Greetings, and welcome to the XPEL Inc. Second Quarter 2020 Earnings 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] It is now my pleasure to introduce your host, John Nesbett of IMS Investor Relations. Thank you, John. You may begin.

Good morning and welcome to our conference call to discuss XPEL's financial results for the second quarter of 2020. On the call today are Ryan Pape, XPEL's President and Chief Executive Officer; and Barry Wood, XPEL's Chief Financial Officer, who will provide an overview of the business operations and review the company's financial results. Immediately, after their prepared remarks, we will take questions from our call participants. I'll now 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 as 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. Forward-looking events and circumstances discussed in this call may not occur by certain specified dates or at all and could differ materially as results known or -- materially as a result of known or 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's 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 laws, forward-looking statements speak only as of the date of which they are 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 out of the way, I'll now turn the call over to Ryan. Go ahead, Ryan.

Thanks, John. Appreciate it. Good morning everyone as well. Welcome to the second quarter 2020 conference call. During our Q1 earnings call in May, I indicated we were seeing signs that the business in many of our regions is turning the corner after the pandemic after the 21% revenue decline we talked about in April. Well, I've been certainly been pleased with our results in Q2, which by almost all measures was an outstanding quarter for us and a fantastic comeback from April, certainly well ahead of what could have been given the COVID-19 impact. Revenue for the quarter grew 19% over Q2 2019 to $35.8 million. It certainly topped our expectations. Revenue ramp up acceleration began in May, and June ended up being a record monthly revenue month for XPEL. And just for context, June revenue was over double April revenue, so quite a swing. We will also review our performance by region. Some things have been similar across regions, a pronounced decline followed by a strong rebound. What's been inconsistent among regions is the timing of entering the decline and the duration of the decline. The China region continued the momentum we saw in April, as revenues grew over 200% to just under $10 million for the quarter. Obviously, China had an easy comp as Q2 2019 was a weak quarter based on the previous inventory build prior to that quarter, which we previously discussed. This was the second highest revenue quarter for China after the $13.5 million we saw in Q4 of last year. As a reminder, we accelerated a few million in revenue from Q1 2020 into Q4 2019, just based on the timing of shipments. China auto sales were up over 10% during Q2, so we're certainly benefiting from that. Our forecast out of China…

Thanks, Ryan and good morning everyone. Clearly, Q2 was a very solid quarter for us with revenues growing 19% to $35.8 million which is the second highest quarter in our history. Included in this was approximately $0.3 million in new revenue net of product sales related to our February acquisition of Protex Centre in Montreal. And we also had about $0.2 million of revenue included in Q2 2019 related to our 2019 dealer conference that was out of period. And if you normalize for those items, revenue would have grown approximately 18.5%. And total revenue for the first half of the year grew 17.1% to $64.2 million. Product revenue in the quarter grew 21.8% to approximately $31 million. And in this category, Paint Protection Film grew 14.6% to $24.2 million due mainly to the strong performance in China during the quarter. As Ryan pointed out our window film product line continued to overperform. Window film ended up being 16.6% of revenue which again was a record high. Q2 2020 service revenue grew 3.8% for the quarter and 13.7% for the first half of the year. And in this category software revenue grew 4.4% for the quarter and 9.3% for the first half of the year due mainly to increases in DAP subscribers. Cutbank credits revenue declined 21.9% for the quarter and 8.6% for the first half of the year. And as we've discussed in the past our cutbank revenue is the value assigned to the square footage added to customers' cutbank when they buy our film. And this effectively is just a reclass out of product revenue. And this decline resulted mainly from declines in product revenue in the U.S. and Canada where the cutbank program is more prevalent. And obviously less cutbank-affiliated product revenue means less square footage assigned…

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

Thanks. Good morning, guys. Really appreciate the detail always, so thank you. Just a couple for me, window film look like it really sort of began to inflect in the quarter. So, I guess, kind of a two-parter there. As you look forward, and through half of Q3 does that feel like, there's some catch-up in there given, it's still a relatively speaking small number, or is that a number you think you can grow off of, and I guess just as you look at the categories for Q3, would you expect to get to that high-teens number sort of similar growth rates of the different categories, or is there a deviation there?

Yeah, Steve. No, good question. I think when we look at that there's nothing in this quarter that we would say is, sort of out-of-period or abnormal relative to the trajectory on the window film business. So, I think we expect that to continue to grow alongside the rest of the business going forward. So, I would not expect that, there was any catch-up on say window film for any reason in the quarter that wasn't present for other product lines. I think what you're seeing there is, just more and more adoption of the product both the automotive and the architecture really across the world, and it takes time to win the customers. It takes time to show them that this is a good product, and we're really just seeing the fruits of that now continue to develop.

