Greetings, and welcome to the XPEL, Inc. First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode and 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, Mr. John Nesbett of IMS Investor Relations. Sir, you may begin.

Good morning, and welcome to our conference call to discuss XPEL's financial results for the first quarter of 2023. 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'll take questions from the 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, 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. Such statements are based on our current expectations and assumptions, which are subject to known and unknown risk factors and uncertainties that could cause our actual results to materially differ from those expressed in these statements. These factors are discussed in detail in our most recent Form 10-K, including under Item 1A Risk Factors filed with the Securities and Exchange Commission. 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, I will now turn the call over to Ryan. Go ahead, Ryan.

Thanks, John, and good morning, everyone. Welcome to our first quarter 2023 call. Clearly, we're off to a great start in 2023. In the quarter, revenue grew 19.5% to $85.8 million. This was our second highest revenue quarter in history, which is great considering Q1 is almost always and historically been our lowest seasonal quarter of the year. U.S. revenue grew 22.8% compared to Q1 2022 to $51 million. This was up sequentially by a little over 7%. Results seems to coincide with Q1 U.S. SAAR performance, which finished better than most expected and rising new car inventory levels were a contributing factor to this better-than-expected results, and we benefited from that. As we discussed in the past, we've been mindful of potential impacts of the challenges current macro environment such as higher interest rates that could impact the new car buyer. But so far, our new car buyers have proven to be quite resilient. I think we're seeing that in our results. And the luxury share of the U.S. market reached an all-time high in Q1, which is a good point for us as well because we continue to over-index into that segment of the market. Our China region finished right where we expected and what we talked about with the inventory destocking and changes coming out of the lockdown of last year, revenue declining approximately 25% versus the prior year quarter. So we should reach the trough in China sales in Q1, and we expect incremental sequential quarter-on-quarter increases for the rest of the year. We're still forecasting annual 2023 total China revenue to be pretty flat relative to 2022 given the slow start of the year. Having said that, – we're bullish on the long-term opportunity in China. As we discussed last call, where with the end…

Thanks, Ryan and good morning, everyone. Just to cover off a couple more points on revenue. Looking at the product lines combined paint protection film and cutbank revenue grew a little over 14% in the quarter and was up sequentially a little over 5%. Our window film product line revenue grew 29.9% quarter-over-quarter to $15 million, which represented 17.5% of our total revenue. And this is up sequentially from Q4 by a little over 28%, so really solid quarter for window film. Our Q1 vision product line revenue grew 6.4% to $1.2 million, and this was up a little over 13% sequentially. Our vision product line tends to be seasonal with December, January and February as low months, but we have momentum in this line as March was a pretty strong month for us. Our OEM revenue had a solid quarter growing a little over 50% versus Q1 2022 to $3.5 million. And our total installation revenue combining product and service grew 34% in the quarter and represented 17.2% of total revenue, so all in all, really good performance across the board in the quarter. Our Q1 SG&A expense grew 18.9% to $21 million and represented 24.5% of revenue. And our expense growth was a bit muted in the quarter with the out of period impact from the timing of our annual dealer conference. The impact was about $800,000 in Q1 2022. So we’ll see those conference expenses hit in Q2 this year, but even considering that we saw some really nice leverage in the quarter. Our Q1 net income grew 46.5% to $11.4 million reflecting net income margin of 13.3% and EPS was $0.41 per share. Sequentially net income was up just under 37%. Cash flow from ops for the quarter was $0.7 million, which is substantially lower than…

[Operator Instructions] Thank you. Our first question is coming from Steve Dyer with Craig-Hallum. You may proceed.

Thanks. Good morning, guys. Nice results.

Thanks, Steve.

We talked a bit about this last quarter, but I’m just kind wondering continue to keep an eye on and sort of in the marketplace. One of the questions is, as inventory sort of starts to loosen a little bit if, you’re seeing any change just among the preloads or the dealers that preload the wrap on vehicles here as things get a little looser and maybe that becomes more of a point of negotiation as opposed to preloading it and tell you that you got to have it.

