Good day, ladies and gentlemen, and welcome to the XPEL Inc.’s First Quarter 2022 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, John Nesbett, Investor Relations for XPEL. Sir, the floor is yours.

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…

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…

[Operator Instructions] Your first question is coming from Steve Dyer with Craig-Hallum.

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.

[Operator Instructions] Your next question is coming from Jeff Van Sinderen with B. Riley. Your line is live.

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.

Thank you. That concludes our Q&A session. I will now hand the conference back to management for closing remarks. Please go ahead.

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

Thank you, ladies and gentlemen, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.