Ryan Pape - President and CEO Jennifer Belodeau - IMS

Andy Preikschat - Edgebrook Partners

Thank you. Good morning and welcome to our conference call to discuss XPEL Technologies’ financial results for 2015 third quarter and first nine months.

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 the business operations and future growth strategies. Immediately after his prepared comments, we’ll take questions from our call participants.

I’d like to take a moment to read the Safe Harbor statement. During the course of this call, we will make certain forward-looking statements regarding XPEL Technologies Corp.

and its business, which may include but not are 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 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 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 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. With that out of the way, I’ll now turn the call over to Ryan.

Go ahead, Ryan.

Thanks, Jen, and good morning and welcome to our third quarter earnings conference call. I hope all of you got a chance to review the earnings release that we put out earlier this morning.

We’ll start just by reviewing the financials and then talk a bit more about the operations. For the third quarter, revenue grew to 10.9 million, which was a 29% increase compared to the third quarter in 2014 and a 38% increase for the nine-month period to 30.3 million.

So, due to our increasing international exposure in the UK, but mainly in Canada, we’ve begun presenting key numbers on a constant currency basis, which we feel will help investors clearly understand the trends in our operations on an apples-to-apples basis irrespective of the macro-currency environment. The constant currency numbers are a non-IFRS measure and they represent the results as they would have been using the prior year’s exchange rates.

So on a constant currency basis, revenue increased 35% for the third quarter and it increased 42% for the nine-month period. So you can see that foreign currency continues to affect our results.

On a revenue side looking at our different geographical regions, we’ll see that the third quarter was a mixed bag in terms of regional performance. In the U.S., the business was consistent.

It was consistent with the second quarter, and we would expect that because Q2 and Q3 are typically very similar in the United States and one or the other can be stronger typically. In China, we saw sales near parity with the previous year.

This was for the first time this year, which is an improvement sequentially from the second quarter and what we’ve been expecting as we worked through our reformulated distribution strategy. We’ve reduced the number of distributors in China to maximize the control and increase our long-term value of the brand, so we’re pleased with how that initiative has progressed.

We still see significant opportunity and the fact that the sales are now at parity in the third quarter relative to the prior year is what we expected and an important accomplishment. This is slightly offset with declines in Canada sequentially from the second quarter and owing to the effect of currency on a consolidated revenue where the Canadian dollar was down about 6% sequentially from the second quarter and from some weakness in the Canadian economy in general, particularly Western Canada.

However, we still see strong gains year-over-year in Canada in dollars and in unit volume, but slightly weaker than the second quarter. As we noted last quarter, outside of China, rest of the world sales growth continued but the growth rate was still slower like we saw in Q2, so that was really pretty much unchanged from Q2.

Gross margin in the quarter remained unchanged at 30% compared to the previous year. Any weakening in the U.S.

dollar will result in increased margin not only as a result of direct effect on financials like we’ve been talking about, but also we won’t need to continue any special pricing to other distributors that we may have extended due to the currency circumstance. SG&A expense as a percentage of sales increased to 24% as compared to 23% in the second quarter of last year.

When you look at year-over-year, it was up substantially and approximately 500,000 of that increase is the total expense structure of our UK and Canadian operations, neither of which existed in the period in the prior year aside from maybe a week or two of the UK operations. So while this is a larger increase over the prior year, we don’t expect substantial increases in the expense structure for either of those operations going forward.

So we’ve continued to invest significantly in marketing, and our marketing and marketing-related travel expense for the quarter was up around $100,000 over the prior year and about $50,000 for the sequential quarter. So, we’ve added a lot of marketing expense this year in addition to just the net new marketing we’re doing, we’ve also had an aggressive strategy to replace marketing materials that our customers have with new updated brand consistent marketing material we’ve been developing over the course of the year, and we’ve done that at our expense to really accelerate adoption and have the consistency with the brand.

So that’s been an added expense for this year and that continues throughout the rest of the year. But looking forward into next year, we expect to hold the marketing expense as a percentage of sales.

