Greetings. Welcome to the XPEL, Inc. Fourth Quarter and Year End Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, John Nesbett of IMS Investor Relations. You may begin.

Good morning. And welcome to our conference call to discuss XPEL’s financial results for fourth quarter and full year 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 call participants. 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 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 plan, is expected, expects, scheduled, intends, contemplates, anticipates, believes, proposes or variations, including negative variations of such words or phrases or state that certain actions, events or results may, could, would, might or will be taken or will be taken to core be achieved. Such statements are based on current expectations of management of XPEL. Forward-looking events and circumstances discussed in this call may not occur by certain specified dates or at all could differ materially as a result of known 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, results to differ materially from those described in forward-looking statements that made the other factors that cause actions, events, 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 statement, whether as a result of new information, future events or otherwise. Okay. With that, I will now turn the call over to Ryan Pape. Go ahead, Ryan.

Thanks, John, and good morning, everyone. And welcome from me to our 2020 (sic) [2022] year end conference call as well. Overall, 2022 was a great year for us at XPEL. Revenue grew 25%, we accomplished our goal of exiting the year to gross margin run rate of 40%, net income grew 31% and EBITDA grew 39%. We want to always drive operating leverage as we grow and we were able to accomplish that this year. Clearly, we ran into some unexpected headwinds in Q4 in China, which I will talk about in a minute, but almost every other region had a very solid quarter led by the U.S., which continues to perform exceptionally well at 31.6% growth in the quarter. Overall, Q4 revenue grew 11.9% to $78.5 million, net income grew 34.7% and EBITDA grew 32.4%. So good operating leverage there. And as we discussed during the last call, our forecast for China in Q4 was less than Q3 and normally, Q4 is a strong quarter for China and a slower quarter for the rest of the world sequentially. So we expected lower growth overall for Q4. The sudden reversal of COVID policies and the reopening in China, which we believe ultimately is very positive news, was clearly disruptive to the quarter. In operating the business, we require payment upfront from our distributor in China. However, our distributor extends terms in country to our dealers. So the prospect of reduced economic activity, which was sort of widely feared at the reopening, but didn’t materialize necessarily to the extent that was feared could have posed significant cash flow constraints on the distributor. And then similarly, like us, distributors maintain higher inventory throughout COVID, going on three years, concerned both about the broader supply chain issues as we have been, but…

Thanks, Ryan, and good morning, everyone. I just want to cover off a couple more items on our topline performance. If you look at the product lines, paint protection film was flat during the quarter. But as we have discussed in the past, cutbank revenue is just to require accounting reclassification. So it makes sense when you look at PPF to combine cutbank revenue with our PPF line and our external reporting to get a full picture of PPF. Combined, paint protection film and cutbank revenue grew a little over 4% in the quarter. So the significant China decline quarter-over-quarter had a good size impact here. Our window film product line continued to perform well with revenue growing 33.7% quarter-over-quarter at $11.7 million. This is down sequentially from Q3, which is expected as this product line does have some fairly consistent seasonality with Q2 and Q3 being the highest quarters. On a year-to-date basis, our window film product line grew 41.7%. Our Q4 vision product line, which is our architectural window film, revenue grew 95% to $1.2 million, and on a year-to-date basis, vision revenue grew 98% to $5.7 million. And also, as Ryan mentioned, our OEM business had a great year with revenue growing approximately 64% to $10.2 million. Our installation -- our total installation revenue, combined product and service, grew 27% in the quarter and represented 17.4% total revenue. On a year-to-date basis, total installation revenue grew 77% and represented 15.7% of revenue. Same-store sales growth for the quarter was 18% and 40% on a year-to-date basis. Our Q4 SG&A expense grew 25% to $20.2 million and represented 25.7% of revenue, as we talked about before. And I would echo Ryan’s comments on SG&A that there is no doubt that we have certain fixed costs built into our…

Thank you. [Operator Instructions] The first question is coming from Steve Dyer with Craig-Hallum. Steve, please proceed.

