Nov 17, 2016
Executives
John Nesbett - IMS, IR Ryan Pape - President & CEO Barry Wood - CFO
Analysts
Jennifer Wolford - Comstock Partners Jason Hershman - Private Investor
Operator
Greetings, and welcome to the XPEL Technologies Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode, and 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. You may begin.
John Nesbett
Good morning, and welcome to our conference call to discuss XPEL Technologies financial results for the 2016 third quarter. On the call today we have, Ryan Pape, XPEL's President and Chief Executive Officer; and Barry Wood, XPEL's Chief Financial Officer who will provide an overview of the business and operations and review the Company's financial results.
Immediately after the prepared comments, we will take questions from our call participants. Let me take a moment to read the Safe Harbor statement.
During the course of this call, we'll make certain forward-looking statements regarding XPEL and its business, which may include, but are not be 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 the word plans, is expected, expects, scheduled, intends, contemplates, anticipates, believes, propose 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 could occur or be achieved.
Such statements are based on current expectations of the management of XPEL. The forward-looking events or 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 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 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 the actions, events, or results to differ from those anticipated, estimated or intended. No forward-looking statement can be guaranteed.
Except as result by applicable securities laws, forward-looking statements speak only as of the date in 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 done, I will now turn the call over to Ryan.
Go ahead, Ryan.
Ryan Pape
Thanks, John. Good morning and welcome to our third quarter earnings call.
Overall, we're very pleased with our results this quarter. Once again, we delivered solid top and bottom-line growth.
Our third quarter revenue was the second largest revenue quarter in the history of XPEL, so we're happy about that. But we're really pleased with the growth given the update we did to our ultimate product line throughout the summer which resulted in constrained inventory in the quarter, specifically in July.
With that revenue grew 24.6% for the quarter, 1% on a year-to-date basis, and our net income almost doubled quarter-over-quarter and grew at a healthy 41% current year-to-date versus the prior year on a currency adjusted basis. So issues related to our ultimate product update largely behind us and we work through in order backlog.
You'll note if you look at the balance sheet, our inventory level is reduced from sort of our historical level and we will see that increase over the coming months. Strong demand for our products and services, as you probably know, from our previous calls a good leading indicator for our future growth is our training classes and those continue to be booked solid.
I think we're booked through February both in the U.S. and the UK training facilities.
So that's a good sign for the future. We recently attended a SEMA Tradeshow in Las Vegas.
This is really one of the largest and most important automotive and automotive aftermarket shows for our industry. It's a good show not only to attract new customers but also it allows our team spend time with customers face-to-face as they may not see all the time from around the country and around the world.
That SEMA show came on the heels of the International Window Film Conference. We had a major sponsorship presence at that show for the first time and unlike SEMA, the IWFC Show is a much smaller, but very targeted show around the Window Film industry.
So we're pleased that we continue to see progress with that line of business. We see year-to-date Window Film represents about 7.5% of revenue.
So we are tracking where we expect to be, we're very pleased with that. And alongside, our investment to market the products like with the IWFC Show, I mentioned we continue to invest in the area we have a major initiative to enhance our software around the Window Film business to make that a key advantage for us like we have in the paint protection film business.
So we're working very hard on that, very pleased with that. Last week, we announced the appointment of Tim Hartt as our Managing Director of Europe.
Tim was one of XPEL's Founders, currently our Chief Operating Officer. He will relocate to Europe at the beginning of the year and lead our strategy, channel development, and oversee all our efforts there.
And as you can imagine, this is no small commitment on his part to make that type of move but he has many years of experience in this business, he knows as we do, the market opportunity intimately and the impact that he can make with his knowledge and his leadership on our growing team. So that move will really allow us to drive the demand for the product, while also ensuring that as we drive demand, we can execute operationally as we build a larger team in Europe.
And Tim will continue to be responsible for our product design and training group on a global basis and I think it's worth noting that a strong product design presence in Europe benefits us globally. So we derive benefit from our European operations outside of Europe, and in many cases, it will accelerate our go-to-market elsewhere, we will have access to vehicles, we need sooner out of Europe and as we cultivate our relationships there, so very important to our strategy.
And as you recall, we established a subsidiary in the Netherlands in the second quarter with the acquisition of our Netherlands based distributor. This is a good complement to our existing UK business.
The leadership of both those business will report to Tim, who will continue to report to me. We are seeing really good growth in the UK and the Netherlands operations has had a strong start and lots of opportunities.
So I think we have a great plan and a very cohesive team in place to execute on that European strategy. So we're really excited about Europe.
We continue to see good results globally. The Canadian business is doing quite well and then in our more traditional distribution model, China, Middle East, elsewhere we continue to see good results.
