Q1 2015 XPEL Technologies Corp Earnings Call

Jun 01, 2015 AM EDT
DAP.U.V - XPEL Technologies Corp
Q1 2015 XPEL Technologies Corp Earnings Call
Jun 01, 2015 / 03:00PM GMT 

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Corporate Participants
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   *  John Nesbett
      IMS, Inc. - Founder & President, IR Representative
   *  Ryan Pape
      XPEL Technologies Corp. - President, CEO

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Conference Call Participants
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   *  Adam Goldstein
      - Private Investor
   *  Jen Woolfords
      Comstat Partners - Analyst
   *  River Spetout
      - Private Investor
   *  Selim Najim
      - Private Investor
   *  Jeremy Hellman
      Avenue T Fund - Analyst

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Presentation
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Operator   [1]
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 Greetings and welcome to the XPEL Technologies first-quarter 2015 conference call. At this time, all participants are in a listen-only mode. A brief 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, John Nesbett of IMS. Thank you Mr. Nesbett, you may now begin.

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 John Nesbett,  IMS, Inc. - Founder & President, IR Representative   [2]
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 Good morning and welcome to our conference call to discuss XPEL Technologies' financial results for the 2015 first quarter. On the call today we have Ryan Pape, XPEL's President and Chief Executive Officer, who will review the Company's financial results and provide an overview of the business operations and future growth strategies. Independently from his prepared comments, we will also 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 and its business which may include but 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 words such as plans, expect, expects, scheduled, intends, contemplates, anticipates, believes, proposes, or variations of such words or phrases or state that certain actions or events will results may, could, would, might, will be taken, occur or be achieved. Such statements are based on the current expectations of the management of XPEL. Forward-looking and circumstances discussed in this call may not occur by certain specified dates 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 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 law, forward-looking statements speak only as of the date on which they are made an XPEL undertakes no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise.

 Okay. With that done, I will now turn the call over to Ryan Pape. Go ahead, Ryan.

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [3]
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 Great, John, thanks. Good morning and welcome to our quarterly earnings call. I hope you've all had a chance to review the first quarter which was released earlier this morning. We delivered solid results for the first quarter, strong revenue growth and growth in profitability. We will take a few minutes and run through the financials and then I will give an operations update.

 So for the first quarter, we grew revenue of 54% to $8.1 million over first quarter of the prior year, and that was a 7% sequential growth from the fourth quarter of last year. So, much of this revenue was really organic growth. We completed the acquisition of Parasol Canada in February, but sort of largely because of currency and a unique front-end monthly loading of the revenue in Canada, there was really a modest impact from the acquisition in the first quarter. So the quarter really reflects our ability to just continue with the organic growth we've had and expand our existing customer base and expense sales to our existing customers.

 Overall, we think that the size and where we are, if we can drive revenue growth year-over-year in excess of 50%, we think that's a great growth rate, and so we are very pleased with that number. Our gross margin improved slightly to 35% compared to 34% last year. These are good gross margins. They are consistent with what we have seen. And now we expect that if we see the US dollar weaken at all, we will see additional gross margins specifically as a result of our Canadian and European presence.

 From the SG&A expense side, we increased to almost 25% of sales, 24.9%, from 21.5% in the first quarter last year. Much like as we talked about before, the increased SG&A reflects our investments in building a much larger business, sales and marketing, and some new IT systems. We did have some legal and accounting costs associated with the acquisition. And now also in the expense structure for at least part of the first quarter, we are consolidating the overall expense structure of the Canadian operation that we acquired.

 So we are proactively continuing to add to our headcount. I think we added two salespeople this past month alone. And as we mentioned before, a lot of the hiring that we've done over the past 18, 24 months is really sort of catch up from really a skeleton crew years before. So we think we are at a point now where we are really starting to get ahead in our needs, both from an employee and systems infrastructure standpoint. So our costs have grown a bit faster than revenue this quarter and certainly a quarter or two before, but we still expect that that increase in the cost structure will moderate in the future.

