XPEL Technologies\' (XPLT) CEO Ryan Pape on Q4 2017 Results - Earnings Call Transcript
At 11: 00 a. m. on March 28, 2018, ETExecutivesJennifer Belodeau Q4 2017 earnings call-IRRyan Pape -
President and CEOBarry Wood-
Cfoanalyst Adam Goldstein-
Private investment company
Private investors are welcome to call XP El Technologies\'s 2017 earnings call in the fourth quarter and the end of the year.
At this time, all the participants were listening. only mode.
A q & A meeting will be held after the official speech. [
As a reminder, the meeting is being recorded.
I would now like to hand over the meeting to your host, Jen Belodeau.
Good Morning Jennifer BelodeauGood, welcome to our conference call to discuss the financial results of XP El Technologies 2017.
Ryan Pape, president and CEO of XP El, said on the phone today;
Barry Wood, chief financial officer of XP El, will provide an overview of business operations and review the company\'s financial results.
After the prepared comments, we will answer the questions of the telephone participants immediately.
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In the course of this call, we will be sure
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Let me transfer the phone to Ryan. Go ahead, Ryan.
Thank you, Jane. good morning, everyone.
Welcome to our year.
End of Fourth Quarter Conference Call
As I said before, 2017 is a year of our transformation.
I think, while overcoming some of the optimistic challenges of the previous year, we have achieved lock-in and achieved fairly good growth.
So we ended the year with less than 68 million of our income, which is 30.
The growth rate of 9% exceeded 2016.
Our quarter-on-quarter growth of 2017 is also growing rapidly.
So I think that reflects a strong revenue momentum.
So while our strongest growth last year took place in markets with the lowest profit margins, we have begun to combine this mix with targeted price increases ---
Other non-price increases and falls
Due to efficiency, the cost of the product and the cost of our goods sales.
So, we \'ve seen the rewards of these efforts in 2018, and it\'s a great thing.
Revenue rose 52 in the fourth quarter. 7% to 20.
2 million, this is the highest quarterly revenue in our history.
We see strong growth in all of our regions, which was a bit different or a bit unstable earlier this year, but especially in Asia and China.
Therefore, China\'s fourth-quarter revenue accounted for only 20% of total revenue.
So obviously this is a good development and it has been building for us for the past year.
This is obviously a new dynamic for us.
So we are building strong revenue, and in this year we have seen the momentum of revenue growth continue to q1.
So we implemented several major initiatives at the beginning of discussions in the third and fourth quarters.
Including the integration of several facilities, as well as a major restructuring of our sales and operations personnel.
So this leads to hiring and severance pay in the fourth quarter, as we did in the third quarter.
As a result, these are all expected as part of these changes.
The costs associated with these changes were well recognized in the fourth quarter.
So these two things are basically complete.
This quarter, we have also been affected by the elimination and integration of some paint protective film products, especially our oldest and more professional product lines, which are the lowest profit margin lines, we actively strive to eliminate these products to support our products with higher profit margins in the future, other products we offer today, and if you\'re willing to leave room for flexibility and working capital for our next generation of products that are coming to market.
So while the elimination of these SKUs is not completely complete, the impact of Q1 will be minimal (if any ).
So, it\'s basically complete.
As a result, the merger of the sku results in about $0.
In non 5 million
Recurring costs in the fourth quarter are similar to some experience in the third quarter.
Did affect the gross profit margin for this quarter, and also because we sold some of these products, we just continued to sell at very aggressive prices, which also put pressure on the gross profit margin for this quarter
But as we mentioned in the release, this generates a lot of cash flow from operations and helps us to double our revolving debtthirds at year-end.
So this is a very good thing.
Also, as we discussed in our conference call last quarter.
We will officially launch our next-generation product, Ultimate Plus, the next evolution of April paint Plus as a better best feature, better installation feature, this is a key advantage for our installers.
Therefore, we are able to introduce some revised prices to further increase the profit margin of all geographic areas that we actually operate.
Also, as we announced earlier, in the fourth quarter we acquired Protex Canada, Canada\'s leading franchise or paint protection window film with over 75 franchises
As a result, our Canadian subsidiary, XP El Canada, has reached an exclusive supply agreement for the franchise group.