Thanks. Good morning, guys. A lot of good detail in the prepared remarks, which is as always appreciated. Within the auto space, in general, it sounds like a dealer business continues to do really, really well. I guess could you help us sort of see or what you are seeing there in terms of adding dealers or are they just sort of buying in more to kind of the profitability opportunities in selling this stuff? Are you seeing greater attach rates, are you seeing greater number of pre-loaded vehicles versus not, any color there would be great?

Sure. Steve, yeah, I think, it’s a little bit of all of the above. The dealership business, especially the end of the year into the beginning of this year has really been a bright spot for us, and by a lot of the metrics, we are seeing some of the best performance that we have. And so some of that is related to just the return of inventory where we have revenue in some parts of the business. Preload, as you mentioned, it’s more coupled to inventory, so we stand to benefit from that. But we are adding for -- all of the various product lines we are adding a large number of dealers, and we have seen very good momentum with this. And it’s not the exclusive reason, but one of the reasons we have heard more than once is that as you are in this environment where the market adjustments are under pressure and have to go away, because the inventory is back, that’s cut out this 100% gross margin opportunity for these dealers and they need to trade that down to still generate the gross margin dollars, but to give the customer something for it instead of just that. So that’s -- we are definitely seeing that in quite a few of those cases. And then we have also had success and really, this has been true since we did the acquisition of PermaPlate in 2021 of adding more products and more content per vehicle too within the current relationships that we have and that could be introducing paint protection film at some level that there was only a window film before. It could be upsell to higher line of window film. It could be door cups and door edge guard protection and things like that, that might be preloaded. So it is a bright spot and it’s really all of the above, all the things that you mentioned.

Got it. Thank you. It sounds like acquisitions are sort of back more front burner this year. Can you sort of help lay out directions or generalities as to what we should expect?

Yeah. No. We -- I think we have got a pretty good carryover from last year on things we were working on that just couldn’t come to fruition for one reason or another. But the things we are going to see really at the top of the list are international distribution. We used the example on the call today of Australia and how we see in a case at almost no fault of anyone, but where the third-party distribution, you can run out of alignment with the goals of the distributor versus our goals and our goal is not to maximize every unit of profit in a market that some independent business might be. So definitely more international activity for other key markets we might want to enter. That would be one. Dealership services and everything that you just asked about, Steve, there are other smaller companies doing some of these things like what PermaPlate did and we think it makes sense to add to that business, we get some economies of scale by doing so. So that’s clearly on the table. And then, lastly, sort of looking at installation and in the broader context, installers and things and looking at this acquisition an appropriate way to fill what we perceive to be gaps in our network markets with lower performance and things like that where you need some type of inorganic movement to change that, which has been core to that strategy. So really the three of those is what we are focused on and that’s what I would expect to see this year.

Perfect. Helpful. And then, I guess, just as a way of kind of following up on that in terms of how to pay for it, a little bit of that debt right now, nothing big, but with interest rates going up and it doesn’t sound like there’s a lot of cash you can ring from working capital per se. How do you think about sort of funding that roadmap this year?

Well, obviously, we will be looking at our overall debt situation, it’s a good time to reevaluate that, so that’s ongoing. So there’s some opportunity to improve that just in terms of the cost of capital on that side. And then, for us really without huge CapEx commitments and we are probably set even for us to have a lower CapEx year than we have had in the past few, even though the number is not great. But the big one is, if we stop investing in inventory for the type of deals we do and then with modest leverage, we should have ample cash to do a number of these things. That’s really the key. It doesn’t -- it’s not predicated upon reducing inventory dramatically, and as we mentioned, you have got $5 million to $10 million max of inventory reduction we could see this year. It’s more about just not committing the rest of the cash flow to inventory. And that with a little debt and if we can do that with a bit more attractive structure than we have today with our current facilities, then I think, we are in good shape for what we want to do.

Got it. All right. Thanks as always guy. Best of luck.

Thanks, Steve.

[Operator Instructions] The next question comes from Jeff Van Sinderen with B. Riley. Please proceed.

Hi. Good morning, everybody. I wanted to just, I guess, get your sense on the one-time items, are those probably behind us at this point? I know you can’t see too far in the future, but as far as the next couple of quarters where the P&L should be clean of those?