 We achieved net income of $672,208 or $0.03 per share, as compared to net $459,000 or $0.02 a share in the same period of 2014. Now, the first quarter included about $70,000 in acquisition related expenses to finalize the Parasol acquisition. So that was the extent of the one-time costs associated with that acquisition.

 Our balance sheet remains strong. We think working capital $6.3 million, $8 million in shareholders equity, so we continue to have a really good foundation to grow the business.

 So, if we switch to operations, we are still committed to growing recognition of our brand and growing our international reach by bringing our product and services closer to the customer. And we must have the ability to support customers in key geographies ourselves to maximize the value proposition that we bring to them. And we've made excellent progress towards that goal with our operation in the UK, and then the Canadian acquisition that we did during the quarter.

 Our UK facility was our first presence in Europe. We're providing sales, support, distribution and training and it is performing well. If you listen, sort of our growth rate domestically is driven by maintaining a full pipeline of new customers while we also work with expanding our existing ones. And that pipeline needs to be built, and it needs to remain full in order to have consistent growth. So we've been developing this pipeline in the UK for the past six months or so, and now we actually have trainings booked already into September. So that's a really good sign that what we're doing is working there.

 Relative to Europe, we plan to further develop the market and we will have an additional corporate presence in Continental Europe this year, which will bring us physically closer to more customers and bring the Company important cultural knowledge and language skills which you just can't get only in the UK. So we are excited about that and it really shows a commitment to that strategy.

 So as I mentioned, during the first quarter, we acquired Parasol Canada. It was a distributor of paint protection film and window tint products in Canada. They were our largest customer in Canada. That integration is really progressing well. And despite us having a small team, we have implemented a really powerful ERP system in the past 12 months, and this has allowed us to manage the added complexity of these international operations better than a lot of companies our size. And it's not -- that type of implementation is not easy, it's certainly not inexpensive, but we think it set us up to do some really amazing things going forward internally and then, by extension, to our customers as well.

 Canada is a tremendously important market. It represents a lot of opportunity for growth, so we have a dedicated sales force in what is the largest outside-US market for us at this point. We retained all of the Parasol Canada employees and we've already added to the total Canadian headcount since the acquisition closed, and we'll continue to do so as we need to.

 So the acquisition is great for us on many levels. We get to own and control our channel, which derisks the current business we've had. We get to bring our operational and product knowledge directly to the customers in Canada, which creates more value and the stickier relationship that we like to have. We get to create more opportunity for the Canadian employees to help us globally. While they are there today, they may not be there tomorrow. We may need them somewhere else.

 And we get to decide what additional products are delivered through the channel. And that will become an important part of our strategy, and that's not something you can always dictate in a traditional distribution model.

 So, the weakness of the Canadian dollar has reduced the accretive nature of the acquisition in the near term. But going forward, we will recapture substantial margin that was previously lost to distribution either through price increases in Canada or through the appreciation of the Canadian dollar. So while we are happy, very happy, with the acquisition and happy where we sit, we feel like it's really in Canada and relative to the impact to the Company, to the bottom line, it's really almost all upside from here. And we are seeing great growth rates in Canada, exactly what we want.

 We continue to fine-tune our operations elsewhere in the world, and in China specifically, looking for the best options to grow. As we mentioned on a previous call, at the end of last year, we removed several of our underperforming distributors in China. China is an important market. We have had product in the country since 2009. And we believe that reducing the number of distributors is the right strategy for us even though it's temporarily reduced sales. Fewer sources of the product in China will ultimately create more value and give us more control, as it does in other places and as it does in Canada, even by virtue of the acquisition that we've done. So, our sales in China are not back to their prior level before we rationalized the distribution, but we are confident that they will be this year.

 We are continuing to evolve the business model. And as some of you know, originally, we started as a software company, and the software component of the business, it's a key element of our overall value proposition.

