In this segment of "Industry Focus" on Motley Fool Live, recorded on Dec. 2, Fool analysts Nick Sciple and Auri Hughes discuss the strong relationship that XPEL (XPEL -1.06%) has with its main supplier.
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Nick Sciple: Okay. One other thing maybe we should talk about with XPEL is they're an asset-light business, so they are not the ones manufacturing their paint protection film, they source it from a third party.
Some benefits there obviously very asset-light, potential risks as well. How do you think about the supply agreements for XPEL and where that fits into the business?
Auri Hughes: Yeah, I think those supply agreements need to be ironclad. It's nice that they're taking on the paint protection film inventory and then reselling it and they are known for it. But it would be nice if they can control the supply, but they've kept those relationships strong for a fair amount of years now.
The other thing they've been able to do that is one of their goals is they increase gross margins, so over time they're getting better prices on the paint protection film. That means they have a good relationship where everyone feels taken care of because they could.
What if I was supplying XPEL and I wanted to squeeze them or get better prices, so they've maintained those relationships. But it would be nice if they did control that part of the supply chain. But it is a resell business.
Sciple: Yeah, it almost looks like a pharmaceutical agreement. Just a little bit of context, so at 75% of their film is sourced from one supplier and XPEL has the exclusive rights to market it or around the world.
You see some of these things in pharmaceuticals where we have the manufacturer and they give an exclusive right to maybe somebody like Allergan (AGN) or somebody like that to go market the product, and that's really what's going on here with XPEL.
You could look at the agreements or the agreement renews every two years and you could say, man, XPEL is selling so well, maybe there is a risk with the supplier and it takes back the supply and disinter-mediates them from the market.
For me, it's one of those things that as long as XPEL is throwing up this 50% plus revenue growth and building a brand that's incredibly strong, the likelihood that the supplier is going to pull that deal is incredibly low.
Because again, you're giving up all these incredible sales. I think you see a lot of this in, again, in pharmaceuticals as well. Allergan I think doesn't technically own the Botox chemical, but it's unlikely it's ever going to get pulled back for them because they've been so successful selling the product.
For me, I view the relationship as a strong one for XPEL again, because they've had so much success. To your point on the margins, if you have a supply agreement that keeps what you're buying at a fixed price, and because of your presence in the market you are able to raise prices to your customers, and that all ends up falling to the bottom line.
That appears to be some of what XPEL has been able to do the past several years as margins have gone up.