Yeah. Jeff, I mean, they are. I think if you look at us from a historical standpoint, when we have called things out historically is one time, we tend to mean it. We don’t bury every quarter with a laundry list of onetime things that individually are, but in aggregate are. So when -- subject to what we don’t know, right, but we call those out because that’s truly what they were.

Okay. And then just thoughts around the acceleration of PPF in 2023?

Well, I mean, the key for us is really China, right? That’s what drives the -- all the numbers you are saying more than anything and the oscillations in that. Over time, with acquisitions, we convert some of our product sales with the businesses we bought into service revenue. So if you look at it over kind of a longer period of time, you actually see that we have done that quite a bit, because we tend to have an affinity to buy our existing customers versus people that aren’t customers of ours, right or wrong. So really, the -- if you look at the fourth quarter, I think, our U.S. PPF sales were up $6.3 million, $6.4 million year-over-year. China was down $6.5 million plus or minus. So that kind of like that out, but ignoring even the installation component of the business, which, as Barry mentioned, has now grown to be a substantial percentage. It’s really all about China and getting the full reset there and getting much closer to the business and trying to remove some of the volatility of it and just knowing where we are and where we want to go with it.

And as we think about that, do you think that the growth rate of window film and automotive or dealer services and some of those other things will grow at a similar rate to PPF this year or faster rate or slower, how are you thinking about that?

Well, I -- it really depends, right? So we are kind of agnostic to a certain extent, because we are trying to grow all sources of revenue as fast as we know how. And so in some sense, you could have an opportunity with the dealership that starts as a product sale, like, you are mentioning, that turns into a labor sale, because they decide that it doesn’t make sense for them to do labor. So that -- and those -- the trade-off between those two, that’s really up to the customer, we are not the ones planning for that. So I think we will see growth across all the categories of product. Some the smaller product lines at a higher rate on the larger product lines and then subject to any adjustments to that if we buy things and convert product to service revenue.

And then I think you said, you are targeting 200 basis points of gross margin improvement for the year. I am just wondering, any thoughts on kind of what the quarterly progression might look like? Do you think it’s going to be smooth, do you think it’s more back or second half loaded?

It’s probably more second half loaded, just knowing how things typically go, because you have got inventory in the pipeline and other decisions that either have been made or things that take a while to see the benefit of. So, probably, second half loaded is more likely. I think if we were at that 200-basis-point exit run rate. That would be good. And if we can do it sooner, it’s certainly possible that I think we want to make sure we get that at a minimum.

Okay. Thanks for taking my question and best of luck for the rest of the quarter.

Thanks, Jeff.

Okay. The next question is coming from Tim Moore with EF Hutton. Please proceed.

Thanks and I appreciate the granularity on the fourth quarter sales, it was nice for Barry to point out that the PPF sales on standalone item and we should be including cutbank revenue and some installation labor revenue growth it’s pretty strong. It was safe to hear about the preloaded penetration for your paint protection film as that keeps trending positively. Were you getting any feedback or any type of relay on maybe more non-enthusiast customers purchasing paint protection film last year in 2022, was there any indication that?

Yeah. Well, I mean, clearly, that’s something that we are very focused on as a company for our longer term future, because we know that there’s a huge middle of the market that are not the enthusiast buyer that aren’t going to learn about paint protection film themselves. We have to reach them. We have either reaching them via advertising, which is probably pretty expensive and not a super primary route to the market or through dealerships where or OEMs where they have access to that customer. Given the nature of our dealership business with what we have acquired and then grown, it is sort of overwhelmingly not enthusiasts makes and models, it is much broader in its scope than sort of the business we have through the aftermarket just by its nature and how it came to be. So when we are talking about those dealerships starting to adopt paint protection film in some capacity, no matter how small or how big the coverage, it’s almost certainly touching consumers disproportionately that don’t fit that enthusiast and that’s one of the reasons that we have invested in these businesses and one of the reasons that we are doing this, because that is a direct goal of this. So when you hear us talk about any kind of cut attachment of paint protection film into those dealerships we touch with a dealership services, it’s almost certainly beyond the scope of the traditional enthusiast buyer.