And you make an interesting point. Is architectural starting to be a more meaningful piece of that mix, or is it still quite a bit of a…

Yeah. No it's – its – like we mentioned, it's still small, but it's becoming more meaningful. And we expect to talk more about that and have a number of investments and other things planned, but we did see record sales for the architectural in June, and then another record in July. And really with any new product that's sort of what we expect because it does take time to win new customers, allow them to evaluate it, and then sort of build on that. So, I think while the automotive window film has been in our product portfolio for several years now, it's not surprising to me at all that we really see that continue to grow now as opposed to say winning all the business when we initially launched it, and I think we'll see a similar thing with the architectural film and then the other products we've got.

That's helpful. And then as you look towards the next quarter, you gave very good granularity, and maybe I missed this, but just as it relates to gross margin, how should we think about China mix in Q3 relative to Q2?

Yes, I think our sense is that the China mix is going to be very similar, maybe slightly less in Q3 than Q2, but we don't expect a big substantial swing one way or the other. So, it's probably comparable or slightly less as an overall percent.

Got it. One more for me and then I'll turn it over. As you talked a little bit about M&A, as you think about that as sort of your strategy, the same which is smaller installation centers or is there any deviation? Would you look to go bigger? Would you look to do product extensions? Any sort of change of plans there at all?

Well, I think we're open to bigger, but in our space bigger is a bit harder to find. So, there aren't a lot of prospects there. Product line expansion is always a possibility, but we've got this great portfolio of products now that we really need to expand and double down on. So, if it was product related it would probably be more built around something we're already doing. So, I think more than likely that sort of leads us to our bread-and-butter sort of channel strategy which is installation and then distribution in country -- in other countries in which we want to operate directly.

Got it. okay. Nicely done guys. Thanks.

Thanks Steve.

Thank you. Our next question is come from the line of Jeff Van Sinderen of B. Riley. Please proceed with your question.

Hi, good morning everyone. Let me add my congratulations on the strong metrics for Q2. I know you touched on this a bit in your prepared comments, but any more color on how you're thinking about how much of the rebound is pent-up demand, I guess what you're looking at there to determine that, and how sustainable you think the growth rate that you've experienced is going forward all else being equal?

Well, I think we're looking at it kind of two ways. We're trying to look at it and say how is the automotive business performing in the countries in which we operate and then how long-lasting and durable has that been? I mean you've seen in China where you had relatively good sales numbers for many months now as opposed to say one really good month following opening up. And then, I guess to a lesser extent we're looking at is it -- are we seeing pent-up demand solely from customers of ours that had lower inventory during the pandemic. We sort of alluded to that fact for Q1 where we saw our DAP usage trend higher than our film purchasing suggesting there was a bit of a destock with our customers. And that may very well have happened, but given how little inventory most of our customers carry, I think it's pretty negligible. So, at this point, I think we feel pretty strong that we're seeing something that isn't just a rebound to satisfy that pent-up demand. I think the -- in the world we're in today, there are a lot of factors, while many of them are anecdotal, but there are a lot of factors that I think are driving car ownership and driving a lot of the things that would ultimately help our business. So, that's -- but that's really all we know. If we -- one of the concerns has been particularly in the U.S. the inventory levels at new car dealerships have been really low. Would that impact the business? We sort of thought maybe if it would we'd see that in July. Didn't really see that so really good results in July as well. So, knowing the limits of what we can know we feel pretty encouraged that we're not just satisfying a month or two of demand for when things were shut down.

Okay. Good to hear. And then I know you mentioned kind of how you're thinking about acquisition targets. But just wondering are you seeing -- or are you sensing that maybe opportunities are improving around acquisitions given the current environment?

I would say so. I think this process whether you're someone in our industry or us it exposes your vulnerabilities and weaknesses. And I think that when you look at the profile and the type of acquisitions we look at, I think that point has been acutely made to a lot of people. So, I think that that does help us in that process. We had talked earlier that we kind of had a hard time closing some of the deals we were looking at, because we just thought the valuation was not meeting our criteria coming into this. So, I think we're a little bit optimistic that's going to help us open that up. But that will be proven out really over the rest of the year, if we're right about that.

Okay. Good. And then, just one more for me, if I could squeeze it in. How should we think about your marketing plans for second half?

Well, we proactively cut a number of things at the pandemic onset as a lot of companies did. And then, we're also subject to a lot of canceled activities relative to our event marketing, which is a pretty big component of our marketing. So we had kind of things we decided to curtail and then things that were just curtailed on us. I think we're -- many of the events that we would look at in the second half of the year, have been canceled. So those are expenses that we're probably not going to have. On the flip side though, some of the other digital marketing and other things that we do that we may have curtailed, we’re definitely either have resumed those or will resume and expand upon those. So, we're definitely going to see an increase from the first half run rate or more specifically probably the Q2 run rate. But I don't think it will meet the expanded amount we talked about last year, wanting to really drive kind of that 90 basis points increase in total spend. I don't think we'll meet that for the year. Just really, because in many of the ways we spend the money, we just literally can't.

Got it. Thanks for taking my questions and continued success.

Thanks, Jeff.

There are no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

I'd like to thank everybody for joining us. Thank you for your time, and we look forward to speaking with you next quarter.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.