So on a percentage of sales basis, we don’t expect that percentage to increase next year for marketing. Overall, we feel that we’re fully staffed in most parts of the company aside from a position or two in our accounting and finance team or any additional increases in our sales team, which should be revenue generating.

Aside from that, we do not see large gaps, which will need to be filled in the next six months in terms of overall personnel cost structure. So net income for the third quarter was $398,082 or $0.015 per share as compared to $473,296 or $0.02 a share for the same period of 2014.

On a constant currency basis, net income increased 44% to approximately 682,000 for the third quarter and it increased 48% to 2.3 million for the nine-month period. So, as you can see, the net income was impacted substantially by foreign currency, particularly the Canadian dollar, which as we said earlier declined 6% further to the U.S.

dollar over the second quarter. But nevertheless, you can see the Canadian acquisition that’s quite accretive on a constant currency basis.

Additionally, as the business continues to evolve, we’ve added a non-IFRS EBITDA measure with the exhaustion of our operating losses. Taxes will play a more significant role, and the overall business will become more complex as our structure and operation evolves.

So the acquisition of Parasol Canada has increased amortization expense related to the purchase price allocation of intangibles and increased interest expense both with interest that we paid on our bank loan and through imputed interest as part of seller’s financing. So our increased investment in software and physical plants along with the facts of depreciation and amortization I mentioned, these affect the business in a more significant way.

Going forward, we think it’s important to understand that. So we calculate EBITDA as net income minus interest, taxes, depreciation, and amortization.

And in the future, if we find it helpful in terms of understanding our ongoing performance, we may provide an adjusted EBITDA metric, which would exclude other one-time expenses, but it’s not necessary at this point. So for the quarter, EBITDA increased 6% to approximately $915,000 and increased 14% for the nine-month period.

On a constant currency basis, EBITDA increased 52% for the quarter over the prior year and 48% for the nine-month period. So the balance sheet remains strong.

Inventory is a key component of our balance sheet. We are evaluating our inventory levels and the needs of our various distributors to make sure we’re at the right level.

Having the right inventory and the right amount of inventory in the right place can drive sales, particularly with our international distributors. It may have a really long cash flow cycle and we’re looking at how can we help and how can we accelerate their access to inventory to generate even greater revenue growth.

So during the quarter in addition to the other marketing events that we do as our normal course of business throughout the year, we exhibited at the SEMA Trade Show, which is a very large automotive industry, business-to-business event. We had tremendous feedback on our exhibition and we do it every year, but we had probably the best setup at this show that we ever had and maybe even one of the best booth setups in the entire show.

And that’s really saying something because the show is enormous and impressive for those of you not familiar with it, you should look it up. It’s important to show for us to generate business globally but it really has an added value for our international partners and distributors where they can send their customers to visit our booth at the show.

And when they see that we’re there, we have a very strong and professional presence, it generates confidence in their local regional or country distributor and in the product back in their home markets. So we’ve also seen an inflection point with respect to our deal flow that in addition to the normal high sales funnel we have of independent installers and dealerships that we deal with and then go through a process of training with us, we’re getting more opportunities with high profile accounts including groups related to OEMs and other potential high profile partners.

So it’s too early to say how these opportunities will play out but it’s a testimony to our brand building capability and it’s a return on the marketing investments that we’ve done up to this point that now some of these groups are seeking us out. So for us that’s – whether it turns into revenue or not depending on the deal that’s a milestone accomplishment for us.

Additionally, we launched the Window Film line in the quarter at the SEMA Show. We’re still in an initial launch phase but the feedback of results have been positive and we’ll continue to ramp up this line of business going into next year.

It’s a complementary product and many of our customers use it, so it’s important to do it well. And if we sell more products to our existing customers, it’s a good way to increase the effective growth rate of our existing customers and we can add that growth at very little incremental SG&A costs, because we already have the people in place to call on and service those accounts.

So that’s a key part of strategy over the long term to get more leverage to the bottom line. So looking kind of at the rest of the year, we’ve talked about it but our dealers will benefit from a new ordering and account management portal by the end of the year.

