XPEL, Inc. (XPEL) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I'm Ryan Pape, Chairman of the Board, President and Chief Executive Officer of XPEL, Inc. I welcome you to the company's 2021 Annual Stockholders' Meeting. Before we begin, I'd like to remind you that during today's meeting, including any question-and-answer session, we may make forward-looking statements regarding expected revenue, earnings per share, future plans, opportunities and expectations of the company. These estimates and plans and other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. These risks are detailed in our latest Form 10-K filed with the SEC on March 11, 2021; our quarterly report on Form 10-Q filed with the SEC on May 10, 2021; and in other statements made by the company. The statements made during this meeting are based on information known to XPEL as of today. XPEL assumes no obligation to update the information we present to you. I'd also like to remind participants in today's meeting that questions can be submitted at any time during the meeting via the website at www.cstproxy/xpel/2021. And after the official business meeting, we'll have a brief presentation and answer any questions. Before we begin, I'd like to introduce the members of the Board of Directors who are with us today: Ryan Pape; John Constantine; Richard Crumly; Mike Klonne; and Mark Adams. Steven Vacante of Continental Stock Transfer is also joining us on the webcast and is serving as our inspector of elections. He has previously signed an oath of office, which has been properly filed in the corporate records. Barry Wood, our Senior Vice President and Chief Financial Officer, will act as Secretary of the meeting. I will now ask Mr. Wood to give us the quorum report and also report on the other administrative matters. Barry?

Mr. Chairman, as of the close of business on April 7, 2021, the record date, XPEL had 27,612,597 shares of its common stock issued, outstanding and entitled to vote at this meeting. The inspector of elections has reported that stockholders entitled to cast more than 70% of the votes eligible to be cast at the meeting are present or represented by proxy, and, therefore, a quorum is present and the meeting may proceed. In addition, I would like to report that the notice of Internet availability dated April 16, 2021; notice of annual meeting of stockholders dated April 16, 2021; as well as the form of proxy; proxy statement; and our annual report on Form 10-K were made available on the Internet on or about that date to each of the stockholders of record of the company as of the close of business on the record date. Mr. Chairman, I've provided you the notice of Internet availability, notice of annual meeting, proxy statement, form of proxy, annual report on Form 10-K and an affidavit of mailing prepared by XPEL's transfer agent, Continental Stock Transfer & Trust Company. I also have a copy of the list of registered stockholders of the company entitled to vote at the meeting, which has been available for 10 days preceding the meeting and open to the examination of any stockholder for any purpose germane to the meeting.

Thank you, Barry. The affidavit of mailing, the affidavit of the inspector, the stockholders list, along with the notice of Internet availability, notice of annual meeting, annual report on Form 10-K, proxy statement and form of proxy will be filed with the minutes of this meeting. With the quorum present, I declare this meeting is duly constituted and convened and may proceed with the transaction of business. We will now read the proposals to be voted upon, after which time we will open the polls. After the polls are open, we'll be pleased to answer your questions about XPEL and the proposals. There are 2 proposals to be considered by the stockholders. Mr. Wood will read the first proposal.

The stockholders are asked to vote on the election of 5 members to the Board of Directors with each serving for a one year term. The nominees for election are: Ryan Pape, Mark Adams, John Constantine, Richard Crumly and Michael Klonne, who are current directors of the company.

Do I hear a motion for the election? We have a motion from Tim Hartt. Do I hear a second? We have a second. Barry, please read the second proposal.

The stockholders are asked to vote on a proposal to ratify the appointment of Baker Tilly US, LLP as the company's independent registered public accounting firm for the year ending December 31, 2021.

Do I hear a motion for the ratification of Baker Tilly US, LLP as the company's independent registered public accounting firm for the year ending December 31, 2021? We have a motion from Mike Klonne. Do I hear a second? We have a second. I now declare the polls open for voting on the motions. If you are a stockholder of record and have not yet voted or if you want to change your previously cast vote and you wish to vote now, you can do so online. You will need your 12 digit control number in order to vote today. Thank you, everyone. We will wait a few moments for vote tabulation. I understand the votes are now tabulated. I now declare the polls closed. Mr. Wood, please read the inspector of election's report on the tabulation of votes.

Mr. Chairman, the results based on the voting of shares represented by proxies on file and tabulating at the meeting this morning show the following. The director nominees have received the greatest number of votes of those shares that were represented at the annual meeting and voted for the election of directors, and, therefore, each of them has been elected as a director to serving -- to serve for the term expiring on the date of the company's 2022 annual meeting and until his respective successor is duly elected and qualified. Also, the proposal to ratify the appointment of Baker Tilly US, LLP received the majority of the shares represented and entitled to vote at the annual meeting, and, therefore, the selection of Baker Tilly US, LLP as XPEL's independent registered public accounting firm for the year ended December 31, 2021, has been ratified. Mr. Chairman, that concludes the report of the voting. Details of the results will be available for all stockholders in our filings with the SEC within 4 business days. Stockholders may also obtain the voting results by calling or writing our Corporate Secretary.

