Greetings and welcome to the XPEL, Inc. First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Jen Belodeau with IMS Investor Relations. Thank you Ms. Belodeau you may begin.

Thank you. Good morning and welcome to our conference call to discuss XPEL's financial results for the 2019 first quarter. On the call today Ryan Pape, XPEL's President and Chief Executive Officer; and Barry Wood, XPEL's 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'll take a moment now to read the Safe Harbor statement. During the course of this call, we will make certain forward-looking statements regarding XPEL Inc. and its business which may include but are 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, is 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 the 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 cause actions, events, or results to differ from those anticipated estimated or intended. No forward-looking statements can be guaranteed. Except as required by applicable securities laws, forward-looking statements speak only as of the date on which they are made and XPEL undertakes no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events, or otherwise. With that out of the way, I'll turn the call over to Ryan.

Thanks, Jen, and good morning, everyone. Welcome to our first quarter 2019 conference call. First, I'll start by reviewing our performance by geography. Our U.S. business is very strong with 36% year-over-year growth. We continue to see pretty broad-based growth in the U.S. business both by geography within the U.S. and tighter of business, as well as the mix of current customers and new customers. Also you may remember we launched our ceramic coating in the U.S. in March, so we had our first revenue there and that's progressing very nicely for the U.S. business. We continue to invest in the U.S. both with an expanded regional sales team and as it pertains our acquisition strategy which has largely been paused for the past six months as we've gone through our U.S. GAAP conversion, but will be a focus going forward. Next, we'll talk about the international business. Overall, currency had a more significant impact in our year-over-year comps than it has in recent quarters for the international business. Q1 2018 was a real high point for many of the currencies we have exposure to. As we've talked about in our last call, we expected significant year-over-year decline in China and that occurred in the quarter to the tune of 42%. Along with our record growth in China last year, there was also an inventory build in-country at the distribution level. The build in inventory principally occurred March through August at the time the business in China was ramping and there was a need to get product in quickly via air shipment and then also inventory more economically via ocean shipment. So, we have better line of sight into the sell-through now and have that on a go-forward basis. Our China revenue for last year was highest in Q2 and…

Thanks, Ryan, and good morning, everyone. Before I get into some details in our first quarter results, I wanted to update you on our SEC registration process. Today we filed Amendment No. 2 to Form 10. From a process perspective since we're not yet effective we were required to update our previously filed Form 10 with Q1 results, which were included with today's filing. I think we're making great progress on our SEC registration process and expect to be effective very soon. And once we're effective, our NASDAQ listing will soon follow. So let's take a little bit more detailed look into our first quarter results. In total, Q1 2019 revenue declined 1.6% to $24.7 million. Sequentially Q1 2019 revenue was down $2.1 million versus Q4 2018. Now while on those surface, our overall Q1 revenue growth was off from historical patterns there's some very encouraging signs when you peel back the onion a bit as Ryan alluded to some of this earlier. We're seeing very good core growth in most of our regions. For these regions that have been -- for those regions that have been underperforming such as the Middle East, we have a clear strategy to improve performance and we've begun to see some of this improvement in Q2. Obviously the sales declines in China have had a substantially impact on our top line results, but we still see great opportunity for growth in that region as the inventory build works through the channel. And with each passing day we gain increased visibility into that market, which will only help us continue to grow there in the future. Q1, 2019 product revenue declined 4.7% to $21.1 million. In the product revenue category, paint protection film declined 8.7% to $18.5 million and represent 74.6% of our total revenue.…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brock Erwin with CleverInvesting. Please proceed with your question.

Hi, guys. Congrats on the quarter. And thanks for some of that color on Canada and Latin America that was good to hear. My question though is about gross margin. It was nice to see it up this quarter, but it seems likely that most of the increase is probably related to product mix especially with less low-margin sales with respect to China. So I know that continued margin expansion is a key focus area for the company. So in that light, could you just talk a little bit more about specific initiatives that you're working on to improve your gross margins? Thanks.

