Greetings. Welcome to the XPEL, Inc. Fourth Quarter and Year End 2023 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I’ll now turn the conference over to your host, John Nesbett with IMS. Sir, the floor is yours.

Good morning, and welcome to our conference call to discuss XPEL's fourth quarter and 2023 year end financial results. 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 our call participants. A transcript of this call will be available on the company's website after the call. I'll 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 are not 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 current expectations and assumptions, which are subject to known and unknown risk factors and uncertainties that could cause actual results to materially different from those expressed in these statements. Some of these factors are discussed in detail in our most recent Form 10-K, including under the Item 1A Risk Factors filed with the SEC. 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'll now turn the call over to Ryan. Go ahead, Ryan.

Thank you, John, and good morning from me as well. Welcome to the fourth quarter and yearend call. Overall, 2023, another solid year for us, revenue grew 22.3%, net income 27.6%, and EBITDA 25.6%. We closed the year with a strong fourth quarter, revenue growing 34.5% to $105.5 million, net income growing 43.2%, and EBITDA growing 33.6%. So a good end of the year. Our US region had a good quarter with revenue growing 16.8% to $55.6 million. Our dealership business continued to be a bright spot for us as car counts have increased and new car inventories have been returning. We'll likely see the preload component of our business to slow modestly, as inventories catch up with their pre-2020 levels, probably over the first half of this year, since preload attachment happens as the vehicles are delivered or sit on the lot. However, we'll continue to grow with new dealerships, and we've been quite successful at adding content per vehicle and expected that will continue as well. I think there is no question now that the aftermarket has slowed over the past nine months from its peak that we've seen. But our view remains that as long as consumers are buying cars, particularly in the enthusiast segment that is well served by the aftermarket, that they will continue to make the decision to buy our products as well. Growth in the aftermarket is driven by net new customers for us, as in new shops, new points of installation, or competitive conversions, and by growth of our existing customers. In our larger markets like the US, growth from existing customers constitutes a larger percentage of growth than in the smaller or more developing markets. And in order for the existing customers to grow, they need to invest in their businesses.…

Thanks, Ryan, and good morning, everyone. Just a couple more comments on revenue. If you look at the product lines, combined paint protection film and cutbank revenue grew 32.4% in the quarter, and this increase was primarily due to increase in product sales in pretty much all of our regions, and particularly in China. Our total window film product line revenue grew 19.2% quarter- over-quarter, to $14 million, which represented 13.2% of our revenue. And this was down sequentially, primarily due to seasonality. Revenue for the Vision product line grew 141% to $2.8 million, which represented approximately 2.6% of our overall revenue. Our OEM business continued to have strong performance with revenue growing a little over 74% versus Q4 2022 to $4.7 million and this was up sequentially a little over 20% quarter-over-quarter versus Q3 ‘23 although Q3 did have some factory holiday shutdowns but still this was a solid performance. Our Fusion Ceramic coating product line which is included in our other revenue line grew 50% for the quarter to $1.7 million and represented 1.7% of total revenue for the quarter and our total installation revenue combining product and service grew 45.7% in the quarter and represented 18.8% of total revenue and this increase was due mainly to really solid performance across all of our installation services portfolio but certainly led by our dealership services business. On the SG&A front, our Q4 SG&A expense grew 32.2% to $26.7 million and represented 25.7% of total revenue. Sequentially SG&A increased about 12% and included in our Q4 SG&A expense is approximately $1.2 million in expenses associated with our Q4 acquisitions and approximately $0.8 million in costs associated with SEMA, which is our largest marketing event of the year after our dealer conference and this cost occurs annually every year in Q4.…

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

Thanks. Good morning, guys. Thanks for taking my question. Early on, Ryan, when you were talking about sort of upside possibilities or areas for potential upside this year, I think you alluded to or you said something about a potential large customer win or large customer wins. Can you sort of help us think about what that might look like, or not specifics obviously if you don't want to, but just sort of what area of the business, what kind of business?

Yes, sure, Steve. I think when you look at our makeup of customers, particularly in the aftermarket, they tend to be quite small. I mean you could have between $50, 000 and $200, 000 of annual revenue is a common sort of distribution. When we look at sort of the overall global portfolio of customers, we just have more larger opportunities that are possible than we've seen. These could be larger groups or other networks of customers where a $5 million account or a $5 million to $10 million account is possible. And that's relatively unusual for us. We have some customers like that already, but for whatever reason across the global footprint we've got a few of those opportunities sort of possible and pending. So that's a little bit different for us which I think is a good thing, but more unusual.

Got it, thank you. Could you talk a little bit, I didn't hear you mention much about OEM business. Can you kind of remind us again how many you have and how you sort of see that playing out throughout the year?

