Good morning, ladies and gentlemen, and welcome to the XPEL Incorporated Second Quarter 2022 Earnings Call. [Operator Instructions]. It is now my pleasure to turn the call over to your host, Mr. John Nesbett, Investor Relations for XPEL. John, over to you.

Good morning, and welcome to our conference call to discuss XPEL's financial results for the 2022 second quarter. 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. Let me take a moment 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 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 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'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 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 acceptable securities laws, forward-looking statements speak only as of the date on which they are made and XPEL takes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Okay. With that, I will now turn the call over to Ryan. Go ahead, Ryan.

Thanks, John, and good morning, everyone. Welcome to the second quarter 2022 call as well. We had a very strong quarter, highlighted by our record revenue, gross margin and EBITDA performance. Revenue for the quarter grew 22% to $83.9 million. It was an outstanding result when you consider the poor but not unexpected Q2 new car SAAR in the U.S., the lockdowns in China that occurred in Shanghai area. And then -- more broadly speaking, FX impact to the business from the strengthening dollar. And we had strong performance across most of our regions, certainly evident in our U.S. region, which grew 43.4% to a record $49.2 million in the quarter. We did see some volume pickup in our dealership services business. So that's off of lows that we've seen on modestly higher new car inventory, but we're still operating at less than 2/3 capacity, as has been the case for the past several quarters. Most of our company-owned facilities continue to experience strong demand, which generally means our aftermarket customers are also continuing to see strong demand in their shops. Looking outside the U.S., record revenue in Canada, Europe, U.K. and Latin America still see strong demand in Canada in one of our most mature markets, but proving there's still room to grow there. Europe continues to perform even in the face of the negative FX impact to revenue and margin, resulting from the strengthening U.S. dollar, particularly against the euro and the pound, not so much against the Canadian dollar unlike in the past. So that's helped us there. Looking at our results on a constant currency basis. Measuring rates as of Q2 2021, revenue was negatively impacted by approximately $1.7 million, and margin was negatively impacted by approximately $400,000 for the quarter. And we expect worse FX…

Thanks, Ryan, and good morning, everyone. I'm going to just a little deeper into our overall revenue performance. Product revenue in the quarter grew approximately 14.3% to $67 million and grew 20.8% to $125 million on a year-to-date basis. Our service revenue in the quarter grew 67.3% to $16.9 million and represented 20.1% of our total revenue. And as in the prior quarter, this growth was driven by increased demand in our company-owned facilities that Ryan was talking about and acquisition-related labor revenue from our dealership services businesses. On a year-to-date basis, total service revenue grew 80.1% to $30.6 million. And keep in mind that sometimes our product revenue is converted to service revenue when we do these acquisitions, such as PermaPlate and Tint Net. So what was pre-acquisition was product revenue, post-acquisition is now service revenue. So this certainly impacts the growth rate in the service category as well. Total installation revenue, combining product and labor, increased a little over 106% and represented 15.7% of total revenue. This increase was due again to both acquired dealership services businesses in 2021 and the continuing strong demand in our company-owned installation centers. And overall, our total revenue was up 16.7% sequentially versus Q1. And again, as Ryan mentioned, we were pleased to see gross margin coming in at 39.3% for the quarter. Sequentially, gross margin was up 19% from Q1, and our year-to-date gross margin finished at 39%. Our Q2 SG&A expenses grew 37% versus Q2 2021 to $17.3 million and represented 20.5% of total revenue. And for the first half of the year, total SG&A expenses were up a little over 56% and represented 22.4% of total revenue. And part of this quarter-over-quarter growth is due to increases in travel-related expenses, as our team has returned to conducting more in-person…

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

Thanks. Another great quarter guys, congratulations.

Thanks, Steve?

When you look at how much you're outgrowing new car sales, particularly in the U.S., I mean, could you sort of break down the biggest drivers, whether it's sort of attach rates or the amount of film going on for vehicle. It doesn't sound like price increases has much to do with that, but sort of what would you attribute it to?