Is there any other business or questions anyone would like to come before this meeting? Hearing none, we'll begin our brief presentation and then answer any questions that have been submitted. As a reminder, you can submit them through the online portal, and we'll attempt to answer all of them. If we could advance the presentation, please. We'd ask everyone to take notice of our forward-looking statements disclosure as we begin the presentation. Next slide? So today, we really just want to cover 2 things, first do 2020 year in review. I think many of you have certainly kept up with us throughout the year, but it's good to look back to last year. And then, additionally, we want to give an update on the acquisition we announced this week of PermaPlate Film. It's an important transaction for us and certainly want to recap that. Next slide, please. Just to recap because we certainly had questions about it with the impact of COVID. As many of you know and will remember, we saw an early impact from COVID earlier than a lot of people, given the concentration of our business in China. And as a result, China revenue declined significantly at the beginning of 2021 and Q1 versus Q4 2019. And that really helped allow us to anticipate the impact that we were going to see to the rest of the business and at least begin to prepare for that. I think many companies who didn't have that exposure in China didn't really get an early warning to see that. But we saw the business in China go to zero effectively very quickly. And so that was quite a cautionary tale for what might happen elsewhere if the mitigation efforts were instituted the same way. So big impact in China at the beginning of the year. We still grew revenue almost 15% in Q1, even with that fall off in China. So it really spoke both to the strength of the business overall and then to the delayed impact of COVID to the rest of the world. Then right at the end of March, we started to see impact in the United States. And then certainly, in April, our April revenue was down 21% over 2019 overall. U.S. business was down 35% that month. And if you recall, the overall car business was down in terms of new car sales quite a bit higher. So we really outperformed the overall automotive industry in that month, mainly due to the areas of the market, which were most closely penetrated. And then also just to the fact that we're -- we and our products are gaining share within that. And then in May, we started to see things come back. We were focused on the safety of the team, liquidity and minimizing the impact on our employees. Those were our top priorities. I think we did all of those well. We took a lot of aggressive steps and payroll deferrals and other options to reduce expenses and maximize liquidity. And then we were able to reverse all that really by Q2 and beginning of Q3. And really, our entire team really stepped up to -- in many cases, we had folks at all levels of the company volunteer, pay deferrals and different things that they could contribute. So really, it was great to see. And then in Q2, we saw revenue grow 19% even with that weak April and weak May. We had a record June. And the U.S. came out for the quarter really almost flat, just down a little bit. So that was great to see that reversal happen so fast. And as most of you know, that momentum carried into Q3 and Q4 and now into 2021. Next slide, please. We were able to still complete 3 acquisitions, consistent with our overall acquisition strategy in 2020 in spite of the COVID impact. First was an acquisition in Montreal, Protex Centre, which was one of the largest wholesale oriented, the paint protection film installers, certainly in North America, a great franchisee of ours, now company owned. We acquired our distributor in France. France is a market that we viewed as underperforming and with a lot of potential. And we knew that by operating directly and executing our strategy that we could change the trajectory of that market, much like we've done in a variety of places. So we did that. And the revenue is always growing in France, but the revenue growth rate since the acquisition has increased substantially several times. So perfect kind of textbook acquisition for us. And then finally, at the end of the year, our acquisition of Veloce. This is really to complement our architectural window film business and really to bring a team in that's dedicated to that, to support our sales team with technical selling. We obviously added some customers, and we added some complementary products to the line with that. So all in all, we really set out the year to do even more from an acquisition standpoint. But having put everything on hold for a good 6 months in the middle of the year, I think we did quite well. And as we'll talk about with PermaPlate acquisition, we certainly started this year with a big acquisition and have more plans there. Next slide, please. Just to highlight, in 2020, we did launch expansion of our FUSION PLUS Ceramic Coating line. You may be familiar with FUSION PLUS as a paint coating, and that's the primary use case so far, but there's other uses for it, other formulations of the product. We'd highlight the marine and some glass applications. And so this is all part of the adoption curve and the natural evolution of that product line. So we're pleased to be able to get those out during 2020 as well. Next slide, please. We just have a few quick financial highlights. Most of you are familiar, continued really good momentum on the revenue trend, 32 -- over 32%, 5-year CAGR on revenue to almost $160 million last year. We started this year very strong so far with Q1 revenue exceeding Q4 of 2020, which typically doesn't happen due to seasonality. So really good progress there. I think a lot to be happy with. And the majority of that, in spite of our acquisitions, is all organic growth. There's very little inorganic revenue contribution to our revenue growth over time. Certainly, that may change going forward. It will change a bit in 2021 with the PermaPlate acquisition, but very much organic growth. Next slide, please. If you look at our sales mix, this is really a continuation of a multiyear trend, where the majority of our revenue is outside the U.S., U.S. being the biggest market, China typically being the second biggest. And that's even COVID impacted in the first quarter with China. I think that if you look, you can look to Canada as what's possible. We do so well on a per capita basis and extrapolate to other places looking there. Our European markets continue to grow. But the other point is just how small many of the other geographies are for us in the rest of the world. Our Asia