an annual basis; it could be hundreds of thousands of dollars. So, that is a significant component. But, on a sort of year-over-year basis, I don’t have that comparison for you.
Okay. And finally, the last question with your new CFO and your new controller position. Is there any particular projects or targets you have for efficiency in 2016, any number that you can share with us that you are trying to create from some new efficiency projects?
Sure. I can say I have a lot of numbers I want to hit. I’m not necessarily prepared to share them. And until Barry is on the job a week, I don’t think I will make commitments for him quite yet. But I think that overall, one of the things we are trying to accomplish is to be more structured and do a bit more forecasting and planning type work and make sure that we are hitting those internal objectives and that they are reasonable but objectives. And that has to do with all the things we talked about from SG&A expense to cost of goods type related expenses. And the business is now complex enough that all of these little details matter tremendously; they have a tremendous impact on cash flow and the bottom line. And it’s incumbent upon us to get really good at managing all that to a fine point. And that’s kind of what we’re focused on. And I think as we through that, we’ll have a better sense of what those are and to the extent we could share them. But, right now, they’re on [indiscernible] targets for us to hit and we’ll go for there.
One last question then, and it’s just maybe higher level question, slightly higher level, because it’s my understanding that a number of your distributors are almost tandem out and they order really right when they need it, sometimes overnighting the product, which takes me confuse why there’s so much sale sort of backend loaded in the quarter. Can you just maybe just address that because it seems like it’s a bit of a discrepancy at least to someone who doesn’t know the business as well as you do?
Well, I think it’s absolutely both of those things are true, we know that. And to the extent that they’re both true and they don’t both make sense together, I think there’s still some questions as to why. I would certainly suggest that some of it’s probably self-induced, meaning that we have very aggressive compensation plans for our sales team and they’re on a monthly basis. And so that definitely creates activity at the end of the month. That would be sort of obvious to sort of quarterly loading effect, perhaps that’s the same sort of trend to hit our corporate goals. But, I don’t know. It’s a good question. And I think it’s also a mix of different type of customers. So, you do have a large segment that frequently and small quantities, just in time, but then you have the interplay of these larger distributors that they don’t order, but once a month or maybe once every other month. And I think some of that turns into that sort of distribution throughout the quarter, if you kind of think of it as every couple of month type ordering pattern.
Our next question comes from Andy Preikschat from Edgebrook Partners. Please go ahead.
Ryan, I’m wondering about price increases, have you done any price increases so far this year in U.S. or Canada?
Yes. So, we did a price increase, single-digit percentage price increase in Canada at the beginning of April, and we will be doing a price increase in the U.S. but we’ve not implemented that yet and that’s probably is we get midsummer, mid to late summer, sort of timing on that.
So, we should see perhaps mid-single-digit price increase for Canada, effective April, you say?
Yes, there was price increase in Canada effective April 1.
And then, that takes -- how many that takes to really show up in the financials, I mean 90 days or…
I would say 30 to 60 probably.
I would now like to turn the floor back over to management for any closing remarks.
Thanks. We appreciate the questions. I think we’ve had a great quarter. And we look forward to talking to everybody next time. I appreciate it.
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