Aug 29, 2017
Executives
John Nesbett - IMS, IR Ryan Pape - President and CEO Barry Wood - CFO
Analysts
Operator
Greetings, and welcome to the XPEL Technologies Second Quarter 2017 Earnings 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 of IMS.
Thank you Mr. Nesbett, you may begin.
John Nesbett
Good morning and welcome to our conference call to discuss XPEL Technologies financial results for the 2017 second quarter. On the call today we have Ryan Pape, XPEL’s President and Chief Executive Officer; and Barry Wood, XPEL’s 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 our call participants. I’d like to take a brief moment to read the Safe Harbor statement.
During the course of this call, we will make certain forward-looking statements regarding XPEL Technologies and its business, which may include, but are not limited to, anticipated use of proceeds from any 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, is 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.
Such statements are based on the current expectations of the management of XPEL. The forward-looking events and circumstances discussed in this call may not occur by certain specified dates or at all and could differ materially as well as results of known or unknown risk 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 the important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. No forward-looking statement can be guaranteed.
Except as required by applicable 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. Okay.
With that, I would now like to turn the call over to Ryan. Go ahead, Ryan.
Ryan Pape
Thanks, John, and good morning and welcome. I extend my welcome to our second quarter earnings call as well.
Second quarter revenue grew 25% to a little over 17 million that broke our previous quarterly record for quarterly revenue, so I think those outstanding results reflect respective execution of our get close to the customer strategy and obviously provides confirmation that I think we've good strategy to continue to drive top line growth. So we saw strong revenue growth across all major product lines.
During the quarter, we had a couple recent acquisitions in the last year beginning of this year with some of the installation facilities. So those are fully integrated, continue to meet our expectations and the brand continues to build strength in the marketplace.
I think it’s evidenced by the increasing demand we see and strong nature of the quarter. And primarily I think the quarter really represents a sort of back to business quarter for us.
So it’s really the first quarter free of some of the distractions that have existed over the past several quarters or really over the past year plus. And I think that’s demonstrated in the results and I think that internally we very much felt that way and our team very much felt that way.
So that for me is really the highlight of the quarter. So I am really pleased with the revenue performance some of our international subsidiaries.
Revenue in Canada and the Canadian business grew over 40% for the quarter over the prior year. So that’s helped obviously by improving economic conditions in Canada of last year and just crisp execution by our team.
I am very proud of the team. I mean that’s for one of our best markets, that’s just tremendous number.
So in Europe, under Tim Hartt’s leadership, we’re continuing to scale up in this what’s a very underpenetrated region. So we’ve talked about it before, but it’s very much in a developmental state.
So we are sort of out there trying to acquire and help build some of our key customers and those that all will really be a showpiece for us as we grow overall. So, I think we’re pretty pleased with the progress there and continue to have really high expectations for that going forward.
As you probably saw gross margin as a percentage of revenue, we remain relatively flat over the prior year quarter and we posted EBITDA growth to little over 6%. So I think that a couple of things there when you look at growth rate in Canada and Europe exceeding sort of the U.S.
and rest of the world business, as it did for the quarter in terms of growth rate, we feel that in terms of EBITDA contribution mainly because of the continued impact of currency. So even in Canada growing 40%, we’re still sort of off on the currency from a historical level and even actually on a constant currency basis it's very well stay.
Canadian dollar was even off slightly over the prior year and as we all know prior wasn’t very good. So from that standpoint when we see that really good revenue growth, we don’t get quite the leverage on it at this point.
But we know that that we will go in forward. So Barry will get into details later, but our SG&A growth for this quarter over the prior year reflects continued investment in the business.
Our SG&A growth is a bit higher than we were trending in Q2 or Q3 last year. So with the other issues behind us, we are going to return to a more of an enhanced focus to make sure that cost structure is right.
I think we were really making progress on that at the midpoint last year and then obviously with some of the other things going on that kind of took a backseat. I'd also point out that we did have operation in Houston.