Sure. Thanks for the question, Brock. So, yeah, I think a couple of points on that. There is – part of what we see with the Q1 numbers is related to China mix. But there's really more going on with the margins than that. And some of that, I think is obscured in Q1, just looking on the currency side. I mean, when you look at the effect the euro and pound exchange rates had on the overall growth rates, I mean, you feel that in terms of the income statement right in the gross margin line. So I think from that standpoint, we really are making more progress than just what the mix would show. And the ways to do that obviously is sort of three components all are equally important to us, but not all equally applicable in every situation. But one is absolute bill of materials product cost, how do we reduce the actual cost to make product that we sell. And we have a number of initiatives to try and do that and manage that. We have some success with that. The second is there's a whole host of ancillary costs that hit COGS that we would not call those bill of material product cost, but some shipping expense, some production labor, other inventory adjustments. These are things that, we have control over. In some cases if it's packaging or whatnot perhaps we can negotiate better. If it's operational, we can become more efficient, we can reduce overtime, we can manage workforce better. So that's kind of area number two. And then the last piece obviously is just selling price and making adjustments market-by-market and product-by-product where we think that's appropriate. Obviously, if we can hold or reduce product costs bill of materials costs and reduce our other elements of COGS and simultaneously raise prices that's, sort of, the trifecta in terms of improving margins. So I think that there is more positive going on than what Q1 reflects once you adjust for currency and we think that we're going to see even better results on the margin side for the rest of the year based on the trend right now.

All right. Thanks for answering the question. That’s it for me.

Thanks, Brock.

Bye.

Our next question comes from the line of Adam Goldstein [ph], a Private Investor. Please proceed with your question.

Hi. Ryan, you mentioned that in April revenue was up 10% compared to the prior year, but then said that for the whole quarter you expect this to be flat. Could you just expand on that a bit? Was April better than May and June, or...

Well, you know, at this point we're just closing out May and as we've learned long ago you never know what the month is until it's done. That's been a constant with this business. And then obviously June is what June is. We don't get a lot of advanced warning and advanced forecasting. So I think -- the point that we're trying to make is that April was a very positive month in spite of the other declines that we've seen more promising than some of the months to-date. But then at the same time we still expect based on overcoming that inventory build last year that's a significant headwind for the rest of the quarter. So we don't know what June holds per se so I think we're relatively -- looking at it relatively conservatively that it would not be unlikely to kind of end up flat. But at the same time we've got encouraging signs in the rest of the business.

Okay. And just another question here about seasonality is that typically in the U.S. business and I think in most of it Q2 was historically your strongest quarter seasonally. Is that also the case in China and like other Asian markets or other international markets in general?

Yes, normally I think Q2 or Q3 -- Q3 was peak revenue last year as an example. There's no question that in most of the markets where we're operating we do better in the warmer months and most of our business is sort of Northern Hemisphere concentrated so we do see that trend. In China, for example, January, February Chinese New Year is typically weak. Canada we see significant slowdown due to the weather. U.S. we see slowdown, but more moderate. So in most of the big markets where we are that Q2, Q3 if you ask the people in the business that's typically, sort of, peak season for them. And then obviously, if you go back further than last year just with our overall organic growth, I mean, we've beaten Q2, Q3 with Q4 many times, but that's based on the growth of the business. I think if you're looking at it really just on a seasonal basis it's Q2 or more likely kind of Q3 peak to the season.

Okay. And then one last thing. I noticed that in the SEC filing there's no constant currency discussion. So verbally you mentioned in order to better understand how the regional breakdown works it helps to discuss revenue on a constant currency basis. But I don't see that on the fighting itself will that be in future filings?

Well, we had removed the sort of constant currency calculations that we had in the past few years to sort of permeate all of our disclosure just because a lot of times we felt that they weren't really as useful to the reader. And some of the real currency oscillations that impacted us kind of 2016, 2017 they just -- it wasn't as pronounced one way or the other. So it just didn't seem quite as relevant. Obviously now with Q1, it is relevant and it was actually one of the reasons we did so well. 99.5% revenue growth in the prior year we benefited from it then so it makes that comp harder. So I don't think at this point we have a plan to bring back that constant currency measure throughout the disclosure. But I do think as it's relevant sort of to understand regional growth we'll continue to talk about it and bring it up like we did today.