Yes. I think it's multiple things. Clearly, attach rate for paint protection film is increasing, has been increasing, and we think we'll continue to increase. Within the paint protection film business, the trend over time has been more product per vehicle on average. So you used to cover a smaller portion of the cars in aggregate, and that's grown over time and probably continues to grow. Then we have additional products that are allowing us the opportunity for more content per vehicle, be they starting with coatings and the window film products where we're able to take market share in some of those cases, particularly in the window film business where it's a more established business. So taking market share into a larger established, slower-growing business, that lets us outearn and outcompete there. And then I think to the extent that we're in the service business, increasingly via acquisition and other things, that has the ability to drive dollar content and dollar-denominated growth in excess of what you would get just for the product sale, just simply because the service is priced so much higher than just the product. So I think it's really all 4 of those things contributing to that.

Got it. As you look at kind of the dealer base, I guess, first of all, could you remind us sort of how many franchise dealers are selling your PPF. And secondly, what do you think is sort of the realistic opportunity there? I'm kind of thinking about is there a competitor share you can gain or other dealers that don't sell anybody's PPF going forward?

Yes. I mean it's a little bit challenging to determine the number of new car dealerships we reach directly and then through our whole network. And then what does it mean to reach? Is it touching 1 car month, or is it touching 100% of the units sold monthly. But that -- we have some connectivity directly and indirectly into several thousand new car dealerships in the U.S. But I think that there's tremendous opportunity to grow the number of dealerships offering paint protection. And that doesn't mean that we need to sell to them. We will and we might, but also through our after-market channel. There are the huge labor force for the new car dealerships. And I think you will find many, many dealerships that don't offer paint protection. And then you'll find many that offer it, but do it when asked or do it on occasion. And the opportunity is to obviously offer it if you're not, and then offer it with greater conviction and much greater unit volume, much greater attachment to units sold. So there's really a long way to go there. And we've seen success doing that at many different price points. When you get the dealers involved, and it's not as driven by the enthusiast buyer who's conventionally about the product in the aftermarket, you can get attachment into a much broader range of vehicles, and we think that that's really important to do.

Yes. I was going to ask, I mean, I bought a vehicle this quarter -- during the quarter and ironically or maybe not so ironically, it came about half of the vehicle's already sort of preloaded with XPEL. And I was just kind of wondering, is that a trend you're seeing? Is that an incentive that you're providing? Or is that sort of strictly dealers looking for margin enhancements and just sort of preloading it on and basically making people say they don't want it, which rarely happens. What -- is that sort of a trend you're seeing?

Yes. I think you are seeing more paint protection film preloaded on the lot. The -- when you look at the environment we're in with the shortage of new car inventory, we talk a lot about the takes and puts that occur in that environment. One is that dealers having an opportunity to do more preloading and do that sort of upfront accessorization, so that might be what you're seeing. But we do see more of that occurring. And yes, it's typically, ultimately motivated by the dealer's profit motive like anything that they would sell. But -- what our job is, is to help educate the dealers that paint protection film is in fact, a better alternative, in our view, than many of the other things that they sell or preload. There's a lot of warranty and finance products that we don't think offer quite as much value to the consumer as paint protection film. And from a dealership standpoint, those are cancelable products. You can leave a lot and cancel it and hard add like a paint protection film that's actually on the car, that stays. So there's a lot of opportunity there. I think the point that may not be obvious to everyone is that we're not telling the dealerships anything they don't already know that they can make money by doing other things and selling the car. They obviously know that. What our job is and what we're doing and we'll continue to do is to say, the paint protection film is a product that customers love, those that buy at once are incredibly likely to buy it again. And it's a real tangible product with demonstrable value, and therefore, it's a better thing to sell with these new cars than maybe some of the other things you're offering.

Got it. And then I guess, lastly for me, speaking of sort of pre-loading. Would you anticipate your deal with Rivian is going to be sort of one of the only OEM ones you do? Or do you feel like there's a big opportunity there going forward?

Yes, sure, Steve. Yes, there remains opportunity with OEM. And what the OEM channel has the ability to do is to reach buyers today that we wouldn't reach in many cases, any other way either because the dealers aren't offering it or the customer is not aware of it. So especially in Rivian's case, they've been very forward in terms of marketing it, talking about it, branding it as XPEL. So I think they've done themselves serviced by doing that, and they've done the broader business of paint protection film service by introducing it to a lot of people that didn't know about it. And so I think there's plenty of opportunity to expand upon that when you're looking at this still small attach rating to the total new car sales and looking at ways to grow that. So this would be not the last one of those to look at doing.