As a result, the proximity of the acquisition does not bring a lot of additional revenue as we have sold the product to the franchisees.
But now, we can double our support to ensure the success of the franchise group and really lock in the relationship.
Therefore, we have set up a dedicated management team for Protex, who will still get great value from the franchise.
Prior to that, as part of an exclusive arrangement to supply Protex, we paid the sales rebate to Protex.
So it is clear that we can now regain this, and another major source of revenue for Protex is the sales royalties of the franchisees.
So we obviously got the income, which is of course a high profit, but it\'s not an important dollar amount relative to the overall income.
So we don\'t have any important plans except Canada.
However, we will constantly assess our global footprint to provide opportunities for Protex outside of Canada.
In addition, during this quarter, we established our business in Mexico by opening distribution facilities and sales offices in [indiscernible].
Mexico is a huge market for our products, and even before we set up our factory, we have been trying to penetrate for a few years.
We are excited about the prospect there.
We\'re about 50 now-
50 mix of domestic paint protective film and window film, we expect window film to play a bigger role there, and probably bigger than some of the other markets we are in.
It\'s not a particularly good market for services, but it\'s a big market and we think we have an attractive cost structure and an attractive portfolio of products to solve this market.
So right now, our initial sales in Mexico are not high, but usually in a few months it will be dwarfed by our sales in Mexico many years ago.
So this is important for us, and we also have the ability to support Mexico through our San Antonio headquarters in Texas and through many connections and long term business connections between the two markets.
This is indeed a strategic advantage for us.
So we are excited about it and hope we can talk more there in the coming year.
In the first quarter, we also acquired
When customer Boise Auto, this is another example of our approach to customer market development strategy.
Boise is a smaller market than other markets where we have physical presence.
So, this provides a different environment, which is helpful to us.
So we continue to adapt and evaluate the models of the future.
Just like our overall strategy around this, we want to take advantage of local presence in Boise, as we build elsewhere on customers buying our films, not just increasing service revenue.
So, I think this is a key part of the strategy and applies to Boise as well.
Therefore, I am very satisfied with the work we can complete in 2017. I think we have made various personnel adjustments in different restructuring and product line integration, I think our positioning is to have a fantastic 2018 and make improvements on many of our overall operational metrics.
So, I think it should be a very good year for us.
So I\'m going to hand it over to Barry and review some numbers in more detail and then we\'re going to answer the questions. Barry?
Thank you, Ryan. good morning, everyone.
Revenue increased by 52 this quarter. 7% to $20. 2 million.
As Ryan mentioned, our fourth-quarter earnings exceeded the previous record of $17.
There were 8 million incidents in the third quarter of 2017.
We have experienced strong growth in all regions, but the growth is particularly significant [in Asia]
As demand in the region continues to accelerate.
Revenue grew by 30 this year. 7% to $67. 8 million.
As a reference point, our revenue growth in 2016 was 24. 8%.
Gross profit margin rose 44 this quarter. 4% to $4.
6 million, sales fell to 22.
Compared with the 23 quarter of the same period last year, 9%. 9%.
We did spend about $0.
In non 5 million
Recurring costs associated with the continuation of the SKU integration program, which began in the third quarter, but for the normalization of these additional costs, the gross profit margin for the quarter will be 24. 9%.
As Ryan mentioned earlier, gross margin is further affected by the sales mix through lower gross margin distribution channels.
However, we do believe that as we move forward, we have offset the future impact of this potential mixing effect and the price increase within the channel. On a year-to-
Daily basis, gross profit margin increased by 19. 7% to $16.
8 million, the percentage of sales from 27. 1% to 24. 8%.
Normalization this yearto-
The date impact of our product integration plan, the gross profit margin will be 26.
3% this year, this low profit margin is actually due--
Mainly the sales mix.
SG & A expenses increased by 26 in the quarter.
Compared to last quarter and 35, 2%. 1% on a year-to-date basis.
Sales costs for SG & a fell to 21. 1% versus 25. 6% in 2016.
So, we\'re starting to see some leverage.
We did pay about $125,000.
Recurring costs associated with our sales and operations, employee restructuring began again in the third quarter, as we noted in previous quarters and discussed on previous calls, from January 1, we changed the method of depreciation of fixed assets from double balance subtraction to straight line method and made this change again, in order to better reflect the future interests of how we consume assets, the depreciation rate of some of our old assets has indeed accelerated to 2017.
