XPEL, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Mar 2021

[Operator:]

Greetings, and welcome to the XPEL Inc. Fourth Quarter and Year End 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. It is now my pleasure to introduce John Nesbett with IMS Investor Relations. Thank you. You may begin.

[John Nesbett:]

Good morning. Thank you for joining us. On the call today we have Ryan Pape, XPEL's President and Chief Executive Officer; and Barry Wood, XPEL's Chief Financial Officer, who will provide an overview of the business operations and review the company's financial results. Immediately, after their prepared remarks, we will take questions from our call participants. Let me 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. Often, but not always, forward-looking statements can be identified by the use of words, such as plans as expected, expects, scheduled intends, contemplates, anticipates, believes, proposes or 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.

[Ryan Pape:]

Thanks, John and good morning everyone. Welcome to our year end 2020 call. We closed out the year with another record revenue quarter reflecting strong top and bottom line performance. Momentum we saw in Q3 continued into Q4 with revenues growing 23.1% to 48.6 million which was a really solid quarter and given the COVID headwinds, we saw early in the year I was really pleased with how we finished the year with revenue of 158.9 million growing 22.3% compared to 2019 especially as we saw some COVID related lockdowns reinstated at the end of 2020 in some of the markets. Looking at the regions. Our U.S. region continued its second half momentum with solid 36% growth in Q4 after posting 40% growth in Q3 sequentially revenue is down slightly from Q3 but all in all was a great quarter. As you know new car sales were relatively strong second half of 2020 in the U.S. certainly a benefit to us. China closed out the year strong with an $11.4 million quarter. This was down a little over 15% compared to the fourth quarter of 2019 but considering the timing of shipments as we've been discussing and the relative performance of China in 2019. This is really better than we initially expected. Sequentially Q4 was up 21% versus Q3 and represented the highest quarter for the year. China auto market has been performing well and we're up to a great start in China for 2021. In Canada revenue was up 32.6% in Q4 which again was a great result. Our Protect Center acquisition from February of last year continues to outperform our expectations and it really highlights our strategy in the channel where our installation related acquisitions serve to grow our product sales in the markets where they operate.

[Barry Wood:]

Thanks Ryan and good morning everyone. Obviously it was a great quarter for us from a revenue standpoint. Q4 revenue grew 23.1% to a record 48.6 million while our 2020 revenue overall grew 22.3% to 158.9 million. Our growth for the first half of the year was 17.1% compared to the first half of 2019 while our growth for the second half of the year was 26.1% which I think demonstrates the impact of COVID and the subsequent back half momentum that we saw. Product revenue grew 21.4% for the year to 136.3 million and Q4 product revenue grew 20.4% to 42 million, which was a record quarter for product revenue and in the product revenue category paint protection film grew 13.8% for the year to 110.8 million and Q4 paint protection film revenue grew 11.5%, 34.8 million, which was a record quarter there as well. Paint protection film growth was impacted by the China weakness in Q1 and the lower Q4 China comp. Also when we do acquisitions of isolation businesses like Protect Center the product we previously sold to them when they were our customer comes out of product revenue and goes into service revenue. So that certainly had an impact on that line as well. Our window film product line performance was really amazing this year. Window film revenue for the year grew 84% to 21 million representing 13.2% of total revenue. In Q4 window film revenue grew 96.1% to 5.6 million and represented 11.5% of revenue and this line item includes our vision architectural window film which as Ryan alluded to earlier had great growth this year. Our vision sales are not big enough to break out yet so the majority of our window film growth is really from the automotive segment. Total service revenue for the year grew 27.8% to 22.7 million while our Q4 service revenue grew 43.6% to 6.6 million and in this category software revenue grew 6.9% to 3.5 million for the year and Q4 software revenue grew 6.1% to 0.9 million. Our cut bank credit revenue for the year grew 7.3% to 7.8 million and for Q4 cut bank revenue grew 27.7% to 2.3 million. Installation labor revenue which is the revenue from our labor component of our installation, total installation revenue for our company owned insulation facilities grew 65%, 10.9 million for the year and grew 77.2% to 3.2 million in Q4 and also note here that our overall installation revenue grew 65% for the year and 77.2% Q4 and if you exclude the acquisition impacts the install revenue grew 32.3% for the year and 44% for the quarter. So clearly good performance from our installation business particularly in Q4 which is a nice surrogate for what our customers are seeing.

[Operator:]

Thank you. We will now be conducting a question and answer session. Our first questions come from the line of Jeff Van Sinderen with B. Riley. Please proceed with your questions.

[Jeff Van Sinderen:]

Good morning everyone and congratulations on the strong metrics for 2020. Any more color you can give us on adding new accounts either independent install shops or car dealers? And I guess how should we think about gaining penetration within existing accounts versus adding new accounts?

[Ryan Pape:]

Sure. Thanks Jeff. Yes. I think the way that we think about it is really twofold and the trend has played out this way over a number of years which is there is a healthy mix of new accounts both in the aftermarket and from a dealership standpoint and growth from existing customers. It's hard to characterize how our existing customers grow because their businesses, the size of their businesses, their business models are so varied but what's been consistent is that we will always have both. There is always a need for more customers in the channel and that's part of growing the channel and then there's always growth at varying rates from our existing customer base and what we strive to do is to balance the two of those the most appropriately in every market. It serves no one's interest for us to over saturate a market with new dealers but at the same time as a market grows there's a need for new dealers. So our team does a great job doing that but it's going to be a mix really I think forever in our future a mix of growth from existing and growth from new accounts but certainly Q4 was no exception. We added a lot of new customers in the aftermarket and new car dealerships at a good rate.