This is tied to our logistics footprint in U.S., Canada and Europe. So it gives our customers the best-in-class ordering, mobile ordering which is very relevant to our customer base because they’re out in the field.

We’re focused on making our products the easiest to order and the easiest to deliver, so we’ve continued to add additional distribution points, specifically in the U.S. where we have pretty good coverage essentially now.

We also think that this investment in technology to more fully automate the ordering and the fulfillment, this is yet another way to sort of bend the cost going forward and add more leverages with more of a self-service model for our customers. And finally, we talked a lot about the marketing that we’ve been doing this year and as I mentioned earlier how we’ve added and redone in a lot of legacy marketing pieces to match the brand and how we’re positioned now.

That will be sort of a culminate at the end of the year with the launch of a new Web site that will be consistent with the branding of the integrated and new content management system where we can share photos and videos from our installer base, use that to generate work for them and have a better online connection to the automotive enthusiasts. So we’re really excited for that and that will launch along with the ordering system at the end of this year.

So overall, we’re pleased with the results and the growth. Brand awareness and reputation continue to be strong that’s evidenced by what we saw at the Trade Show.

We’re focused on continuing to get close to the customer, continuing to evolve our distribution to make sure we got the right inventory in the right place to serve these customers. We’re still seeing strong interest, net new people coming to the business for training and from dealerships and then awareness from retail customers alike.

So I thank everyone for participation in the call today and we’re happy to open it up for a few questions.

Yes. Good morning, Ryan.

My first question is on the SG&A front. I was wondering if you could explain the quarter-over-quarter increase.

I know you said about 50,000 of that was marketing. What would the balance of 200,000 be?

Thank you.

Sure. We saw approximately $30,000 in increased personnel expense related to net new employees or other adjustments.

We had some expense as a true-up accrual related to some other incentive plans for our different employees relative to how they’re paid. So we saw some expense there.

And then the rest of the expense sequentially from the second to third quarter was split more widely across a variety of categories, so not any one thing in particular.

Okay, thanks. And second question was on the rest of world.

You mentioned that the growth looks a lot like Q2. I was wondering though are we talking about – was it an actual year-over-year increase or was it a decrease?

Sure. So when we’re talking about the growth rate relative to the business, the only year-over-year decline that we’ve seen in any region ever in the past, say, 18 months was in China relative to the reorganization of the distribution.

And there we actually saw on a year-over-year basis a net decline in sales. In any other region and in sort of that rest of the world, what we’re talking about is a change in the growth rate.

And second quarter and third quarter in sort of the rest of the world had a lower growth rate than we saw in the first quarter and in the fourth quarter back into last year. But it’s not a decline in sales, it’s just a reduction in the growth rate for that rest of the world segment.

Perfect. I’ll get back in the queue.

Thank you.

Hello, Ryan. Can you talk about how many installers you are training per week in the U.S., Canada, and Europe right now?

We don’t normally break it out per week. Typically, we have – in the U.S.

we have a capacity of 8 to 10 installers or 8 to 10 people per week and that varies weekly. Canada is training a little differently and the UK has a similar setup but slightly less capacity.

Just to speak to it generally, overall the training classes have been full. Our training class offered in our headquarters here in San Antonio, first, after Thanksgiving was full this morning.

So we’re still seeing strong interest from the net new installers to the business or from existing installers who were training up additional people.

So what growth rate would that imply on your existing installer base if we were to annualize that current training?

I’m not sure that that’s necessarily the way that we would look at it because you’ve got net new people in the business, then you have additional installers as part of an existing business and depending on what that person is doing, they may have a disproportionate effect on the growth rate of their own organization. So if someone is brand new to the business, they might be limited by more than just their training capacity, they may need sales experience, and they’re getting a new business up and running whereas an additional installer plugged into an established operation might be able to have a more meaningful impact, so we don’t see a direct connection between the number of people in the training class and a measurable way that that impacts the growth rate, but overall we do know that getting additional trained installers is key to continue growth of the industry and of our business whether they’re new to the industry or they’re going into an existing operation.

