Good morning, and welcome to our conference call to discuss XPEL's financial results for the first quarter 2022. On the call today, Ryan Pape, XPEL's President and Chief Executive Officer, and Barry Wood, XPEL's Senior Vice President and Chief Financial Officer, will provide an overview of the business operations and review the company's financial results.

Immediately after the prepared comments, we will take questions from our call participants. I'd 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 not be limited to anticipated use of proceeds from 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, expected, expects, scheduled, intends, contemplates, anticipates, believes, proposes 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, occur or be achieved.

Such statements are based on the current expectations of management of XPEL. The forward-looking events and 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 could 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 in which they're 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, I'll now turn the call over to Ryan. Go ahead, Ryan.

Thanks, John. Appreciate it.

Good morning, everyone. Welcome to the first quarter 2022 call.

We're up to a good start in 2022 for the first quarter, it was a record quarter for revenue and gross margin. Revenue grew 38.6% to 71.9 million, and we had strong performance in most of our regions.

Sequentially, revenue was up about 2.5% from Q4, which was good to see given a 29% sequential decline in China due to lockdowns, and many of you know, Q1 is seasonally the weakest quarter for us, and we haven't in every year, always exceeded Q4 revenue in Q1. So we're happy that we did this time.

And as you recall from our last year end call, we weren't sure if that would happen this quarter. So that was definitely positive and happy to see that.

The U.S. business grew 62.4% to 41.6 million, again, another record quarter for the U.S.

region. The U.S.

Q1 new vehicle SAAR was down about 16% versus Q1, 2021, and relatively flat against Q4. We saw some modest volume improvements in our dealership services business at the end of the quarter, and this was encouraging, but the inventory rebuild that we hope for, still very much a work in progress for the industry and probably pushes beyond Q2, as we'd originally thought.

And obviously a moving target. But despite the anemic SAAR for reasons we know, which is primarily related to new car inventory shortage, we saw good growth, which suggests we're continuing to see tax rates grow for our products and to take market share.

So all in all, a lot to be happy with the U.S. business against the broader backstop.

Our company owned installation facilities in the U.S. and which really -- they act as surrogates for what our customers are seeing generally saw record sales in March.

In fact, almost all of them did all-time records. And given this, we expect continued strong performance in the U.S.

in Q2. And this results we see in those locations are really a proxy for many of our aftermarket customers.

So we expect the same from them. We remain in a really unique environment where these retail aftermarket sales continue to do great as indicated by the company owned sales I just mentioned, and what we're seeing from our customers.

The dealerships, however, are mixed bag where our revenue is more inventory coupled at dealerships, which is through our dealership services business, we have more pain, which we know, and as we've been mentioning when we're talking about the performance of our acquired businesses over the past few quarters. Some dealerships have been able to use the shortage of inventory to increase the attach rate of our products into their vehicle sold.

But this is mostly for dealerships that were already carrying our products, but had room to increase the attach rate. So that's been a positive to counter the other negative.

However, we're also competing with an invisible accessory at these dealerships, which is the ability for the dealerships to place market adjustments on top of the MSRP, which bring the dealership record profit, but without doing anything. So it's complicated time to get a full read on the market with these competing inputs.

But as you see, the results have been good either way and in many respects, the good and the bad are balancing them out to be decent for us. So we feel good about that for the US business.

Outside the US, we saw solid growth in most of our regions, including record revenue for the Europe, UK, Latin America. Continental Europe was up sequentially and both were up -- UK was up quite a lot from Q4, so all good numbers there.

Europe's been doing better than we thought really with the war in Ukraine and knock-on effects there. So we're happy with that.

And sequentially, Canada was down a bit from Q4, which is certainly normal for the seasonality in that market. As mostly, you know lockdowns have returned to parts of China due to COVID and this reduced revenue in China for the quarter to 8.9 million.

And we'd already talked about how we thought China would be a bit back end loaded for the year, and then obviously took this turn of events with the lockdowns. Unlike the 2020 lockdowns, however, this is not ground business to halt around the entire country, which is what happened in 2020.

But the lockdowns and the ensuing port congestion will reduce China sales in Q2 by at least 5 million from our original plan and may reduce them from Q1 levels. It's a very fluid situation, so we don't know fully what to expect.

And I think as you see -- as you see how the markets react to the news out of China every day and the oil market, no one really knows to -- what to expect. So, but there will be a continued impact in Q2 from Q1.