While that operation is closed this week with Hurricane Harvey, all of our employees are safe and facility is secured and no damage there, so obviously a huge disaster there. Finally, I would like to formally welcome Mike Klonne to our Board of Directors.
Mike was elected at Shareholders Meeting in June. He is a great addition to Board.
He served as a President and CEO of Bostik, Inc. a global adhesives company, and had responsibility for more than a 1,000 employees and 20 sites of theirs in North America, Latin America, Europe and Asia, heavily involved in their M&A strategy.
So, I think during his tenure, they grew revenue from about 250 million to over a 1 billion. So, he has already provided tremendously valuable insight during the short time on the Board.
And I really look forward to that going forward. So overall, I am pleased with our second quarter performance especially the top line.
Obviously, I think it was really a good quarter for the quarter in terms of getting the team engaged and getting everybody focused on the 1,000 little things that we need to do right every day to serve our customers and to drive growth. So it was nice to build focus on those things.
So, with that, we'll turn it over to Barry to go through the numbers and then take some questions.
Barry Wood
Thanks, Ryan, and good morning everyone. Before I take you through the numbers, let me first say that certain of our key measurements that I talk through today will be stated on a constant-currency basis.
We believe that comparing these numbers on a constant-currency basis will provide a little better insight visibility into our operations. Our constant currency numbers are non-IFRS measure and reflect the current period results, as if we were using prior comparative period exchange rate.
So, with that said, I'll jump in to the numbers a little bit. For the quarter as Ryan alluded to revenues increased 25% to $17 million.
On a constant currency basis, revenues grew 26.3% for the quarter. And also as Ryan alluded to our second quarter revenue was the highest in our company's history by far, so a great quarter for our top line growth.
Growth was strong across all product lines, but I will highlight our window film product line which represented 8.4% of our total second quarter revenue, and on a year-to-date basis revenues grew 18.9% to 29.7 million. Gross margin for the quarter grew 23.1% and declined only slightly as a percentage of sales to 27.1% versus prior year quarter.
And on a year-to-date basis, gross margin grew 13% and decreased as a percentage of sales from 28.3% to 26.8%. This degradation was due mainly to the supply overhang issues we talked about last quarter.
I will note our warranty cost line item improved significantly this quarter as expected, and we expect continued improvement in that line item as we move forward. On the SG&A front, expenses for the quarter increased 39.4% versus prior quarter and 39.9% on a year-to-date basis.
The second quarter increase was mainly a function of our growth and continued investment in the business. About 50% of our SG&A growth comes from our personnel related line items.
We now have 133 full time equivalents in the business versus a 110 full time equivalents during this time last year of Q2 2016. We also recorded commissions paid to our sales people in those line items which obviously will increase consistent with sales growth.
And as a note in past quarters, we continue to see increases in sales and marketing, occupancy and IT costs as we continue to build up for scale. In addition, we also experienced a sizeable increase in our internal shipping costs where we ship product to our various satellite locations as we supply those warehouses and company locations with inventory consistent with our get close to the customer strategy.
And then finally as we noted last quarter effective January 1st, we changed our method of depreciation, depreciating our fixed assets from the double declining balance method to the straight line method. And as you'll recall, we made this change because we think it better reflects how we consume the future benefits of our assets.
This change is considered a change in accounting estimate under IFRS and therefore the effects which we'll handle prospectively and the impact of this change for Q2 is approximately $900,000. And this change effectively accelerated depreciation from some of our older assets into 2017, and this change will lessen significantly as we move into 2018 and beyond.
On a year-to-date basis for SG&A, the increases there include expenses related to our dealer conference held in the first quarter as well as some of the legal expense overhang that we discussed last quarter. I will note, however, that our Q2 professional fee line item decreased about 13% versus prior quarter due to the reduction in legal costs which is very nice to see.
EBITDA increased about $99,000 or 6.23% versus prior quarter and decreased to $2.1 million or 23% on a year-to-date basis. On a constant currency basis, EBITDA increased 6.3% for the quarter.