[Jeff Van Sinderen:]

Okay. Good. And then did you say 60% revenue growth is what you're expecting in Q1? I guess how should we think about that?

[Ryan Pape:]

Yes. That's correct. We're expecting 60% revenue growth maybe a hair above that based on the current run rate and that's really a function of just a fantastic start to the year really in all of our regions and then a relatively easy comp due to the impacts in Q1 last year with China, with the early COVID and then to a lesser extent a bit of a muted end to March last year but yes 60% is what we're looking for Q1.

[Jeff Van Sinderen:]

Okay. Great. And then I think you mentioned initiatives to stabilize gross margin and I believe you spoke to some point in second half of this year. Can you just elaborate on that a bit?

[Ryan Pape:]

Yes. So as you look at kind of our the overall gross margin profile we kind of trade between a 32% and 35% range if you go back over the past you'll call it six quarters and the main driver within that range is our distribution business where we're accepting a lower margin to sell to our distributors. China being the largest example of that. So in quarters where our China percent of sales is larger the gross margin is less but you've seen us kind of max out at 35, 35.5 and with what we're working on really as it impacts every aspect of cost of goods we're expecting that as we get to the second half of this year that will start to be beyond that 35, 35.5 cap that we've had. So if we could start getting 36, 36.5, up to 37 over time there's still going to be a range depending on the distribution mix in China or not but rather than that be a 32 to 35 range maybe that's up at 34 to 36 and we try and drive it higher from starting second half of the year.

[Jeff Van Sinderen:]

Okay. That's helpful and if I could just squeeze in one more anything more to talk about in terms of the outlook for the EU segment this year what initiatives you're working on for EU.

[Ryan Pape:]

No. I mean it's really a business as usual for us there in terms of what we know we need to do. The attachment rate and penetration of these products varies significantly country to country if you look at any sort of attachment or penetration metric by country even within the EU and they're just the distribution is huge. So we have a lot of work to do in a lot of countries with very low attach rate, very low sales and then continue to grow in all the other countries. So we're feeling really good about what's happening in Europe and really how it's performed during COVID and so for us it's continued to invest, put more people in more countries, get closer to the customer, perhaps look at other distribution acquisitions in region like we did in France last year but really just to run that strategy and continue to develop the market.

[Jeff Van Sinderen:]

Okay. Thanks and best of luck for a first half.

[Operator:]

Thank you. Our next questions come from the line of Steve Dyer with Craig-Hallum. Please proceed with your questions.

[Steve Dyer:]

Thanks. Good morning guys. Nice quarter. Nice outlook. Ryan just kind of circling back to your commentary on gross margin which was really helpful. It sounds like that's more of a second half positive impact. So given that in the first quarter should we expect to sort of be on the lower end of that range given the strength in China?

[Ryan Pape:]

Yes. I would expect that Steve. We're going to have a really good number for China in Q1 so when you look at the range that we trade in that'll bring us to the lower end of that for Q1 for sure.

[Steve Dyer:]

Got it and then a lot of good commentary around M&A just curious kind of further there I guess is there anything large and meaningful in the pipeline or should we just expect sort of more volume of deals more of the same of what you've been doing just more of them?

[Ryan Pape:]

Yes. I would say both. Certainly I think that the quantity will increase but also with what we have in the pipeline I think the average size is increasing from where we've been in terms of incremental revenue or deal size and then really the top end of what would the larger type acquisitions be that's going to be quite a bit higher than we've ever seen before at least in terms of what we're seeing. So I think we'll see the complexion of those deals change a little bit but really not the strategy. The strategy is going to be very consistent with what we've seen in the past.

[Steve Dyer:]

And I mean we should expect sort of a mix. It sounds like of sort of the one-off installers’ sort of market share grab, channel grab and it sounds like maybe more or something significant laterally in terms of other products to put through.

[Ryan Pape:]

Yes. We're looking at both. As we've said with the product line expansion that we've done over the past two years we're certainly not short on products to take to market and we have a lot of work to do with the products that we have but at the same time there's some other interesting products that we think are a long-term mix that we're looking at. So there's a component there and then the bread and butter really around channel go to market domestic and international to just execute on our get close to the customer strategy and use that to drive adoption and penetration in all the markets of the world where we can.

[Steve Dyer:]

Got it. And then just a quick modeling question for me. Obviously very strong commentary around Q1. Would you expect sort of normal seasonality then for the remainder of the year i.e. you sort of build on Q1 or are you anticipating there's something abnormal or pent up demand or something that may not make -- be able to grow on that?

[Ryan Pape:]

Yes. No. I don't see anything exceptional about Q1 aside from just the strength exiting last year and then the relatively easy comp. There is no one timer even the strong performance we see in China again we track this carefully now and we're not building inventory in China nor are we expecting to the underlying dynamic and Seltzer's been really strong.nothing unusual about Q1 from that standpoint.

[Steve Dyer:]

Got it. Okay. I'll jump back in queue. Congratulations guys. Thanks.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

[John Nesbett:]

Yes. Thanks everybody. Really appreciate your time and look forward to speaking with you next quarter.

[Operator:]

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.