And then hopefully, wer’e able to move beyond that quickly after that. In the case of the previous lockdowns in 2020, if things resumed very rapidly coming out of lockdown in China, and so for the regions affected this time, we don't really know whether to expect that again or not, but we continue to watch.

We did launch -- as we talked about in the last quarter, launch one small OEM program in March, this is for a new manufacturer, which is great, in Europe. And our larger planned OEM program, which was the second that we were launching has been delayed several months due to supply chain issues with the OEM, kind of no surprise there in keeping with a lot of the talk.

So that's a drag on us a little bit until we start to see revenue from that in Q2 or Q3, depending on the exact timing. So a few month delay there, but we're still focused on that line of business as additional way to grow awareness of paint protection and bring paint protection film to consumers that have never seen it before.

So at this point, we would affirm even that with China situation, our previous guidance of revenue growth in the 30% range for the year, and we expect Q2 to be in the $80 million range plus or minus, which is definitely lower than we would've expected in Q1 after we adjust for the China COVID impacts I mentioned earlier. I was pleased with our gross margin performance in the quarter.

We finished a gross margin of 27.7 million. It's quarterly high for us and gross margin percentage was 38.6%.

And as we discussed in prior calls, a combination of product and channel mix has been benefiting us, impact from some price increases that were region specific, and then improvements in build material costs of goods for some of our products. All of this comes together and is contributing to our improving gross margin profile that we have been talking about.

So, still expect to see a continued improvement in Q2 and beyond this year, and still expect to hit 40% gross margin in the second half of the year, and that's not changed. That comes with still pressure on gross margin and costs in general, just as we see price increases, and still have reduced capacity in our dealership services business, which where we have extra labor, which reduces gross margins.

However, we have seen some improvement in that. So, when you add that as a negative along with the other work, we are very pleased with the progress in gross margins that we are making and that we are going to be at 40% in the second half of the year.

Our new product initiatives have also been advancing quite nicely. We released the ULTIMATE FUSION, which is a hydrophobic film.

It's been very well received. In fact, started in the U.S.

and then just now in the past 30 days, we are releasing that globally. And this is a specialty film that has a super hydrophobic coating, which really combines the benefits of our ultimate – XPEL’s paint protection film and our Fusion Ceramic Coating.

This is a component of our future product portfolio. It'll -- maybe it's long-term 10% to 20% of the mix.

So it won't dominate that business, but it is a nice addition. Additionally, a lot of focus in the past few quarters on really launching in earnest architectural film business and expanding the product line, it's a very skew intensive, very wide product line.

And it's really coming together, Q1 revenue doubling from Q4, so really starting to pick-up the momentum there. And some of you may know, that's a business with really two distinct sets of customers for us.

We have got customers in the automotive space, who really started their business in the window film space and are in both automotive and these architectural films. Sometimes people think it's a completely distinct set of customers and that's just not always the case.

And then there are customers who are focused solely on those architectural products, architectural film, and we have been winning some of those accounts. And those are really the higher volume, more prestigious accounts.

And so, with the product line expansion that we have been doing and the focus over the past year, we are now a viable partner for those businesses, and starting to see some success with them. So very encouraged by that and that will continue to develop throughout the year.

Our inventory level for Q1, we ended a little under $75 million in inventory. And for those watching the balance sheet, this has been over the past two years, sort of a $25 million, $50 million, now $75 million over the past 18 to 24 months.

So big, big increases in inventory, and we have been particularly concerned about TPU resin availability, which goes into making the extruded TPU film, which goes into making paint protection film. And going into 2022, production on some of this resin was really forecasted to be flat for the year for a variety of reasons over 2021.

So, into a growing market that is obviously had been and was a concern. And then more recently, there were concerns that the actual production capacity was going to see a reduction over the previous year, due to various shortages in the broader chemical market and other factors.

And the other side is, we have been building inventory, others have been building inventory. So you have this overall dynamic in the economy where you have seen such massive inventory build, which is probably contributed to some of the pricing dynamics we've seen and shipping expense, and now everybody's sort of coming to terms with this.

But as a result of a concern with that TPU resident shortage, we planned aggressively to build inventory to mitigate that impact. That's what's been occurring with us really over the past six to nine months.