Pacific, other, which excludes China, Latin America. The dynamics are different in all of these markets, but tremendous growth opportunity over time if we can run our playbook and execute how we know how to do to get these other regions to be a more significant percentage of sales over time and not sort of the rounding error that some of them are today. So lots of opportunity there, but certainly the continuation of that trend. Next slide, please. On an EBITDA basis, what we like to see here, increase in EBITDA dollars and then in EBITDA margin, really speaks to our efforts to manage our gross margins and manage those up over time, and we have plans to continue to do that this year, exiting the year and then managing SG&A. We talk about 18% SG&A target, and do that and grow revenue, and we see increasing leverage. So we're really happy with this chart. I want to see it continue to grow both in dollars and in percentage, but great progress for the year, especially in spite of all the other events. Next slide, please. Similar trend on net income, increasing in dollars, increasing net margin, very much same story. Pleased with that. Have -- I like to see that continue to grow. And I think we have a plan to do it. Next slide, please. A strong balance sheet. We've been in a net cash position for quite a while. We've talked a lot about inventory and the lessons learned from COVID. And then even now with the winter storm as it impacted the Gulf Coast in the U.S. and impact on supply chain. So we've been pretty consistent in saying we want to walk those inventory numbers up in light of all of that. And with some of the shortages in raw materials related to some of our products, we've been very aggressive about that this year. So in 2021, we've got the possibility for some more unusual type volatility in the total inventory number just based on how we're trying to mitigate that risk, but we're quite comfortable with that. Great cash flow number. Obviously, that's very important. Maybe one of the most important long-term metrics for the business. If we look at cash flow per share, for example. So really pleased with that. We'll see working capital and inventory -- working capital overall and inventory scale with the business to some extent and maybe increase slightly faster with these initiatives. But that's the primary driver of what we're going to see on the balance sheet over the next couple of years. Next slide, please. Obviously, the market has recognized the performance and the momentum we've seen, absolutely tremendous reception in terms of how the stock has been priced and receptivity to our story. So this is not what our team looks at to know if we're doing a good job, but we do want to make note of it. Next slide, please. Really, finally, before we open up to Q&A is just to mention our PermaPlate Film's acquisition that we completed this week. PermaPlate Films is a distributor and installer of predominantly automotive window films -- window tint. And what is a bit different about PermaPlate Film compared to our core business is that it reaches the mid-range market, which are vehicles that -- non-luxury vehicles, non-vehicles priced at the higher end of the market. They really reach that segment more than our overall business does. And that's important to us because we know that all of our products from window tint to paint protection to coatings -- they have a place in all segments of the market. And so through this acquisition, we will have relationships with an additional few hundred dealerships that are predominantly in that segment, which we think is good business by itself, but that gives us a platform to launch these other products. PermaPlate does a lot of installation of the window tint. And part of the strategy with the mid-range dealerships is to offer a solution for really high-volume installation and high-volume attach rate for window tint. So if you look at our overall business, obviously, we sell product to dealerships, and we're talking about our dealership segment, our installers and the aftermarket service. Then we service them out of our installation facility. This is really an additional business model, which is to, in some cases, embed our team and these dealerships to do this really high-volume window tint work. So we're excited to add that as a new option for dealers. And I think the logical question then is, well, how do you get the other product sooner? How do you get the paint protection in? And there are multiple ways to do that. The primary way for a lot of these dealers who would be looking at paint protection film for the first time is that we connect them with our installers in the aftermarket because they're ideally suited to do that work. So we're leveraging our relationship with the brand on the window tint side to start to get more paint protection film attachment, as an example, leveraging our dealer base and our installer base. And that's great for our installers. It should serve as an awesome referral source to them, to grow their business. We paid $30 million -- was purchase price. It was all cash. PermaPlate Films had about a $25 million annual revenue run rate. Obviously, we bought the company midyear, so it will pro rate in terms of our full year impact. We've got a lot of integration to do and synergies we expect predominantly around supply chain and product and other related things where we have our own solutions for what PermaPlate may have found on the market today. So that's going to bring us a very nice operating profile on this business we're saying on that $25 million in revenue, at about a $6 million EBITDA run rate once we have implemented all of the -- once we've completed the integration and receiving all the synergies on the product and software and other things that PermaPlate would buy individually. And so that's really to start that run rate impact of EBITDA in Q4. Between now and then, we're going to encourage some costs related to integration. We've estimated $0.5 million at this point. But then also, we'll just be working on obtaining all of the synergies that we know we can. So we won't see the impact of that on a run rate basis until Q4. But I think a great deal for us. I think it's a good deal financially. It's a good deal strategically and excited to add that to the mix and then do more after that. Next slide, please. With that, we will open up for questions and answers. If you've not asked a question, you can certainly submit through the portal. So with that, there are no questions. And with there being no further business, the meeting of the stockholders of XPEL is adjourned. We appreciate your interest and attendance. Thank you.