 And we subsequently many years back entered into the film business. We now have the best film in the market. But customers can still buy the software and the film independently. But increasingly, we are developing a strategy where the software and the film will be bundled together. And in Europe and Canada specifically, we've moved to a more aggressive model to bundle those, and this really helps us maximize our competitive advantage, and we will continue to do more of that going forward.

 So we've made really continued, measurable progress growing the Company in the first quarter. We're seeing the brand awareness continue to grow. We are seeing success with the development of the international markets and really across all of our channels. So we think we are positioned well for growth. We are very much consistent with the strategy that we've had, keep that going for the rest of the year.

 So I want to thank all our employees for their hard work. The integration of an operation like we did in Canada is a lot of work. There's been a lot of long hours, and so we owe a lot to them to getting that done.

 So at this point, I'll open it for some questions.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions). Adam Goldstein, a private investor.

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 Adam Goldstein,  - Private Investor   [2]
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 Hi Ryan. First of all, I'd just like to complement you on your introductory remarks there. You really I thought did a very good job of covering a lot of material. In fact, a lot of my questions you answered, so that was very useful.

 So one question I have is on the Parasol acquisition. Can you give us an idea of what Parasol's annual revenue was, and what percentage of that revenue was XPEL product versus non-XPEL product?

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [3]
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 Sure. So, generally, we do not break out the revenue by geography or by country, mainly for competitive reasons, because a lot of people would like to know where we are strong and where we are weak. So I can't give a Canadian total sales number. But the majority of the revenue, Parasol's revenue, was derived from selling XPEL products -- north of 80%.

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 Adam Goldstein,  - Private Investor   [4]
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 Okay. And can you give us -- maybe you can't for competitive reasons, but can you give us some idea of the margin they were making, and so the incremental margin that XPEL will now capture?

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [5]
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 Generally, if you look at that type of distribution business, you will see a range, and it's for average gross margin of 15% to 30% or 30-plus%, and that depends on exactly what they are selling, the customer mix and pricing. So absent any fluctuation from a currency standpoint, they're in that range across different customer set for gross margin.

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 Adam Goldstein,  - Private Investor   [6]
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 Okay, that's actually higher than I would have thought. Okay. So I've got a few. I'll just ask one more question and jump back into the queue. I'm curious now. I'm not entirely clear on which geographies XPEL is now selling direct versus through distribution. Could you walk me through that a bit?

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [7]
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 Sure. Obviously, we are direct in the US. We are now direct in Canada. In Europe, we have the operation in the UK. From there we are selling to -- directly to customers throughout Europe, although there are still a few other distributing servicing different countries in Europe. But we are adopting more of a direct model there. Elsewhere outside of those key areas, it's still through independent distribution.

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 Adam Goldstein,  - Private Investor   [8]
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 Okay. All right. Thank you. I'll jump back into the queue.

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Operator   [9]
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 (Operator Instructions). Jen Woolfords, Comstat Partners.

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 Jen Woolfords,  Comstat Partners - Analyst   [10]
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 Could you give us some insight on the composition of the end-users or end-customer base, how it breaks down between, say, the high-end autos and kind of the regular car enthusiasts?

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [11]
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 Sure, it's a great question. What we look at when we think about the product and what we see is, overall, paint protection film is -- still generally doesn't have a lot of awareness with the average consumer. And in any given market where locally paint protection film is relatively new, we first see adoption at the very high end of the market, and we see adoption from the enthusiasts, which are those that are really passionate about their vehicle, and that spans not just the high end, it's a wider range. And then once the market is more developed and there is more awareness, and that might be more awareness at the consumer level or more awareness through the local dealership community, then we start to see a rounding out of the customer base and a wider distribution between sort of the everyday driver, which is more mass-market, and the enthusiasts, or the high-end.

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 Jen Woolfords,  Comstat Partners - Analyst   [12]
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 Okay, great. That's helpful. Thank you very much.