The impact of this change will be greatly reduced in 2018 and beyond.
The impact in the fourth quarter was about $90,000.
In this depreciation change, SG & A expenses will increase by 19 in order to normalize the cost of one-time restructuring.
8%, representing 20.
3% of total sales.
Therefore, we are very satisfied with the direction and continue to work hard as we move forward.
EBITDA increased by 0 this quarter.
Compared with the same period last year, $9 million to $1 million, compared with $92,000 in the same period last year, down about $100,000 to $4.
3 million full yearto-date basis.
Our non-factoring business
For recurring projects that affect EBITDA, EBITDA will be $1.
Quarterly and 5 for 6 million.
6 million full yearto-
Represents the date basis of 28.
Growth of 9% year on year.
Net income for the quarter was about $4,000, slightly higher than the $92,000 loss we saw in the fourth quarter of 2016, and began to consider a one-time project for the quarter, with net income for the quarter of about $450,000, net income has been reduced to 1 so far.
13 million to 2.
16 million for the previous year, normal for the yearto-date non-
For recurring projects, net income for the current year is 2.
27 million represents one or four.
Growth of 1% year on year.
Operating cash flow was strong for the quarter at $7.
5 million and this strong cash flow is mainly due to the improvement in the collection of our accounts receivable, as we monetize some slow moving goods, the inventory level is reduced, we did receive advance payments from some customers for future sales, which helped us a lot. So, on a year-to-
By date, the net cash provided by our business was $4 million.
Return our stock 4.
69 times in 2017, compared with 5.
17 times last year, and our strong cash flow performance mentioned by Ryan, allowed us to significantly reduce the debt burden because we paid $4 million in credit lines, our balance is now $2 million as of 1231. Debt-to-
The equity ratio of 1231 is 29. 2 % versus 47.
The previous year was 8%.
So it is clear that our balance sheet is still very strong and I think we have the ability to effectively meet the business needs at cost
We move forward in an efficient way.
Therefore, we are very satisfied with our back line growth and are encouraged by the momentum we continue to maintain in back line profit increase SG & A efficiency and revenue growth, which is still 2018
2017 is undoubtedly a year of great achievement for our company, and you know we have done something significant that has allowed us to achieve what we believe to be outstanding in 2018.
So, with that operator, we\'re going to turn the phone over now to ask questions. Question-and-
At this point in time, we will have a question --and-answer session. [
Our first question comes from the point of view of Adam Goldstein, a private investor.
Please continue with your question.
It is clear that this quarter\'s revenue growth was excellent.
You mentioned China as the main reason.
I\'m just wondering if you guys are thinking about going to China as a direct selling model instead of going through a dealer?
Thank you for your question, Ryan PapeAdam.
So, I think we, I think we are already very clear that our overall operational preferences are as direct as possible where it makes sense.
Because we believe that only in this way can we provide the greatest value proposition and position the brand most effectively.
So, I think in the end this is obviously something that China should consider, as it is elsewhere.
But I think at this point, considering the sum of all the factors, and all the things that we have to work on, it\'s not something that operates directly in mainland China, in any near-
But I think we all agree that it fits into our overall strategy, but that\'s not what we\'re thinking about right now.
You mentioned that due to some targeted price drops and some of the operational efficiencies you are going to improve, hope to increase profit margins in the future.
Can you quantify this from the percentage of sales you can see? Ryan PapeYes.
We can\'t quantify it yet.
I mean, obviously, in terms of time, we\'re in a position where the first quarter is coming to an end.
So we have enough confidence in the momentum we are seeing to talk about the improved features we are seeing.
But, nonetheless, March should generally be the busiest month of the first quarter, and it tends to load the backend this month.
So, as we have warned in the past, we need to go through the parade and have the opportunity to end this quarter.
But, given our point in this quarter, I think it shows us that we are moving in the right direction, in terms of improved profits and growth in performance and revenue.
Just may not be very focused on specific quarters.
But overall, the trend over the past few years has even exceeded expectations.
This is clearly a decline in the percentage of gross profit.
Therefore, according to the adjusted figures you used, the adjusted gross profit margin for the most recent quarter was 24. 9%.