Sure. Yes. No, I think there’s a couple dynamics there. We’ve seen it both ways. When you look at where our products are most often preloaded, we see it much more with the window product line than we do the paint protection film to begin with. So the amount of preloading, at least for substantial coverage paint protection film that we see across the whole network is actually relatively low. So I don’t think we have a huge exposure to that. And window film as a preload is really a necessity in many markets. So that should be pretty durable in any environment. And then on the flip side, we’ve seen – definitely seen interest from dealers in terms of adding products as the market adjustments that have had been so prevalent, have been winding down or being substantially reduced. So I don’t see significant exposure to that as that inventory dynamic continues to shift.

That’s great color. Thank you. Just on the acquisition that you made in the Dealer Services segment, wondering if you could just get a little bit more specific as to what this company does? How it integrates with what you’re already doing, et cetera?

Yes. So in our dealership services, we’re doing relatively high volume in terms by attach rate installation of paint protection or window film for car dealerships directly. And this is typically a type of business that our existing aftermarket network isn’t as interested in with the preload high volume. And that’s what we did with the PermaPlate acquisition and a subsequent acquisition two years ago. And this is really just another smaller version of business like that that we can integrate to do that work for dealerships.

Okay. And then I guess given some marginal revenue there along with the Q1 beat, any sort of change to your view on the year of 20% to 25% revenue growth?

No, I think we’re still there and what we’re seeing now, keeps us on track for that. I don’t think our position really has fundamentally changed. We’re not inherently more pessimistic about the year nor are we more optimistic than we were two months ago. So I think we’re feeling good about the business, still a little cautious just as everyone is. But no fundamental change in our outlook.

Got it. All right. Appreciate the color guys. Good luck.

Thank you.

Thank you. Our next question is coming from Jeff Van Sinderen with B. Riley. You may proceed.

Good morning, everyone. Let me add my congratulations. Just wanted to see if maybe you can update us on where we are with the attach rate at this point. I know we’ve got some moving parts, but maybe just touch on that if you could for PPF?

Yes. So I mean, yes, for PPF, I mean, I – this is a slow moving, but ever increasing rate, best that we can tell. So depending on how you look at that, you’re looking at the U.S., you’re still talking probably high single digits with some amount of paint protection film attached. I would tell you that from a quarter-to-quarter even, multiple quarters sequentially, this isn’t something we’re able to define probably more accurately than that. But we still see the upward momentum of attach rate for the paint protection film product for sure.

Okay, good. And then great to see automobile inventory broadly improving on dealer lots. Where do you think we are in the process of inventory levels on dealer lots kind of normalizing and maybe could you speak more about what you’re seeing in your dealer services business and how you expect that business to trend over the next coming quarters?

Sure. Yes, I mean, I’m hesitant to correlate the overall trend with how it impacts our dealership services business only because for various reasons we’re – have geographic concentration and even concentration around certain makes that perform differently just in terms of the manufacturer’s ability to restock that inventory. But as it pertains to our business directly, we’ve seen a broad based improvement in that for the most part. I think probably affecting 60%, 70% of the dealerships that we service have seen either a substantial improvement in their inventory situation or a complete improvement. And that’s been a positive for us this quarter. We’ve seen in that segment some of the highest numbers we’ve had both from a car count standpoint and then from an overall revenue standpoint. So that trend has certainly been good for us. And I think as we – as the rest of the 25% to 40% of those dealerships sort of that we service kind of get back in that situation, that’ll continue to be positive for us.

Okay, good. And then I wonder if you could speak a little more – a little bit more about the depth [ph] software feedback on that. What’s left to be done on the new software initiative as you basically end of life the old software?