So we expect inventory to peak in Q2, although the timing's slightly less certain given the lockdowns in China, but generally we expect to release cash from inventory over the second half of the year. And at that point we will either have built sufficient reserve inventory to counter any supply shortage or the feared shortages will not have materialized, because they were exacerbated by others building inventory that maybe they didn't need.

And either way, we’ll be in good shape for our customers in terms of ensuring we have ample supply, and the only difference will be the rate at which we release cash from inventory. And in the second half of the year that could be $20 million reduction plus or minus depending on how that actually plays out.

So that's a strategy there. From a EBITDA standpoint, grew 29.6% to 11.9 million, that was an EBITDA margin of 16.5%.

Like we talked about before, we held our Annual Dealer Conference in February where we had about 510 employees, which was up from 350 at the last conference in 2020. We didn't have it in 2021.

So there was about a net cost of that about $800,000 in Q1 that wasn't present in Q1 2021. Also had a $400,000 project we completed.

So that was $400,000 in professional fees that won't reoccur in the quarter. So if you normalize for those our EBITDA would've been -- EBITDA margin would've been approximately 18% and EBITDA would've grown about 42%.

So that really good numbers there. So we continue to make good progress towards our goal of 20% EBITDA margin by the end of the year, and that’s really driven in large part through the anticipated revenue growth and then the gross margin objectives that we outlined earlier.

So all in all, very solid quarter under the circumstances, very pleased with the effort by our broader team. Everyone's very creative and working hard to work around all of the different things that we see in the market and doing a fantastic job.

So with that, I'll turn it over to Barry, and then we'll take some questions. Barry, go ahead.

Thanks Ryan, and good morning, everyone. I'll jump right into the revenue categories.

Our product revenue in the quarter grew 29.3% to approximately 58.1 million. And within this category, paint protection film grew 22.8% to $44 million, and sequentially this was down about 3.7% from Q4, primarily because of China -- challenges that Bryan talked about.

Our window film product line grew 61.1% to $11.5 million, which was a record for us and represented 16% of total revenue. And we continued to gain share in the automotive window film segment.

And as Ryan said, our architectural segment had a great quarter doubling from Q4. Q1 2022 service revenue grew 98.5% for the quarter to $13.8 million, and this growth was driven by increased demand in our company owned installation facilities and acquisition related labor revenue from our dealership services business.

Our total installation revenue combining product and labor increased a little over 197% and represented 15.3% of our total revenue. And this has certainly contributed to some of the favorable mix influencing gross margin that Ryan was referring to earlier.

Our Q1 2022 SG&A expense grew 81.5% to 17.7 million and represented 24.6% of total revenue, and sequentially Q1 SG&A expense was up just under 9.4% versus Q4 or 2021. And if you normalize for the dealer conference and the earlier one-time expense for professional fees, the project related professional fees, SG&A would've been essentially flat versus Q4.

Sales and marketing expenses increased 86.3% during quarter, and again, normalizing for the dealer conference, sales and marketing expenses would've increased about 63%. Sequentially, sales and marketing expenses are essentially flat versus Q4, again normalizing for the dealer conference.

Q1 2022 general & administrative expenses grew 79% to $11.4 million. And this increase was primarily due to expenses associated with our new acquisitions, and primarily the increased amortization costs from those acquisitions.

Sequentially, G&A expenses were flat versus Q4 after normalizing for the one-time costs. While we've manage -- been managing gross margins well, we're not immune to inflationary pressures and you see some of that show up in our SG&A, but we're doing our best to work through that.

Q1 2022 EBITDA increased 29.6% to $11.99 million reflecting a 16.5% EBITDA margin. And again, echoing Ryan's point, normalizing for dealer conference and cost of professional services have not incurred EBITDA would've increased 42.3% to 13 million reflecting an EBITDA margin of 18.1%.

Q1 2022 net income increased 14% versus Q1 2021 to $7.8 million, reflecting a 10.9% net margin. EPS for the quarter was $0.28 per share.

And if you normalize for the dealer conference and the one-time professional services, then net income margin would've been approximately 12.2% and EPS would've been $0.31 per share. As Ryan alluded to, we continue to use cash to maintain elevated inventory levels, primarily to hedge against future supply chain risks.

And as a result, we used operating cash for approximately 4.3 million for the quarter, and we do anticipate inventory levels dropping during the second half of the year. And finally, we closed the quarter with 33 million drawn on our line and we remain well capitalized to execute on our initiatives in coming quarters.