SG & A then accounts for 20 of the revenue. 3%.
So our operating profit is getting smaller and we have dropped to 4. 6% of revenue.
So it\'s an emergency in terms of our future business model.
Around our expectations for the business, 6% of the operating profit margin? Ryan PapeNo.
I think our goal is to increase profit margins.
I think we \'ve been saying that it\'s just a matter of exact time, where we are and how we grow, where we are and how we invest.
I think we talked about it last quarter, and our investment in the European business has increased by the equivalent of $1 million A year in SG &.
But now, we see, as one of our fastest-growing areas, revenue growth in percentage terms.
So this should solve the problem of SG & A soon.
So, where to invest and where not to invest is a constant decision, and I think we are satisfied with the size of those investments and businesses, and it continues to grow at the rate we grew last year, this helps you grow through SG &
We need to make sure that our level of investment in the future is targeted and intentional, and then help us reach the final number.
Now back to one of the questions I raised last quarter, which is some disclosure about the report.
I noticed that now it looks like you \'ve changed the report from a previous Europe to the international one now, and I\'m a little confused.
Can you explain how your report changed?
Adam Barry Woody. This is Barry.
Thank you for your question.
So basically what we do-
Since Mexico only started later this year, as a separate project or any of our regional disclosures in that international submission, it does not have a significant impact, this is the only change.
Now, as we have said in the past, we will continue to evaluate that part of what we have disclosed and try to reflect what we think is useful and most useful for investors.
As an investor, this is my suggestion and I think the business is putting it into the US market at least as per my understandingS.
Canada, Europe and all the other countries, these four barrels seem to make sense, don\'t they? Barry WoodYeah.
This is certainly an option for us, and of course, as I said, as we move on in 2018, we will evaluate this again.
I was curious because it was not disclosed in the document and Europe had been discussed very quickly earliergrowing region.
Can you say, how did Europe perform in 2017 compared to the previous year?
So we saw very high revenue growth in Europe. over-year.
Revenue there has grown nearly 100% times. Yeah.
Adam Goldstein. wow.
So, I think Europe will be as smooth as you wish?
Ryan PapeYeah, I think it\'s always a challenge to know exactly what\'s going to happen because the dynamics of these markets are different.
What I want to say is that your income will definitely double --over-
We did not expect more.
So, I want to say that we are very happy with this, which shows the strong foundation of our team, which shows the value of our team there and also shows the execution of the team.
This is with the support of this--
Before building these businesses in the past two years, relying solely on a third business
Before that, we did not distribute political parties, but a small part of our income.
So I think for us, it does prove that if we invest wisely, we bring everything that we have to bear, we will strive to bring all the value we provide to our customers in North America and elsewhere, saying that we can really grow faster and achieve greater overall success in other key areas, I think we can run it ourselves.
I think Europe is a big test, and I think it proves that, you know our overall level of investment is a little higher than we originally thought, just as you get into the investment and realize what we really need, but with the type of growth rate that we see, you know you\'re rushing through those SG &.
So, we are very satisfied with this.
The next question comes from Jason Hershman, a private investor.
Please continue with your question.
Jason hershmaana was a little disappointed that you didn\'t achieve a three-digit growth in the discipline, and I think there will always be a target for the next quarter.
So overall it\'s a really good quarter and I have two questions for you today.
Now that China has become so important, maybe you can be a little more colorful about the factors driving China\'s quality growth.
Whether it\'s the new movie Zeus you \'ve released, or the full acceptance of PPF or some combination, whatever color you can offer, will be appreciated.
Ryan PapeSure, I would say it\'s a combination of things.
So we have a very strong distributor in China and we have been working together, I believe the product, development has been nearly four years, as you mentioned, we did get an additional reflection from line that we are selling in China, although this only represents a part of those sales.
In the past year, what they have really done with our help, just a huge investment in the XP El brand, you will see its stores in China and the location of the XP El brand to be a real competitor anywhere in the world in terms of how well they are executed.
So, I gave them a lot of credit and also gave our team to help them manage the issue because we spent a lot of time and mileage on the plane, and all kinds of things to help support them.
So, I think it\'s broad-based and very rooted in the XP El brand, and I think that\'s very important because it\'s still a huge deal compared to anonymous movies shipped in containers, but the business built around the XP El brand will be much better for us --term.