Okay. Could you share a bit more about how the window tint is going and when that could see 10% of sales?

So when we look at the window tint, when you look at sort of the history on the paint protection side, we won a lot of business historically and still do on converting customers from competitive product. And on the window tint side, that works similarly as it did on the paint protection film side historically, which is – it’s a rather drawn out sales process because we’ll talk about the product with our existing customers, then we’ll sample the product, then the customer will evaluate the product, then they may purchase some and work it into their daily operation, and then with the goal being that after that they’ve switched all of their business to us.

So to look at a given customer and say, if we worked them hard, could that be a three-month cycle or longer, it could be depending on where in the season that we did them. So that’s ongoing now with our existing customer base.

We’re trying to win that business. I think it’s going to be into the middle of next year before we get a critical mass around the window film.

At what point does that hit or exceed 10% of revenue, it’s just too early for me to say at this point.

That’s all I had. Thank you.

Thank you.

Hi, Ryan. Can you talk about flexing power for your international distributors?

Do you know if they’re able to go back at this point, go back to their my kit and increase prices to basically fix the impact of the stronger USC [ph]?

It’s a good question. I think the answer may depend and it sort of depends if you’re looking at independent distribution, it sort of depends a lot on the dynamics of their particular business.

Do they rely solely on paint protection film to run their distribution business or were they more diversified and they’re doing other things, which may create other opportunities for them? I think the best way that I can answer it is what an independent distributor might do has to look at how we approach it ourselves in our international subsidiaries.

And at this point looking at Canada specifically and our extension in UK is similar although they have not faced quite the currency challenge the Canadian dollar has, but we look at it and we did a price increase in the spring, approximately 5% depending on who you were and what you were buying. And we look at it now and obviously since then we’ve given that price increase back likely with continued sequential decline with the Canadian dollar.

But we look at it and we’re trying to build a long-term business, we’re trying to take market share, we’re trying to grow the business. And so we take a sort of cautious view near term at raising prices as much as you would need to, to create a meaningful impact to the bottom line because it’s not clear that doing that is in our best long-term interest.

Now that said, as we get pass the end of the year and take stock of sort of where we are on the FX side and consider making further adjustments. But I guess if we look at it and we’re fairly cautious in terms of what we want to do, especially in Canada with some challenge at the macroeconomic level, I would suspect that a lot of our international distributors who are in essence exposed to the same thing would have similar caution.

Okay, thanks. And that 5% increase effected in spring, was there a meaningful impact with regard to just volumes after you increase the price, do you notice reduced volume or it was fairly easy to pass on the pricing?

I would say there was not a meaningful impact of volumes. The market accepted that fairly well.

You look at it in context, if you were to receive a 5% annual increase in this type of business that’s typically pretty high. So that was not a small amount to be absorbed by the market, but I do think it was absorbed fairly well and that’s why as we get passed the first of the year, we’ll be reevaluating and take stock of where we are in terms of pricing.

Okay. Can you share some of the specifics related to your customer base?

If we talk about how many customers you have this year versus last year? And churn rate, is that something you could be comfortable discussing?

Well, in a sense no because what we don’t have in terms of a metric that we want to share is something we find incredibly meaningful in terms of number of customers. The number of customers continues to increase.

It always increases. It increases month over month.

But when you look at the profile of who our customers are, there is an incredibly sort of long tail in terms of the distribution of how much they buy and what their volume is. And the reason is that you can have a customer who runs a sizable operation and does only pain protection film.

That could be in the U.S., that could be a top 20, top 10 customer of ours and obviously then they have large volume. On the other hand, because of the nature of this product, it’s also something that can be sold as an add-on in many other types of businesses.

And so there are many customers that have substantially smaller volume. So, the total number of customers continues to grow.

We have other metrics where we segment customers and look at how many in one bucket or another, but I don’t think that those are particularly relevant to share at this point because there’s a lot of noise in sort of how we classify those customers.

Okay. And how about churn rate in your key customer base, is that something you track?