And with that, operator, we'll now open the call for questions.

Ryan on for Steve. I don't think I caught it, but so China sounds like sell into the country a bit disrupted because of port issues and everything going on there, but can you comment on sell through?

I guess, how to sell in compared to sell through? And then secondly, how do your inventories look at the country level at your distributor?

Yeah, so I think that you're seeing, and the dynamic there as you correctly mentioned is that, when we're talking about large quantities going to China, you've got sell in. You might have inventory on a boat, inventory on airplane, and then there's inventory in country.

And then there's inventory in country and then sell through to the end customers. And the sell through is obviously disrupted in provinces that have been in lockdown, clearly, so, Shanghai and some other places.

So you've got disruption there. And then as a result, we have less product going in country just in anticipation of needing less product in the immediate term due to those lockdowns.

So in that sense, it impacts both the sell in and the sell through with the lockdown scenario.

How do you feel about inventory in country at the moment?

Well, I think we ended the year at a little higher inventory than we had say, in Q3, the distribution there had, and I think we talked about that. So that dynamic is really unchanged, not higher nor lower, given that we already had been reducing shipments even in Q1.

So I don't think the inventory dynamic has changed. The real change is just the -- the sell through as a result of the areas and provinces that have been locked down.

Switching over to the US, I mean, industry challenges here are pretty obvious, you mentioned many of them, but our math implies XPEL is taking accelerated market share here in the US. I guess, anything you can attribute that to more recently.

And then secondly, do you think that outperformance relative to new vehicle sales can continue as the volumes increase or is there not necessarily a kind of one for one type comparison to new industry vehicle sales?

Well, I think, our thesis has been for a long time really twofold. One, if you look at paint protection film as a product category, as an industry that's growing, and the attach rate to new car sold is growing and that there's more cars with some amount of paint protection film, and then within the business, the amount of film per vehicle has been increasing over time, too.

So, effectively content per vehicle increasing and attach rate increasing. And so, that's what -- whether it's now or whether it's during the early days of COVID in 2020, that's what's led us continuously -- part of what has led us to continuously outperform the underlying market because we're seeing that growth in attach rate.

And then separately, in terms of market share, we do take market share. We still believe in paint protection film, but we certainly take market share in the window film and automotive window tinning space.

And so that in the same way as the growing attach rate of paint protection film, that's kind of runs counter to cycle that we're in and is what allows that category to grow even when vehicle sales drop and really to grow even in excess of that amount. So I think, both of those have been true and both of those still are true.

And that's I think a big part of why we've outperformed in a substantial way the USR for the past three quarters now, I think since we first saw the SAAR weakness in Q3 of 2021, that dynamic has held. And so we think that even with all the uncertainty that's there, that trend continues at some level, no matter what the macro sort of throws at you.

So, from that standpoint, we feel pretty good.

Just following-up on the window film, can you remind us what the approximate mixes of new versus used vehicle applications for window film? And then maybe how that compares to paint protection film?

Yeah. So for us, the vast majority is still new, even for the window film.

We've not put out any specific numbers, but the vast majority is new. But the applicability of window film into the used car market, we do see is substantially greater than paint protection film into the used car market, only because from the moment that you apply window film on a vehicle, you get the full utility of the product even if that happens later in life.

With paint protection film, there's a decaying, declining use if you don't apply it while the vehicle is new, because it's being damaged the whole time. So there's more potential in the used vehicle market for window film and paint protection film, but it's still overwhelmingly new cars, which is really just primarily due to our route to market, which is premium installers in the aftermarket and dealerships, they're much more tied to new cars than used cars, which you might see in some of the lower end aftermarket shops that aren't our bread and butter customer.

So for us, that skews it overwhelmingly towards new car.

Great. Just one clarification then I'll turn it over to the others.

But just to confirm, you said $80 million revenue for Q2, and 30% growth for the year on revenue?

I was still looking at 30% growth for the year, even with China impact. Obviously if that situation deteriorated going into the year, that might change that but still feeling good on that overall.

And Q2 around $80 million, that would be down from where we were with China. We talked about China having maybe a $5 million, $6 million cut, so that would've been 86, maybe 87 plus before reductions in China for Q2, so around $80 million.

Yes.

Hi, good morning, everyone. Let me just say congratulations on strong numbers, especially in the face of a lot of just general headwinds out there.