Great. That’s an color to hear and just given how big that market it’s just gigantic. On pricing, I know you mentioned last quarter and you had a remark earlier about price hikes taken. Is it fair to assume that you might have only been able to take pricing from maybe 50% to 60% of your markets since you probably couldn’t take it in China or a few distributor markets, and what I am getting at is, can that provide an additional pricing power for next year in those other markets you are not taking it?

Yeah. I think you are right in that, it’s probably hit less than 50% of the customer base for the -- in the quarter or for the portion of it in the quarter, but it actually probably hit even less of the revenue, because it was really product oriented and not service oriented. The pricing on the service side is just handled in a completely different way. So from a customer base, you are probably directionally accurate, and then from a total revenue basis, it’s probably even less than that, it’s probably in the 30s, but it actually 30% of revenue that it touched in some way. So, yeah, we -- the -- we are continuing to look at that. We have been more restrained in pricing than our competitive set for a variety of intentional reasons. So that is a further opportunity for us this year, but we haven’t made firm decisions on, but the strategy to do what we did and then leave the rest available to us was intentional and it’s something for us this year.

Great. That’s helpful, Ryan. What about -- just on the Rivian relationship, I believe that started ramping up slowly probably in October. Can you just maybe an update on that, and if I remember, is there are three European direct OEM programs that you are doing, how’s that going?

Yeah. So the Rivian program did start in terms of our work at our facility near their plant and then it’s been successful and we are in the ramp-up stage now and that’s a combination of getting all the vehicles on the schedule that we need and then having our team available to do the installations. I think the initial feedback is quite positive, and provided we can get the full allocation of vehicles, I think, there’s interest -- potential interest from both sides in expanding this. It’s had a higher than expected take rate from the end buyer. So I think it’s positive all the way around and we just need to collectively then scale it up to its full potential. So I think we are super pleased with that relationship. There was a delay in getting that going last year until October and that cost us substantially with that delay, but we were ultimately happy to do it and glad that we did it and it’s now something to build on. And with respect to Europe, yes, we have projects today with three different OEMs in Europe and those are in some stage of discussions on possible expansion and that could be additional vehicles or just expanding the number of units of the same make or model that we touch. And then there are other manufacturers with different types of projects that we are in the process of talking to and these things have a long sales cycle just as the ones we have now that usually coincide with a new model introduction or something. So there continues to be strong interest and there’s interest in China and other things where we are talking about needing to invest further there and our willingness to do that. So I think it’s -- overall, it’s a bright spot and we expect to continue to grow that.

Great. That color is very helpful. Just as a quick follow-up question to Rivian. For your 20% to 25% organic sales guidance for this year. Does that include a decent chunk from Rivian or are you modeling that $10 million or less?

No. I would say, we are relatively conservative. I mean in -- from that standpoint. Rivian has done a great job of scaling their production in a number of vehicles, but that has to continue for us to get to our full potential there and so we are not -- we are being very pragmatic to say the least in terms of our model in there.

Great. And my last question is just, have you seen or put more team and managers devoted to cross-selling window tinting and PPF, are you seeing that benefiting you lately?

Sure. Well, I mean, the number one thing that we do is, the way we pay our team, we don’t discriminate between product or service. We are trying to align on growing gross profit dollars in every channel and for every customer type and so that creates inherently a strong incentive to cross-sell and the team knows that we want customer to be able to have an all XPEL experience with all of our products. And so we know, especially in the aftermarket that many times, we have customers that are buying all three products, paint protection film, our coatings, window -- we want them to have an all XPEL experience. So there’s really -- when the team knows that as something to our core and to our brand and then you incentivize them where all of those dollars count. And from their time, more revenue dollars and more gross margin dollars out of one location is more efficient than spreading yourself in and having more places to visit and it’s in keeping with our strategy. So I think we are 100% aligned on that goal.

Great. Thanks, Ryan, and that’s it my question.

Thank you.

We have reached the end of the question-and-answer session and I will now turn the call over to management for closing remarks.

I want to thank everyone. We had a great year, and most importantly, I want to thank our team who’s worked exceptionally hard and continues to do so today. So thank you and we will speak to everyone next quarter.

This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.