I guess as a quick add on to that then, would you have to typically do that with a manufacturer that doesn't sell through the dealer channel just given sort of the conflicts there?

No. There's opportunity for both. I think when you look at Rivian with an alternative channel, it's allowed them to engage in marketing activities and whatnot direct to the consumer because they're that much closer to them. But we have other examples now in the OEM channel, where we have a product being installed and sold through the dealers. And there's, again, a benefit to the dealer, too. It's another margin opportunity for them just as it is to OEM. So it seems equally compatible sort of irrespective of the new car channel.

[Operator Instructions] Next question is coming from Jeff Van Sinderen from B. Riley.

Let me add my congratulations on the strong Q metrics. Sounds like there's some encouraging signs in OEM production rates. But can you speak a little bit more about what you're hearing from the dealers, from the OEMs around the inventory outlook and flow that they're expecting as we're thinking about second half?

Sure, Jeff. Yes, I think we -- you have kind of a couple of data points you have, what do the OEMs talk about publicly and what does that mean in aggregate. And then what feedback do we get from all the dealerships that we see and the feedback is literally down to when are the trucks delivered and do the car show up. And those, I would say, haven't necessarily run together in -- over the past 3 quarters. Now it seems like maybe they're coming in to alignment a little bit more where we have reports from dealerships getting sort of increased fill rates, increased delivery rates and that seems to tie a little bit more into what you hear the manufacturers talk about. So if you went back to last year, our expectation was that Q2 would see a meaningful improvement in the overall inventory situation. And while I think the inventory ticked up off of the lows for Q2, no one would probably call out a meaningful recovery. But it does seem now that there's kind of room for optimism there for the rest of the year, both by what we're seeing even in fits and starts at the dealership level and then matching that with the OEM's public comments. I think there will be improvement in that throughout the rest of the year. It seems pretty certain.

Okay, good. But it seems like that's probably a multi-quarter thing, right? I mean we're not going to get back to normalized inventory by end of this calendar year.

Make sure that's -- yes, yes, absolutely.

Okay. So we've got some runway there. So still, you're running -- I think you said less than 2/3 capacity in dealer services. I guess my question there, anticipating more inventory to come in, probably no change you need to make there. Or I guess how are you thinking about kind of getting capacity or getting -- utilizing more of that capacity?

Yes. Well, I think the question was even a few quarters ago, did we expect that the inventory to recover such that we could maintain that capacity, and we were pretty adamant that we believed it would and that we wanted to do that. So the first order of business, hopefully, as that inventory recovers as we use more of the capacity that we have and that is accretive to gross margin. There's some fixed costs there that we can just earn through by doing that. So our plan would be to stay the course and then ideally benefit from that in that segment as inventory recovers.

Okay. Good. And then we're just curious on the software that you acquired that I think you said you are melding into the DAP software platform. Maybe you could just touch on what that is. Just curious on that. And then also, any other components in that vein that you might want to layer in that you would acquire?

Any more -- what was the second part of the question, Jeff, any more components in what?

Yes, I'm just curious Yes. I was just wondering if there are other components like you or that you might want to acquire as well? Or if you feel like you that everything you need done now?

Yes. So we're not quite ready to talk about what we bought and how it integrates in the DAP. Probably need a little bit more time to advance that. But I do think that, that's something that we are looking at and open to as a way to build out that platform. We look at the market that we're in and the customers we have as being technology start in many ways. And we know this is true even when looking at our own operation and where our own operation is strong and weak and where we need things. So there's a lot of benefit that we can bring. And most of that will be from our internal efforts and the team we have and the team we're growing here. But like we did with that, a little tuck-in there, and there's probably some other opportunities for that, certainly ones we would consider going forward.

Okay. There appears to be no further questions in the queue. I will now hand back over to the management for any closing remarks.

Thanks, everyone, and thanks to the XPEL team for doing a great job and looking forward to speaking to everybody in the future. Have a great day.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.