So we are very pleased with that. We continue to manage the 3M Lawsuit.
We have put together a very robust team and we feel really solid in our position that we do not infringe on the patent in question and we do not believe the patent is valid. As we stated before, so we don't have a whole lot else to say, but we continue to manage through that and as we could see the business continues to do well in spite of it.
So we've got a really passionate team, a growing team, I think Barry will tell us that we're up to nearly 110 full time equivalent employees and we see that continuing to grow. And I think one of the most exciting things for me obviously we know where we are and inflection point we are, greatest challenge we have, and the greatest opportunity we have is building the team and building the people.
And what we're seeing now is people coming to us that want to work for XPEL in an unsolicited fashion and that's a testament to the team we have and to our mission and we intend to fully leverage that. So that's a great thing for us.
So with that, I will turn it over Barry Wood and let Barry take a deeper dive into the numbers. Thanks Barry.
Barry Wood
Thanks, Ryan. Good morning everyone.
Before I take you through the numbers today, let me first say that with we will state certain key measurements on a constant currency basis. We do this because we believe it provides a better comparability for our numbers.
The math to get to constant currency numbers basically just takes our 2016 numbers and restates them using prior period exchange rates. And as a reminder on that, our constant currency numbers are a non-IFRS measure.
So with that let's take a walk through the numbers here. For the quarter, revenues increased 24.6% to $13.5 million and 25.4% to $13.6 million on a constant currency basis.
As Ryan mentioned, Q3 was our second largest revenue quarter in the history of XPEL, despite the fact that we saw the largest impact from our inventory constraints in July. On a year-to-date basis, revenues increased 27.1% to $38.5 million and on a constant currency basis revenues increased 28.1% to $38.8 million.
Consistent with prior periods, the majority of our growth and we're just -- this has been very consistent and continues to come from our PPF and window product, window film product lines. Domestic and international growth rates particularly in the UK continue to be robust.
We anticipate continued success and a possible acceleration in our revenue growth across Europe as we continue to execute our strategy there. So we're very encouraged and excited about that.
Gross margin for the quarter declined to 28.1% versus 30.3% in the Q3 of last year. Year-to-date gross margin declined 28.2% versus 31.3% in the prior period.
As mentioned during our previous calls, effective at the beginning of this year, we began allocating more personnel costs to COGS to better reflect the increased dedication of our employees in the installation business. So if we normalize for the effect of this change, gross margin for the quarter would have been 29.6%, and on a year-to-date basis would have been 29.5% reflecting a slight degradation in gross margins which still remain to customer and product mix impacts.
Overall though we're very pleased with our ability to hold margin levels relatively constant. On the SG&A front, SG&A expenses for the quarter were effectively versus prior quarter.
On a year-to-date basis SG&A expenses grew 4.8% versus the prior year period. Normalizing for the effect of the cost allocation change I talked about earlier, SG&A expenses for the quarter grew 7.5% versus prior year quarter and 12.6% on a year-to-date basis versus prior year period.
As a present of revenue, SG&A expense declined substantially for the quarter and on a year-to-date basis obviously reflecting some efficiency there. The normalized increases in SG&A for the quarter and on a year-to-date basis are due mainly to three areas, three key areas increases in personnel costs as we continue to add folks to support the growth in the business as Ryan mentioned.
We're up to right at a 110 full time equivalents working in the business. Secondly, we had increases in occupancy costs that support our ongoing growth of our operations.
And then, thirdly, increases professional fees due mainly to increases in legal costs. Our legal costs, legal expenses for the year through Q3 were little over $400,000 with most of that incurred on litigation.
We continue to experience very strong EBITDA and net income growth. On a constant currency basis, EBITDA grew 67.3% to $1.5 million for the quarter and 37.1% to $4.3 million on a year-to-date basis, while net income grew 92.1% for the quarter and 41.3% on a year-to-date basis.
The unusually large quarter-over-quarter growth was due to some trend anomalies in last year's third quarter, but that being said, we're very pleased with our bottom-line results despite some expense headwinds due to increased litigation costs, as well as increased costs due to inventory constraints that we had over the summer. On the cash flow front, the company continues to generate very strong positive operating cash flow.
Cash flow from operations for the first nine months of the year was a healthy $3.2 million. Our liquidity ratios continue to be very strong.
Our debt-to-equity ratio declined to 41% as of September 30 versus 72% as of December 31. As our 2017 plan is coming into focus, we're very excited about our growth prospects as a result of our strategy.
We very mindful the need to continue to drive efficiencies in production processes and leverage our SG&A across the enterprise. From a overall financial perspective, we are well-positioned to allocate capital efficiently as we continue to execute on our strategy.
And with that operator, we will now open the call for questions.