We do and our churn rate is very low. We have really great customer loyalty and we continue to do that.

In fact, even those that we may lose because it does happen obviously, we see a substantial sort of boomerang effect where some will say, well, I like XPEL but I got to go try something else, maybe it’s cheaper, maybe it’s this, maybe it’s that. And we see a lot of those customers come back.

Again, just sort of based on the ordering patterns that are customers have given that wide distribution, we don’t have a good churn metric to share because it’s such a wide distribution. However, when we look at our top customers and look at our top percentage of customers, we’re tracking those specifically to make sure that we’re still getting the order value from them and the churn rate is low on those and those constitute a large portion of the revenues.

Okay. Maybe a couple other questions.

You talked about an inflection point with your deal flow that you’re in early talks with certain OEM groups or is it dealership groups. Can you expand on that what’s going on there?

Well, if you look at where the business is traditionally, this would be your independent installers and dealerships. And that’s the bread and butter piece of the business and that’s who we add continuously and who we work through the training process.

When you look at who else could theoretically take the product and run with it in terms of adding it as an accessory, you have groups that customize vehicles, you’ve got the special edition vehicles and you have OEMs that want to take paint protection film and offer it. These are what we kind of consider these high profile type accounts because they’re not independent installers and they’re not dealerships.

They really fit another part of the industry and that’s --

That was the OEMs at the factory level or the dealership level…

No, we don’t look at this product as really suitable for a factory level. There is some paint protection film installed at the factory on those vehicles, small pieces and really high ware [ph] areas and that’s really a commodity business.

So we run across those opportunities every now and then and if it hits our sweet spot, we’ll pursue it. But we’re talking about not at the factory level but others that are selling vehicles or customizing vehicles that could add XPEL as an option.

And there’s a real value of what we’re saying because there’s a difference in us trying to call on and knock down doors and raise our hand to get noticed where now these potential customers are coming to us. And so it’s a validation of the strategy.

But that will evolve over time and we’ll see how good of a fit our product is for any of these partners.

And my last question is on window tints, do you have a sense of how big the market is at the wholesale level in the U.S.?

We do. It’s substantially larger than paint protection, likely several hundred million dollars.

Okay. And do you know who are the biggest players in terms of market share?

Overall, I think that the largest player has to be Eastman Chemical and their associated brands and companies they’ve acquired a number of different brands under their umbrella. And so I think I just assume they have the largest market share.

All right. That’s it from me.

Thank you. Keep up the good job.

Thank you.

Yes. Just more of a high level question here.

In order to bring the business to the next level in terms of sales, is there anything different that you’ll have to do whether it’s operational or bringing in new talent eventually? Thank you.

Sure. So I think on our side there’s always an opportunity to continue to increase our sales team, and this is relationship selling and this is not a one-off sale, this is someone that – a customer that we want to bring – that we want to order every day or every week or every month or on a reoccurring basis.

So the more people we add on that side, the more relationships we can build and we can get that sort of reoccurring revenue. I think if you look at it high level, there’s opportunities to sell the product maybe not in other verticals but if you look in the fleet business or other aspects of the automotive business that we don’t currently touch, it’s likely to think that we’d look to bring in other people with experience in that skill set.

But aside from sort of that kind of specific domain in sales experience that we don’t see a big gap or something that needs to change operationally. Now on the other hand, the way we look at it as we look at the profile of our customer and you have dealerships, like we mentioned but on the independent installer side, these are independent businesses and they’re typically small businesses.

And so they have their own challenge and opportunity. So one of the things we continually look at is what are their paint points, what prevents them from growing faster, what prevents them from scaling their businesses more because at the end of the day, if they scale their business, we’ll continue to scale ours and what else can we be doing to address challenges they have that may be sort of nontraditional or maybe outside the scope of what we do today.

But that’s sort of just a long-term process to evaluate that and work that into our portfolio as it makes sense.

Okay. That’s it from me.

Thanks, Ryan.

Thank you.

Okay. Well, we appreciate everyone’s participation and we look forward to talking next quarter.

Thank you.