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Operator   [13]
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 (Operator Instructions). Adam Goldstein, a private investor.

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 Adam Goldstein,  - Private Investor   [14]
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 I guess there's not many on the queue here. So another question I had was -- let me see here -- okay, so I noticed on the income statement that there is something called exchange differences on translation that may be reclassified into operations. Could you explain that a bit? What is the nature of that translation (multiple speakers)

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [15]
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 It's essentially -- happy to provide a more technical answer off-line, but it's essentially the translation of the balance sheet of a subsidiary who has a different functional currency than the parent. So in that case, our Canadian subsidiary operates in Canadian dollars, and obviously we report and operate in US dollars as the parent. So that's the translation of the whole balance sheet from period to period to adjust for that, and that will kind of go back and forth one way or the other. And so it's a balance sheet change in their equity section. It's just presented there.

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 Adam Goldstein,  - Private Investor   [16]
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 Okay. So what I was worried is the -- it's not the actual operating -- the actual sales that went through, that of course is already taken into account in terms of foreign currency translation. It's just the balance sheet translation that you referring to?

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [17]
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 Correct.

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 Adam Goldstein,  - Private Investor   [18]
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 Okay. Let's see here. I guess my last question would be about what's going on in China. It's hard for me to understand how reducing the number of distributors, which has as you said temporarily reduced sales, it's hard for me to understand how that is a good thing, unless you are going to a direct model. If you're going to do something in China like you've done in Canada and Europe, then that would make sense. But I don't understand how it's beneficial to have just one distributor and to have reduced sales?

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [19]
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 So, it's a great question, and really the dynamic in the answer to the question is not unique to China at all. It's a global phenomenon. Even was true in the US when we had additional distributors. And what tends to happen, or what can happen, and it was true in Canada as well actually, what can happen is when you have multiple distributors that are not geographically restricted or in a geographic territory, what we as a supplier want them to do is to go out and acquire new customers. And when they do that we grow and they grow. And that's what we want.

 However, there is another incentive for the distributor which is rather than go out and acquire new customers, it might be far easier to go acquire market share from another distributor who has already done the hard work of selling the product to begin with. And what that starts is sort of infighting among a distribution structure, which ends up reducing the margin for both distributors. It likely reduces the selling price of our product in the market, which reduces the value, perceived value, of our product. And then ultimately, if you have multiple distributors who are now competing with each other to accept a reduced gross margin, then they start to lose their enthusiasm to sell the product at all and will focus their efforts on other products, whether they are related products or unrelated products, because they can generate a higher margin from doing it.

 When you have one distributor or a limited number, whatever might be appropriate, you can control the message, you can control -- you can maintain the value proposition, and it creates a more stable environment. And there are other geographies where we have had multiple distributors, and we've reduced to fewer or to one as it might be. And the results are very conclusive that if you can successfully pick the right distributor, you get better results when you really double down on them to do the work for you. And obviously, there's risk there in that if you're going for multiple distributors to one or multiple distributors to fewer, if you pick the wrong team, you're going to pay the price. But overall, if you can allow them to be handsomely rewarded for the work that they do developing the market -- developing their market, then it works out better for you in the long term.

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 Adam Goldstein,  - Private Investor   [20]
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 Okay. So can you talk a little about how -- China is now the largest new car market in the world, I believe. Can you talk about what penetration, either the whole paint protection field or XPEL, has in China versus other markets? I assume it's pretty small.

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [21]
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 It's very small. The penetration in the US still feels very small. China is smaller than that, as are a lot of other places. So there's a lot of opportunity there, as there is elsewhere, to continue to grow the business.

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 Adam Goldstein,  - Private Investor   [22]
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 Are you happy with how it's going in China now, or do you still think you need to continue to improve the business there?

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [23]
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 I think our business needs to be improved in a lot of ways in a lot of places. I think we are rarely sort of happy with the status quo. I think reducing the distribution to create more value and give more incentive to the remaining distributors to work harder is the right move. But we have a lot of work to do there to increase sales, as we do a lot of places.