So, it\'s not a special thing, it\'s not a overnight thing, it\'s the result of their constant efforts in our support over the last few years.
Jason hershmanok, maybe I\'ll ask you a similar question if you can transfer from China to Canada.
Are the other numbers or colors you provide primarily related to the size of the business?
I know that it is stronger in some parts of Canada;
This is a 7-
Digital movie users in Canada
Digital movie users in Canada, you can provide any color.
Ryan PapeSo, I think when you look at the Protex Network and The Protex franchisees, you will know that there are 75 franchise locations for paint protective film and window film, all of which are independently owned with an operator, there are multiple locations.
Therefore, these franchisees will purchase their products directly from XP El Canada even before the acquisition, because XP El has a supply agreement with Protex, we sell them exclusively to Protex for all their products from their franchisees, but we would rather sell them to individual franchisees.
So in general, you know it\'s a few million dollars a year for us, but it\'s not a new net income from the acquisition of franchisees, because if it makes sense, we have earned revenue by selling directly to franchisees?
I know, they started online and Instagram to promote your flat glass production line through their own online marketing.
I would like to know if you can update me on Canada and [indiscernible]and elsewhere? Ryan PapeSure.
So repeat what we said before.
So we have XP El Vision, which is a residential commercial window film, similar to the car window film that many people know about, but apparently for architectural purposes.
It\'s completely new business for us, not car business, but for us, customer overlap and supply chain overlap.
So, in our different geographical locations, we are really in a very preliminary soft launch.
Protex works with franchisees of the building Film space.
We have been able to speed up the release and aim at a lot of initial marketing and initial collaboration with them as they represent the captive audience and we can do it too fast.
So this may be the reason why you see more of this marketing in Protex franchisees and elsewhere.
But I think for the rest of next year or this year, when we try to start and accelerate this line more fully, you will see more from us outside of Protex.
Jason Hershman finally, give Barry a question if you can.
Barry, are you energetic about how much capital these professional movies have released, 1 million, is 1. 5 million.
I\'m curious how much working capital can you take out of the business? Barry WoodYes.
Jason, let me answer.
So I think our goal is to eliminate about $2 million in inventory of other products we want to stop. So as of year-
In the end, how much percentage has been completed, we have not done this directly.
But that\'s a big percentage.
Therefore, the goal is not necessarily to permanently reduce the working capital needs of enterprises.
But, ultimately, it\'s possible to turn it into a faster product and build more inventory of the products that sell the most obvious. Operator[
Our next question is from Rob [indiscernible]
Please continue with your question.
Unidentified analysts just want to know if you can talk about listing on the Toronto risk exchange in the USS. currency.
I know the issue will come up on a regular basis, but I think it\'s been a while now and when the 2017 is coming to an end, the momentum just seems to be moving up.
I want to know what your idea is, if they\'re a bit close-term, medium-
Or do you really not know to go public in the US?
Ryan PapeI thinks what we said, and we still recognize that this is important and our priority.
So we don\'t have more specific time to share.
Our next question comes from Andy prerick Xia, a partner at Edgebrook.
Please continue with your question.
As you mentioned on the phone just now, Ultimate Plus will be officially launched on April.
Could you please share the details of what marketing aspects you did in this release? From the final version, what will the transition look like? Thank you.
Yes, we have a marketing campaign around it, trying to create some buzz, there are many other visual differences in products and different packaging, and there are completely different experiences as well. We think it will really create some excitement around it, and that\'s part of why the schedule for that launch was delayed several times and ended a little later in April or April, later than our original goal, we wanted to get everyone\'s attention. In fact, we have improved the product and created a better overall experience in the splash, so we have quite a bit of marketing work to do and there are a few videos and other things that need to be highlighted for the benefit and create that splash in the demo
So, I think this will be a really good release for us, the ultimate advantage, and then we can do that with other products and some enhancements that we are developing.
Ladies and gentlemen, we have finished this issue. and-answer session.
I want to turn this phone back to Ryan\'s closing remarks now.
Ryan PapeI thank you all for your participation and questions and we look forward to talking to you again in the first quarter. Thanks a lot.
This concludes today\'s meeting.
At this point, you may disconnect the line.
Thank you for your participation.