Our next question comes from the line of Andy Preikschat with Edgebrook Partners. Please proceed with your question.

Yes. Congrats on the strong U.S. growth. Can you share what is driving U.S. growth? Is it mostly from new installers coming on or is it mostly from additional volume from existing installers?

Sure. Well, I hate to sound like a broken record relative to the U.S., but it's been remarkably consistent over time which is a healthy mix of both. And if you look at our overall customer base there's a really long tail in terms of customer size, customer volume and growth aspiration. So if we said, what is the average growth rate of our existing customer base? It ends up sort of a less meaningful number. So we've seen a really healthy combination for a long time. And the way we're looking at it internally is, we really stack up all of the various metro areas against each other and we're trying to look at measures of penetration sort of per capita, per metro area and how best to get there. And if we have really strong customers that are growing at really good rates that we can help grow, that's a great way to get there. But there's some markets that are just clearly underpenetrated. There's only so many folks offering the products. And in that case there's a more intense focus on adding net new people. But it continues to be a mix dominated by some customers who have a huge appetite for growth that grow sort of far in excess of our overall growth rate, some that grow but at more modest rates and then continued addition of new customers. And I think big picture, we all -- we have expect that we need to continue to always add new customers just to meet the demand that's out there. It's not possible to do that simply with current customer base. So that will always be a focus of ours.

Okay, great. And maybe I missed it but can you share what month you are targeting for the NASDAQ listing?

You want to mention that Barry?

Yes. So Andy, obviously, we filed our Amendment Number 2 today, there's a review process for that, that occurs. I would expect that we would be effective soon. I can't say exactly when that is and we're really beholden to the timing of the SEC. But once we become effective then the NASDAQ listing should follow very soon thereafter. That's all we know at this point.

Our next question comes from the line of Jason Harshman, [ph] a private investor.

Hi guys, how are you doing today?

Hey Jason, How are you?

Okay. Very good, I got one question and one follow-up for you. And it's basically -- the first question is asking a little bit more detail about the U.S. sales. I was wondering that strong growth how much of that is perhaps due to a heightened push into the dealer channel as opposed to the independent installer channel?

Yeah. I think if you look at it overall. And we don't -- we've not yet broken out those numbers. We're seeing sort of direct sales to dealerships increase at a slightly faster rate than the rest of the U.S. business. So, in terms of what we're seeing that is having a net positive impact. But it doesn't radically diverge in terms of growth rates into the aftermarket versus into the dealership direct. And the main reason is that many -- half the time products are sold by dealership, regardless of who they're installed by be it the dealership or the aftermarket. And so, you kind of see that growth even as dealerships are selling more of the product and pushing more of the product you see that growth split. But we are seeing increased activity from the dealerships at a rate higher than the overall growth rate.

Okay. My follow-up question is actually about a very small line item on your income statement, which is the training service revenue which was above $163,000 which is still year-over-year good growth. I was wondering if you can give me a little bit more color on that. Is that because of just additional training sessions in the U.S. or in Continental Europe or Asia? I just view that perhaps as sort of a leading indicator of the overall demand for PPF and XPEL products.

Yeah. Well, I would tell you for sure that the number of people coming through our training sessions is an important leading indicator, and one that we follow closely. And from that measure we are doing more training however you look at it. In the U.S. we've increased our capacity. We've obviously added window film training in the past two years. We've done in Canada one of our first architectural training classes. We will be adding ceramic coating training soon And then, we've also in the past two years done a lot more training and added a lot more training capacity in Europe specifically. So we have a lot of classes both out of U.K. and the Netherlands facility. So in terms of the number of people we're training that is important and that is increasing. Most of the time there's a correlation between number of people trained in that training revenue but not always. We're open to negotiation for training if it brings us a really good opportunity. So I would definitely encourage a focus on how we're training a lot of people that's critically important. I wouldn't focus quite as much on how much revenue we derive from doing that.

Okay, well thank you very much.

Thanks, Jason.

There are no other questions in the queue. I'd like to hand the call back to management for closing comments.

I want to thank everybody for your time for the first quarter results. And we look forward to speaking with you next time. Thank you.