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 Adam Goldstein,  - Private Investor   [24]
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 Okay. Well, I have one more question but is there anyone else in the queue?

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Operator   [25]
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 Yes, there is.

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 Adam Goldstein,  - Private Investor   [26]
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 Either I'll jump back or I'll just end my questions.

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [27]
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 Go ahead with your final question.

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 Adam Goldstein,  - Private Investor   [28]
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 You want my final question? I was wondering about -- you mentioned you used to be a software company and now you are bundling. I've never been quite clear on really how valuable -- it's my gut feel, my impression is that the customer relationships and the product of the film are the primary thing that XPEL has going for it. Maybe I'm wrong. Maybe the software is more valuable than I realized. But what I'm wondering is -- your competitors, there's obviously other software available people use with your competitors' film. Do you really think --

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [29]
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 Sure. It's a great question. You're correct. Having a software platform, and really the software is the conduit for the patterns, and the patterns are what are cut into the film to make the application of the film possible. And you're correct that all our competitors have a software platform and they have patterns.

 So, the distinction is not the presence or existence of software platform patterns, but it's really the quality. And the quality matters, and it matters in a couple ways. It matters that the database is complete, which says if you're an independent install using our product that you know with confidence that any vehicle that's going to come into your shop will be able to provide the pattern for and by extension you will be able to offer the installation for. If you have a database that is less complete, you may have customers come in that you can't service using precut patterns, which either means you're going to decline the business or you're going to do it another way which might be more time-consuming. But more important than that is the actual quality of the pattern and how it fits and how that impacts their business. When you think about cutting out a two-dimensional piece of film and then having to apply it over a three-dimensional shape with the compound curves that you see on vehicles today, the design of that pattern is the difference between, depending on what you're doing, installing that piece one time and getting it done successfully, or installing it three times and throwing away two pieces of material, and it's the difference in installing that panel in 20 minutes or 40 minutes. So, the software, the availability of the software and then the quality of the patterns really drives fundamental pieces of our customers' business, because the alternative is increased labor costs or increased material waste.

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 Adam Goldstein,  - Private Investor   [30]
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 Okay. So it sounds like you think that the software is actually a significant value-added. It's not just customer relationships in the film itself.

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [31]
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 No, it's a significant value add.

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 Adam Goldstein,  - Private Investor   [32]
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 Okay. All right. Thank you very much.

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Operator   [33]
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 River [Spetout], a private investor.

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 River Spetout,  - Private Investor   [34]
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 Hi guys. Congratulations on the quarter and great job. Since the queue was short, I thought I'd ask this question. It has to do with the acquisition of XPEL Canada. I see a few items added to the statements of which contractual relationships, customer relationships and noncompete. It seems that that probably was in Canada and just transferred over. I was wondering if that's a category that's going to be phased out or expanded to include US and UK.

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [35]
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 So, what you are speaking of would be the additional -- rolled up together largely as additional intangible assets on the balance sheet. And that's really a function of the acquisition accounting of the acquisition of Canada. So working with the evaluation team, takes the total purchase price paid and then obviously you've got your receivables or tangible assets, and then the rest of the purchase price is allocated between intangible assets like the customer relationships and other contracts that you mentioned, and then the balance would be accounted for as goodwill on the balance sheet. So, you won't see an increase in intangible assets typically in our business as a result of new customer relationships unless we would have acquired those as part of some transaction.

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 River Spetout,  - Private Investor   [36]
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 And these numbers will just be eventually dissolved or incorporated into the rest of the standards?

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [37]
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 Yes. Those amounts which you mentioned which are part of the intangible assets, those are amortized over a period of time.

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 River Spetout,  - Private Investor   [38]
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 Okay, thank you.

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Operator   [39]
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 Selim Najim,  - Private Investor   [40]
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 a private investor.

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 Selim Najim,  - Private Investor   [41]
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 Can you provide a breakdown of nonrecurring expenses in Q1?