Operator
Thank you. At this time, we will be conducting a question-and-answer session.
[Operator Instructions]. Our first question comes from Jennifer Wolford from Comstock Partners.
Please go ahead.
Jennifer Wolford
Thank you, good morning. Could you expand a little bit on the European strategy and on some of the prospects that you're seeing over there that are causing you to make the move within the Netherlands operations?
Ryan Pape
Sure, happy to do so. We look at it a couple of ways.
I think when you look at the business today, we over index globally into luxury vehicles in European luxury market in general. So any opportunity we have to be closer to that industry is going to pay us dividends globally.
So that's sort of a really high level strategy. But when you look at Europe market specifically for this product and more specifically for our business, Europe has been underpenetrated in both respects for a long time and I think there is a feeling here that as it relates to our business, Europe is may be six years behind the U.S.
in terms of the market development. So we see a huge opportunity in the market itself and then for the opportunity for that to impact the business globally, so that's sort of driven the steps that we've taken to -- in a sense replicate what we're doing in the U.S.
and Europe but obviously be mindful of the differences and differences that we need to operate but that's what driven that investment. We see a huge opportunity and I with Tim as we put together a 2017 plan, he obviously sees the opportunity as lot of shareholder and recognize the importance to that and sees the need to have that direct presence and have that continuity of knowledge and experience to help drive it forward.
And I can tell you for sure that we wouldn't be making that that commitment. We wouldn't be asking him to make that commitment, if we didn't think the actual European market to be a very substantial market for us over the next couple of years.
Jennifer Wolford
Great, thank you. It seems to make sense.
Thank you.
Operator
[Operator Instructions]. And our next question comes from Jason Hershman, a Private Investor.
Please go ahead.
Jason Hershman
Hey guys, great quarter. I have a few housekeeping questions for you today.
First of all just want to confirm that the large percentage increase in freights this quarter sounds like it was mostly due to the inventory constraints that you faced particularly during July is that correct?
Ryan Pape
Yes so generally if we're short on inventory for any reason, what ends up happening is we will accelerating shipping to customer usually on our don and so that's what you're seeing there for sure.
Jason Hershman
Sure. And yes second question is and thank you very much for breaking out some more -- some more information on the gross margin line, cost of goods sold line.
The warranty expense as for the quarter went up 110% to the first nine months up 61% which is of course faster than your revenue growth rate, is that something we can sort of anticipate growing faster than your rate of revenues simply because there is a larger pool of cards out there in the market with XPEL film that are still within that 10-year warranty period that may be five-years-old, seven-years-old for example and therefore that line should continue to accelerate faster than revenue?
Ryan Pape
No, actually Jason I think that’s a good question. We would not expect that to really grow faster than revenue.
And when you think of the context of the warranty, I think that there's immediate thought is sort of the long-term durability and our obligations to the product that's been installed two or three years ago. But the reality is a lot of the actual expense that we may incur has more to do with manufacturing or product issues at the point of installation.
And compensating the installers for issues that they had at the time of installation more so than issues related to long-term performance. So while it will vary sort of quarter-to-quarter, what you're seeing there is really a reflection kind of the same trends for the past two quarters which is with the -- the product update and product transition while the inventory was constrained, we also had higher rate of material with issues straight from manufacturing and so that line specifically was driven, our response to that to either replace or compensate the installers appropriately as we did.
So, no, I would not expect as to see that grow just looking at the total vehicles in the market with the film on it. The reality is the warranty claim rate for vehicles out in the field of the product installed year after year is extremely small and so what you're saying a reflection of the inventory situation for sure.
Jason Hershman
Okay, great. Thank you very much for that color.
And one more question, I noticed the sales and marketing was down fairly significantly in the year Q3 2016 versus Q3 2015. I know obviously you had some large service rent to.
So just view that it's just a question of timing when we short expense hit the income statement then therefore Q4 may be elevated compared to the previous Q4 but that something which you do expect going forward?
Ryan Pape
Yes, I think you are seeing that. We made a conscious decision in our budgeting for 2016 looking at the marketing expense to kind limit the rate of increase so overall for the year; you're seeing that as the trend of versus a 2015 where we had very large increases from the prior year.
But within that, yes you are using sort of the mix of when the events are incurred fourth quarter, will be heavier for us just with engine. But in aggregate you see us this year having been a bit more restrained on the rate of growth for the marketing expense.
Operator
Thank you. This does conclude the question-and-answer session.
I would now like to turn the floor back over to management for any closing comments.
Ryan Pape
I want to thank everybody for their time and we look forward to speaking with you next quarter. Thank you.
Operator
This concludes today's teleconference. Thank you for your participation.
You may disconnect your lines at this time.