Net income for the quarter was relatively flat versus prior year quarter finishing at about $750,000. On a year-to-date basis, net income was $685,000 which was reflective of the first quarter cost incurred related to the dealer conference, the legal fees and supply related challenges that carried over that we discussed last quarter.
And on a constant currency basis, net income was right at about $751,000 for the quarter. On the cash flow front, our net cash used in operating activities totaled 3.7 million due mainly to the cash outflows related to the continued plan build up of our inventory pursuant to the execution of our strategy that place our inventory closer to our end customers.
In addition, with this prior inventory build up, it sort of acts as in fact our hedge in future supply interruptions should they occur. Our inventory turnover for year-to-date 2017 was 1.9 times compared to 2.4 times in prior year to-date.
Strategically, we believe an overall increase in our inventory level is the right thing to do but we’ll be working to manage those closely to the optimal level in the next two quarters. Our balance sheet continues to be very strong as evidenced by our liquidity ratios and our debt-to-equity ratio continues to be nicely optimized and consistent.
So all-in-all, a very successful quarter for XPEL and we look forward to continuing outstanding results as we move forward. And with that, operator, we will now open the call up for questions.
Operator
Thank you. At this time, we will be conducting a question-and-answer session.
[Operator Instructions] Our first question comes from the line of Adam Goldstein, a private investor. Please proceed with your question.
Unidentified Analyst
Hi. So from my perspective, it was a nice quarter in terms of revenue.
So congratulations on that. I guess I am trying to understand from a big picture perspective.
Why it seems over a period of years now, we don’t see the operational leverage that one normally sees in a business that whose revenue has expanded by the amount XPEL had? I mean it’s gone from like back in 2013, an $18 million revenue this year on track for higher than 60 million, but SG&A cost as a percentage of revenue has actually gotten worse over the years, if we compare it like 2014 and ‘15 and ‘16.
So, I know there's always specific reasons when it's discussed, but can you give a big picture understanding of why just over a period of years you think we haven't seen the kind of operational leverage you normally see?
Ryan Pape
Sure, Adam, it's Ryan. I think that if you go back and sort of look at our comments over the years where we used to talk about was that, we basically, probably I don't if this is a time that you're speaking off, but we didn't have the infrastructure and the staff to support sort of where we were and where we were super lean.
So you had kind of this evolution where you're sort of building to the type of staff you need to be able to support the growing business, and we thought for a period of time that we're really -- we're in the hold on that. So then we kind of moved through that phase and then move into sort of where we're now where we're growing, obviously, we're establishing the different components to the international business.
I think when you look at -- when you look at Europe today, I mean there's a lot of SG&A costs that we put in to help support the revenue we're generating, but clearly the SG&A costs there will support a lot more revenue. So that's an investment not in the form of an acquisition, but investment in the future.
And then I think you can't ignore the impact of currently. If you look at Canada as a percentage of our world today and you look at the kind of nominal exchange rate where we're today versus where things were sort of prior to beginning in 2015, that alone has a huge impact on the business and now we see that a little bit in Europe too.
So, it's always a struggle and a balancing act to say where're you investing for the long term in terms of your people in terms of new initiatives and then what do you do to trying to gain most leverage to the bottom line, I think that we saw middle last year we saw increasing leverage in terms of SG&A growing slower than revenue and that certainly the path that we want to be on under the circumstances for a variety of reasons, at the end of last year beginning of this year, we kind of regressed from that a bit, but that's still sort of where we think we can be and where we will be all pending, we think there's other really good opportunities that are going to set us up for long term growth. We'll still evaluate that case-by-case, but I think it's a combination of those things that you see over time.
Unidentified Analyst
And I know there is something specific the quarterly employee salaries and benefits under direct costs increased by 67% from the same quarter previous year, sounds like the number of full time employees increased by much less than that, so any…
Ryan Pape
I don't have that exact number in front of me. I think if you recall, I'm not sure which comparison you're looking at, but we had increased allocation of personnel costs to direct costs via the installation businesses.