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [42]
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 Sure. From a nonrecurring expense, what would come to mind is principally your costs associated with the Canadian acquisition, which were about $70,000. Obviously, in any month in any period in any year, we have other expenses that don't recur. But really the only one of note would be the acquisition related expenses.

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 Selim Najim,  - Private Investor   [43]
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 Okay. Can you provide your expectation of your personnel's contribution to EBIT for this year?

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [44]
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 Given that we are not releasing the revenue number for competitive reasons, I can't provide the contribution to EBITDA or to the bottom line. But I will say again that we bought the business in part because we thought we could recapture a substantial margin, and we can and we will. And to the extent that we see appreciation in the Canadian dollar, then that contribution should only increase throughout the year.

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 Selim Najim,  - Private Investor   [45]
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 Okay, thank you.

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Operator   [46]
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 Jeremy Hellman, Avenue T Fund.

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 Jeremy Hellman,  Avenue T Fund - Analyst   [47]
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 I wanted to circle back to a comment you made earlier on and make sure I followed you right. You mentioned topline growth of above 50%. And was that rear-looking or forward-looking? The way I ask it forward-looking, you get into some much more difficult comps going forward. The March quarter of 2014 was a $5.3 million revenue quarter and then you step up to $8.3 million, $8. million -- for the next couple of quarters. So obviously if you can hold for the full year 2015 a greater than 50% growth rate, we are looking at probably $10 million, $11 million plus quarters going forward. So I wanted to make sure to clarify that.

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [48]
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 No. I think you're looking at it the same way we are, which is we know those are big comps, and 50% growth on second quarter of last year is a big number. But that's what we are gearing for, and if we can maintain at that 50% number, we are going to be very excited about that. And in excess of that is just a bonus.

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 Jeremy Hellman,  Avenue T Fund - Analyst   [49]
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 I think we will all be very excited about that, so I look forward to that.

 And then just switching gears, I wanted to ask you about the US listing. You've got this XPLT listing which is on the low tier of the OTC market. And as you -- I don't know how attuned you are to some of these things, but there are some issues with the listing. I guess the best way I would frame it, there's been some instances where the XPLT here in the US will trade at a price well divorced from what the DAP listing trades at in Canada. Some other issues that have cropped up where the shares don't show up on screen, there are varying databases. With my point I'm actually dealing with an issue right now with JPMorgan views the XPLT listing as worthless, which obviously isn't but it is disconcerting nonetheless. So, I wanted to see what your thoughts are. I know I am a long-term investor and you're managing the business for the long-term and I think a lot of us are patiently putting our trust in you in terms of an uplifting when the time is right. But have you given any thought to maybe at least in the interim uptaking the listing to the next level up in OTCQX so we can at least see your bid-ask as a US listing and the like?

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [50]
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 Yes, so I think it's a great point. And as we've said, I am a large shareholder. We have a lot of people here that are large shareholders. We all recognize the benefit and the need to better listing in the US. And so we are committed to keep moving down that path, and I can't provide a time frame on when that will occur. I can tell you that since in the past two months since our year-end, we have been focused with all we have on getting the Canadian business integrated fully, and we have done that successfully. So, there is a time to spend, sort of review all the other priorities and where we are in different projects and work that going forward. I think we all agree and we hear you with that concern, and it's something that will be addressed just as soon as it makes sense and that it doesn't come at a point where it makes it harder to hit that 50% number we want to hit. And we want to be able to do both to continue the momentum we have. But we understand your point.

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 Jeremy Hellman,  Avenue T Fund - Analyst   [51]
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 Okay, I appreciate that. Thanks, Ryan, and good luck.

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Operator   [52]
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 At this time, I will turn the floor back to management for closing comments.

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 Ryan Pape,  XPEL Technologies Corp. - President, CEO   [53]
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 I want to thank everyone for participating, and we look forward to next quarter's conference call. Thank you.




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