Well, I would say in terms of what left – what is left to be done, is anyone who’s ever been involved in a software project knows it never ends. So it will never end. So it’ll never be done. But I think in terms of some of the core things that we’re trying to do to help our customers with options for process to be more efficient for compensation and commission to make sure they’re paying people right. And then ultimately we want to create a platform to enable more pricing discovery about what the cost of these installation should be. The industry has a very simplistic pricing structure today, and maybe that’s fine, or maybe it’s not, though without the technology and the data behind it, you don’t know. So from that standpoint, we’re talking many iterative cycles here are left to go to bring that value. So right now we’re really focused on the incremental wins and then shifting people to this platform. But there’s going to be work to do on this for years to come to hit exactly all the things that we want to do.

Okay. Fair enough. Thanks for taking my questions and continued success.

Thanks, Jeff.

Thank you. Our next question is coming from Tim Moore with EF Hutton. You may proceed.

Thanks and congratulations on the strong gross margin. And so can you continue execution of the plan? A few of my questions were already answered, but let me start off with if I heard – did I hear correctly that the OEM sales were up 50% sequentially and can maybe update if that was driven a bit more by Rivian or if it came from kind of a European smaller OEM relationships we have over there?

Yes, so it was 50% over the prior year Q1 2022. And it’s really a combination of things. Certainly, Rivian is a contributor of that as that program produced its first revenue in October. And then, we’ve been working to scale that each month-on-month sequentially after that. So that is a driver of that. But at the same time, our other programs have all grown as well in terms of their efficiency or vehicle counts or as manufacturing logjams have been released. That’s put more vehicles through the system too. So it’s really a mixed bag. But certainly, Rivian is now contributing to that on a year-over-year basis where there wasn’t revenue in the prior year.

Great. That’s helpful color. Just to follow up on window tinting, it seems like some investors are overlooking that growth profile. I know it’s a smaller revenue base, but they have been very consistent with the growth rate. How are you may be trying to approve the attachment rate? And I would assume you have dedicated teams for the window side to drive sales growth? Are they broken up from the PPF team?

Yes, so our bifurcation there is really about the automotive products and then our architectural window films where we do have dedicated team on the architectural side. In terms of automotive, that’s handled by our core team. And really you look at, we’ve got the three core product lines, paint protection window film and the coating business. And our goal is to drive content per vehicle across all of those, and in various channels in various ways, sometimes a sale of one versus the other is easier. The window film business for automotive obviously is more established. There are more people that are familiar with it. So there are times where we’re leading with that and then trying to come back in with paint protection film and coatings or anything else. So it really depends. But our job is to get as much dollar share content on as many cars as we can. That’s job number one. And then, less important that is, our ideal split among the different product types. And so I think you’ve seen that with the window tin is one where we’re able to provide good service and good value and win market share in a slower growing and much more established business. And that is either because of the paint protection film business and the coatings business, or it will ultimately be a driver of the paint protection film and the coatings business depending on the order in which it happened.

Great. That’s helpful, Ryan. My last question is, I was curious, how fast is maybe the ceramic coating growing the past few quarters? I saw those that news announcement last week for the four new coding options. Maybe you could just talk a little bit about ceramic coding?

Yes, we’re still on a small base. So we’ve seen growth generally far in excess of our overall growth rates, right? So it’s a much higher growth product on a smaller base. That’s one where we think more product differentiation can actually help grow it faster. Not all of the products we sell are necessarily equally benefited by extensive product differentiation. But in terms of the ceramic coating, we actually think that it will be as it intersects the installation characteristics and sort of the customer preferences there. So, the expansion that we did even within automotive, ignoring sort of the aircraft component is one that we really think will be a catalyst to continue the high rate of sales growth we’ve seen there, because we have more options for more people on how we get the product on the car. So yes, really happy about that.

Thanks, Ryan and Barry. And I look forward to you to seeing you at the conference this week in New York. That’s it for my questions.

Thanks, Tim.

Thank you. We have reached the end of our question-and-answer session. So I’ll now hand the call back over to management for any closing remarks.

Yes, thank you all for joining us and thanks to our team for a great quarter and we’ll speak to you soon. Bye-bye.

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