XPEL distributes and installs after-market automotive products worldwide. The company offers paint protection films, headlight protection, automotive window films and plotters. The company also provides aftercare products and installment tools such as software. In addition, XPEL offers installation services and installation training courses, as well as operates installation centers that serve wholesale and retail customers. It sells its products directly to independent installers and new car dealerships.
Think of XPEL’s product as screen protectors for phones. We buy screen protectors to avoid our screens getting scratched, shattered and to avoid costly repairs. XPEL offers paint protection films for cars, which serve a similar purpose, except their protection film is also self-healing. This means that if a rock chip hits a car, the vehicle will be protected and self-heal, thanks to XPEL’s protection film.
I had the opportunity to chat with the Investor Relations at XPEL recently. Below are some notes and commentary from the chat.
XPEL does not manufacture its product, its main suppliers is Entrotech. So IR suggested I think of XPEL like a marketing company that has created a strong brand. It did so subtly at first, for example by helping one of the installers of its product to set a Guiness World Record by tinting the most windows in one business day. Its marketing effort have been racheted up in recent months, most notably through the multi-year partnership with XPEL. The company will be the primary sponsor of the No. 1 Dallara/Chevrolet driven by reigning and two-time NTT IndyCar Series Champion Josef Newgarden for two races in 2020. XPEL will also serve as the ‘’official protective film partner of Team Penske’’. The partnership with Team Penske – the most successful in motorsports history – represents the first racing sponsorship for XPEL.
Beside the strong brand XPEL has created, the company has a strong dealer network. This network is the set of installers who provide XPEL products to customers. XPEL also offers software to its installers. This software helps to use the protection film as efficiently as possible, and to avoid wasting any. Think of when the screen protector is being applied to your phone. A phone screen is a fairly uniform and smooth surface, yet extreme precision must be applied to avoid creating an air bubble. Now think of the complexity of an automobile. The software, which is equipped with the designs of 70 000 car models, is a big part of XPEL’s moat.
XPEL also provides training to its installers. Keeping in mind that a good protective film is just one part of providing a good experience to the end consumer (the owner of the vehicle), solid training and software is key to make installers’ job as simple as possible. XPEL also increases awareness for its product by setting up dealer conferences.
All the above factors are differentiating factors of the company, and demonstrate a key focus of the company, which has also been underlined during many earnings calls: a willingness of the company to get closer to its customer. XPEL does this by supporting its dealers very well, by growing its installer base worldwide and providing training.
We also discussed the company’s operational leverage. IR underlined the exceptional SG&A contraction of XPEL of the past years, from over 38% in 2010 to less than 20% in FY 2018. IR said there was space for additional operational leverage in coming years, and there are internal targets, but nothing specific. It does matter where sales come from, and margins will differ according to geography. For example, in China, sales are done through a distributor, meaning the margins are lower there.
A little more about China: earlier in fiscal 2019, XPEL reported a large drop in revenue from China. The country is a very different market from Western ones and also very competitive. IR shared a funny anecdote: 2 years ago, the company participated at a car show in China, and there were only two PPF companies in then. Last year, there were over 80 PPF companies in China. However, many of these PPF companies were knock-offs of XPEL and do not have the brand or the network of XPEL. IR even said some of the knock-offs were using alternatives names to XPEL (ex: XPIL). Think of your classic counterfeit Hugo Bass perfume. I saw this imitation as flattery though. If counterfeit companies are coming up with alternative names to XPEL, it must mean the brand is strong. China’s market is also barely penetrated, so there is a lot of possibility there. XPEL’s strategy in China has to be different from other countries because the consumers are different. Chinese consumers prefer their protection film to be thicker, so XPEL actually sells a different, thicker film in the country. But similar to Western countries, XPEL is working on customer product and installer support.
About the other markets XPEL is present in: the company also provides architectural film, which is protection film for buildings. It makes up a smaller % of revenues, but 30% of installers who do car protection film, also do it for windows. This means XPEL could reach this other market through the same sales channels.
When it comes to capital allocation, XPEL’s priorities are split into two:
1) Organic reinvestment: getting closer to consumers worldwide by developing training facilities and distribution hubs, as well as by improving their protection film.
2) Acquisitions: tuck-in acquisitions of installers, by paying single-digit EBITDA multiples. The strategy of acquiring installers is intelligent as it assures that the installer will now be using XPEL’s protection film exclusively. XPEL also prefers that existing management/employees stay in place and does not seek to change the culture at installers.
After this conversation and due diligence, I decided to initiate a position in XPEL. The thesis is that XPEL is in a prime position to benefit from the paint protection film market's growth (not mentioned here) due to its competitive advantages. This moat includes proximity to customers through dealer conferences, training and its software, its brand awareness and operational leverage. Penetration into new markets is also a growth factor XPEL is capitalizing on.
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