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XPEL Q4´22 and Full Year Results
Date: March 1, 2023.
Stock Price USD 65.70
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I own shares of Xpel, Inc.
Revenue for 2022 grew 25% to USD 324 M in line with my forecast.
Gross margin run around 40% (36%) in line with management goal.
SG&A expense for 2022 grew to 73M representing around 28% of revenue.
Margin EBITDA is around 19% (17%).
Net margin is around 13%. (12%).
Q4 China sales came in 6.2 M, which was a 50% decline respect to Q4 2021. Normally Q4 is a strong quarter for China.
Q4 SG&A expense grew to 20.2M representing around 25.7% of revenue.
CEO Says about China:
“We expected lower growth overall for Q4”.
“The sudden reversal of COVID policies and the reopening in China, which we believe ultimately is very positive news, was clearly disruptive to the quarter. In operating the business, we require payment upfront from our distributor in China. However, our distributor extends terms in country to our dealers”.
“So the prospect of reduced economic activity, which was sort of widely feared at the reopening, but didn’t materialize necessarily to the extent that was feared could have posed significant cash flow constraints on the distributor”.
“And then similarly, like us, distributors maintain higher inventory throughout COVID, going on three years, concerned both about the broader supply chain issues as we have been, but also the China specific issue of the threat of unplanned port closures that would prevent product from arriving even if it was available from us”.
“So as a result of this uncertainty and with inventory to spare given the reopening, our distributor requested and we agreed toward the end of the year to eliminate several orders that were planned, and ultimately, it’s easier and better for us to absorb that than to ask them to take it into the circumstances”.
According to the Management Team the plan is expanding the corporate team in China to improve support to distributors, car dealerships and OEM relationships.
U.S Revenues grew around 32% in Q4 to 47.6 M (36 M). China is a lower margin market for XPEL but has been a smaller percentage of sales respect to U.S market what is a higher margin contributor.
XPEL was able to increase prices for products. Revenue per car is a key metric in the future.
Window film product line grew 33.7% quarter-over-quarter at $11.7 million. On a year-to-date basis, window film product line grew 41.7%.
Architectural window film, revenue grew 95% to $1.2 million, and on a year-to-date basis, grew 98% to $5.7 million.
OEM business grew approximately 64% to $10.2 million.
Total installation revenue grew 27% in the quarter and represented 17.4% total revenue. On a year-to-date basis, total installation revenue grew 77% and represented 15.7% of revenues.
Year-end inventory was approximately 81M. Year-to-date basis, grew around 56%.
“We have honored many handshake commitments to our vendors who have accelerated their production for us when we were more concerned about supply chain and total inventory dollars over the past few years”.
“So we have been fortunate to have had the support of these vendors to prioritize our business, sometimes at the expense of others over the past three years, down from every component of the product down to the corrugated suppliers, which resulted in us effectively never being out of stock on anything, which is something our competitors couldn’t necessarily claim”.
“So as we reduce the days of inventory on hand, it’s imperative that we maintain the relationships that have helped get us there. So the team has slowed me down a little bit on that, which just means this just takes a bit longer to work through, but it’s the right move”.
CEO says about Australian Business:
“We have also reduced selling prices in the country by double digits on our paint protection films to better align with the market price and drive growth over unit economics, which sometimes distributors can prioritize”.
“So with that, we are looking at several other countries with similar dynamics to enter for 2023 with a similar strategy in mind. We intend to complete a number of acquisitions in 2023, similar to those we have done before, especially as reducing our days on hand of inventory and stop committing our cash flow to working capital at the same rate we have”.
In my opinion, given the business nature is important to check the relationship Gross Margin and Days of Inventory on Hand. Reduction of Inventory through cut prices may be a wrong strategy on long-term.
Significant acquisitions are fully lapped, so there is not inorganic component on XPEL growth.
Q1 in the 83M to 84M range (72M)
Gross margin around 40%
SG&A in the 22% range.
The outlook is a soft Q1 in China due to:
Q1 is typically the slowest quarter.
Chinese New Year holiday.
Stock price has dropped by 12.74% since the analysis date.
After earnings presentation the stock dropped by 13.50%. In my opinion that circumstance is due to an overreaction market regarding to soft China market results.
Upside is wider respect to the analysis date.
On 28, February 2023 I bought shares of Xpel Inc.
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