So as we've added installation businesses like Las Vegas and Dallas that represents the majority of the personnel costs for those businesses as now part of direct costs because they're actually installing the product. So that maybe what you're seeing there.
Unidentified Analyst
One last question, there was a pretty large cash outflow due to operations this quarter. I know inventory was a big part of that.
It looks like there's only $1.5 million left of availability on your revolving credit line. So are there any issues with the cash outflow over the next few quarters?
Barry Wood
Hi, Adam, this is Barry. No, we don’t see any issues at all with that.
In fact, we’re continuing to work through that and working with partners helps grow the business. So, we’re -- there will be no issue with that as we go forward that we see.
Ryan Pape
Yes, and Adam, I’d just add to that, that I think that you see the growth in inventory certainly from the beginning of the year. We view that as a positive thing.
And we’ve sort of made a conscious commitment that we’re going to carry, more inventory in general going forward. But then we’ve also engaged in a process to do some other things that aren’t obvious in the total inventory number just to increase our internal efficiency sort of number of SKUs and there’s elements of the inventory that historically don’t turn as fast as others.
And so we’re really consciously focused on that so that at the end of the day, yes, we carry more inventory and perpetuity. But then hopefully within that, when you sort of break it down.
We’re even now much more efficient which effectively is giving us that much more available inventory. So hopefully, we get the benefit of increased inventory even beyond what you actually see in the number -- in the dollar amount of increased inventory.
But clearly during the quarter that was a big use of cash but for a good reason we think.
Operator
Our next question comes from the line of Jason Hershman, a private investor. Please proceed with your question.
Unidentified Analyst
Hi, guys. How are you doing this morning?
First of all, glad to hear that everyone is safe and confuse today and hopefully your operations won’t get disrupted and everybody in Houston can get back to the normal sooner rather than later, so very terrible thing down there. So a couple of small questions and then may be a just some big picture questions.
Maybe you can go over just the increase in travel related costs this quarter, was it and just explain why that one has gone up dramatically year-over-year?
Barry Wood
Yes, I think it wasn’t any one thing in particular. It just happens that we have a number of sort of long running projects either specific things we are doing or specific projects related to new customers that just represented in a lot of travel sort of in the quarter combined with some of our timing of certain marketing events and things like that.
So I think it’s probably more of a timing issue with some of those than really a change in anything more material.
Unidentified Analyst
Okay and a similar question. On the professional fees try to see it starting to come.
How does it come down percentage wise as much as one might have expected. Are there some residual legal fees from formal lawsuits still in the mix in the Q2?
Ryan Pape
There were a little and then I think also when you look at the distribution and legal fees last year, Q2 was relatively light legal fees, so those expenses relative litigation really accelerated in Q3 and Q4 of last year, so from a comparison standpoint and with a little bit of handover that difference wasn't as dramatic in Q2.
Unidentified Analyst
Okay, now just a couple of bigger picture questions if I may. In terms of the investments that you're making in personnel, is that -- could you give us a little more color in terms of geographically where it is occurring?
Is it occurring mostly in Europe, in United States, in Canada, in China? Can you just give a little more color because I presume maybe some of that investment is occurring in Europe?
Ryan Pape
So I think the Canadian headcount has been relatively flat overtime. I think we've added a person or two over a couple of years, so that's been not a factor.
Europe we've seen on a percentage basis the greatest increase in headcount and that's just trying to build that. Again I think to the other question earlier, trying to build that to the level that we need to sustain the size of the operation we think it could become.
So this is like sales people, customer service people, folks doing designs for our software, installation training, so just sort of that kind of core of the business that really has to be replicated in Europe. And I think now we've got some number of people kind of in all of those key roles, so I think we've kind of staffed out to a level that we'd like it to be.
And then the balance of that would be increase in U.S. headcount and that's there were a couple trends there that I think will kind of shake out over the next few quarters which is in certain areas where we relied principally on third party or external firms or contractors to do things, some marketing, some IT things.