Can you speak more about what you're seeing and hearing around car dealer inventory levels, I guess, forward expectations there, how you see that sort of developing, and then also how that's influencing your outlook for kind of a ramp in Permaplate and Tint Net segments. And I know this may be tough to answer, but when you sort of expect those to be running at levels where you are utilizing capacity at a more acceptable level?

Sure. Yes.

So I think you have kind of two ways to look at that. You could look at the -- what the industry talks about, and what the manufacturers talk about in terms of their manufacturing output.

And then you can look at what do we actually see in the world that we live in, which obviously doesn't overlay all makes and all manufacturers equally. So we see kind of one thing and you hear another.

So I think that the prognosis in terms of more inventory was probably more bullish last year than you get into this year and maybe other disruptions and things, there's wire harness shortages due to Ukraine and various different factors. But I think the consensus -- overall view is we still see an improvement in that inventory situation through the rest of the year where maybe Q2 was a turning point.

Now maybe the industry view is more that that's been pushed out to Q3 or beyond. So it's still improving, but maybe not at the rate out of the industry level that we thought earlier.

In our case, we're exposed to certain vehicle makes and models and have concentration that doesn't reflect the broader industry. So at any moment for us, it could be better or worse depending on what that concentration is.

And what we saw at the end of March, we saw through the dealership services business which really reflects the deliveries of vehicles to dealerships more than sales, we saw some of the highest and higher numbers than we had seen higher than say, December in many cases, where December's typically a good -- was a good month. So we've seen pockets of improvement.

It's just hard to say if that's a trend or just a flash in the pan, but we definitely have seen some positive signs there at the end of the quarter. So I think realistically, we're looking at this in kind of a Q3 timing, we've had pockets of the country where our labor was fully utilized and we've actually done some hiring.

And that could be both from increased delivery rates of vehicles to dealerships, and also just where we've won and added new accounts. So that's been good, but I think that realistically, that is later in the year before we could fully put that installation capacity to work.

And then I wanted to ask you, I know, obviously, there's a lot of things evolving and moving parts, but with the attach rate improving in the US, are there any trends to speak to regarding full wraps versus partial wrap? Just wondering, if there's any sort of underlying trends there as you get bigger?

Yeah. The trend -- and really it's been the trend for paint protection film forever, has been to more and more coverage over time.

And so we're used to see years ago, small -- relatively small amounts of film just on the leading edge of the vehicle or a partial hood on a high end vehicle like Porsche. Now that covering part of the hood on a Porsche really in the aftermarket or even in the dealership space is just completely unheard of.

So that grew and has grown to say, cover the entire front end of the vehicle. And then you have more consumers who have been covering the whole car for a variety of reasons.

So that trend very much continues, and it even continues to go down market. As you see, more mid-range vehicles that give any attachment in paint protection film when those are through the aftermarket, we've seen the coverage on those continue to grow.

So it really is twofold, it's paint protection film content per vehicle and paint protection film attach rate, and both have had and continue to have positive trends and we're a beneficiary of that.

And then sort of as a follow up to that, I hate to use the R word, but it is on people's minds. I'm just wondering, do you think that the partial versus full wrap mix might change in a US recession or even a global recession?

Well, our view on that is no. And the -- our belief is that, if you're going to buy pay protection film, you're buying a new car.

And if you're buying a new car in a bad environment or in a recessionary environment, our belief is that you're still virtually as apt to buy our product with the car if you're buying the car. Now, if you don't buy the car, it's a new car product, primarily you're not going to buy our product, but if you're buying the car, we believe you're going to still buy the film and that you're probably not going to alter the coverage seubstantially to save a few dollars, because as a percentage of that new car value, it's a very small percentage and adjusting the coverage doesn't move the needle on that materially.

So from that standpoint, we're coupled to the SAAR, right, at some level in a recessionary environment, but then you have this increasing attach rate that continues, which gives us a level of disconnection which is what you've seen in the past three quarters where the SAAR has been a negative trend, but we've performed quite well. Some of that is that we over-indexed into the luxury segment, which has done better with the inventory shortages than some of the rest of the market, but still you've seen that decoupling here.

And we would expect that that exists in any type of environment we might see in the next couple years.

Okay. Thanks for taking my questions.

I can take the rest offline. Continued success.

I want to thank everyone for participating today, and look forward to speaking with you again next quarter. Thank you.