We've been going through the process to bring those in-house and that's either a zero sum in terms of no extra costs or actually slight reduction in costs to internalize those things. So that's going to drive some -- just going to do a shift the costs in essence from other line items and SG&A in the personnel costs for some of those.
But we think that these are things are really core to the business and there're ongoing expenses, so they need to be done with our people. So that you sort of see that a trend I think slightly increase full time count in lieu of some sort of external third parties.
Unidentified Analyst
And final question I had was basically if you could just provide a little bit of color on the Chinese market and how that's developing in Q2 and whether that's continuing to move forward nicely?
Ryan Pape
I think overall in China relative to paint protection I would call it, it was an okay quarter in terms of we saw some growth. We always like to see it higher.
The other thing that's really positive it's been developing alongside that really coming out of Q2 at the end of Q2, as element of some window film opportunities in China and some very specialized products that we're creating for that market. So overall I think that we still have really high expectations and expect to see a lot of growth there.
What we do tend to see is obviously working with local partner and distributor and there's other obstacles and things that may get in their way from time-to-time that sort of make quarter-to-quarter a bit unpredictable for us. But the macro trend is still a positive one and still one that we expect to see a lot of growth from going forward, both paint protection and now window film in that market.
Operator
[Operator Instructions] Our next question comes from the line of [James Watanabe] of DKAM. Please proceed with your question.
Unidentified Analyst
Yes, thanks. Good quarter there guys.
Just a question here just on the European operations. It looks like it was a bit of a drag on the net income for the quarter.
I was wondering, if you could just give us a little bit more details on the nature of those costs. I can obviously see the breakdown with it all rolled out, but anything specific to Europe would be valuable?
And then just wondering, if you anticipate running losses on the European operations for the remainder of this year and next year or if where do you see again breakeven?
Barry Wood
Sure, I think it's possible how it presents in the segment revenues to see losses there through the rest of the year. I’ve cautioned sort of reading too much into the individual segment profitability only because you’ve got multiple factors.
You've got -- it’s a truly global nature of our employee base, means that we’ve got people in the U.S. contributing to the European effort in certain ways and vice versa.
So it’s perhaps a little less segment driven than segment base reporting would have you believe at least in terms of practical impact. And then obviously, there is issues related to transport pricing and cost of goods between the subsidiaries which sort of complicate easy understanding of the results.
But if you think about it overall, I think it’s fair to say that when you look at the European operation, we’ve now relative to the earlier question, staffed it kind of with all the key pieces that we need to support that and they are there to support, a larger revenue than we currently have. So, we are in a situation where we anticipate growing revenue through those costs in Europe.
And I will say that overall that does represent our cost and ultimately a hit to sort of net number to be able to do that. But we think it’s the right thing to do to set a stage for that market to be like a lot of other markets.
Unidentified Analyst
Okay. And then I was wondering if you could provide an update on the recent M&A focus that you talked about earlier in the year.
It still is optimistic, have you made any additions to your M&A team and how do you think it looks on that front?
Barry Wood
Yes, so I think we prior framed to sort of our posture that were we actively looking for installation businesses in key markets to acquire as part of our get close to customer strategy and the market development strategy. That’s very much still active.
And we are still either pursuing those opportunities in one stage or another. I think that’s one of the things we’ve learned in doing that is that give the nature of these customers some of these even take longer than you might think just because the folks we’re dealing are very active in their business.
So to get them to step away takes some time. But given what we see there and what we see from the type of deals we’ve done so far, we’re still very much interested in pursuing that and adding to that and doing that at some scale for the rest of the year.
Operator
There are no further questions over the audio portion of the conference at this time. I would now like to turn the conference back over to management for closing remarks.
Ryan Pape
I just want to say thanks everybody for participating and we look forward to speaking you in the next quarter.
Operator
This concludes today's conference. Thank you for your participation.
You may disconnect your lines at this time. Have a wonderful rest of your day.