Yes, no, the OEM business was strong. I think I didn't mention it specifically. I know Barry called out the growth. I think it was quite substantial year-over-year growth. The business has been good. What we continue to see is interest in additional programs. The account of OEMs that we are doing something with has grown. It's under 10, but it's certainly growing in different kinds of programs. So we see both new programs with new folks that we have not worked with before, and then also the possibility of growth of the existing program to say, okay, if we've had success with one platform or with a certain number of vehicles, can we grow that? So I think it's a positive story there pretty much all the way around. We're at their mercy in some sense in terms of their production and the unit volumes that they can generate. So there's a little bit different dynamic there with that business of scale, but we continue to see new accounts, new growth, new platforms, and then growth of the existing. I think that was reflected in that Q4 growth and expect to see more of that this year.

Great. You mentioned a little bit some potential inorganic opportunities, maybe larger ones than you've typically looked at. In terms of funding now, what is that likely to look at -- look like? Are you sort of comfortable with your credit limits and sort of debt facilities and so forth? Would you look to essentially raise equity? Would you buy in stock? What are some ways to think about that?

Yes, I think that our overall position has really been very conservative for a number of years in terms of our net debt and total leverage, which has basically been zero. So I think our primary use or primary way to fund those acquisitions would be just through borrowing that way. We're not opposed to that debt and think a lot of these things pencil out. We do expect to generate a lot more cash flow this year, as Barry mentioned. So that's obviously an option. In some of the opportunities we have, there's a possibility of seller financing as well with the profile of people we look at. So that's something you have to look at on a case-by-case basis. And then I think really for us the question on the equity side would be more, is equity a tool to gain alignment with the sellers in terms of the type of performance we want to see post-acquisition? I think that's kind of where we see the potential use of equity more than is a necessity to fund that way. Can we better achieve our objectives, particularly if we are looking at any larger acquisitions that may be less traditional for us and that they can sort of function a little bit more independently? That would be another tool to create alignment with the sellers assuming they are around. But I think absent that you are going to see us look at more borrowing and seller financing, and then cash from ops.

Your next question for today is from Jeff Van Sinderen with B. Riley.

All right. Good morning, everyone. Maybe if we could just circle back to China for a minute regarding the outlook there. If you could speak more about some of the changes that you're still working on in China.

Sure, Jeff, yes, I think when we look at our view of the China market today, you really have multiple product lines and multiple price points in the country in a way that we really don't see elsewhere. And I think that the opportunity for us is to evolve our go-to-market to have products at more of those price points, and ensure that we can have all the product we need in country, that there's no constraints on inventory availability, and that we can work or partner with our distributor to ensure that we can address the entirety of the market. And I think that the reality for us now is that we're addressing the most bespoke part of the market. And that's great for our brand positioning, but it's not great for our share wallet, as I mentioned. And I think we have the opportunity to maintain that brand positioning while taking more share. And there's a number of strategies we can use to do that that we're working on in conjunction with the team that we've built in China and are building, and then with our distribution partners there. So I think it's a little bit premature to say that exactly what that has been finalized, but I think we have a good sense of what we want to accomplish. And now it's just a matter of exactly how do we do that. The net result as we are successful in doing that is selling more. That's how we'll measure our effectiveness and how we have a job we've done.

Right, okay. And then since you mentioned it as a focus, maybe you could just touch more on what you are seeing in the rate of onboarding new dealers overall, and then more specifically onboarding new car dealers, and maybe just kind of how you are approaching that going forward, or any changes to that.

No, there's really no changes to the approach or the strategy. The aftermarket has a channel management that's different than the dealership business. I mean there are elements of dealership business that we could serve directly that a lot of our customers don't want to do. And so in many respects, every dealership in the world should be selling our products one way or the other. They could internalize it and do it themselves. They can work with one of our installers in the aftermarket or in other cases, we can do the work for them. So from the dealership standpoint, the selling proposition and what's out there is very clear. Now the difference is dealerships tend to have a longer selling cycle. It's a little bit more involved sale. And then once you're in the dealership, their unit volume is more or less fixed. Where a customer in the aftermarket could grow their business 100% in a year, if they were so motivated, the dealership for the most part is not going to grow their unit volume 100%. That's just not possible. So you have a fixed unit volume with the dealerships, but you have a big variable in terms of sort of the ASP and how much content can you get. And then sort of in contrast in the aftermarket, we can't serve every customer in the aftermarket and maintain our brand positioning, but we could be the best partner for those that want to grow the most. So they're really two completely different approaches to the market. They're complementary, but aside from focusing on both of them in their own way, I would say no change in our strategy. I think you continue to see new customers on in the aftermarket. I think the only thing that we probably see now that started midway last year is that you're seeing in aggregate lower growth year-over-year within the aftermarket channel than maybe we saw the previous year. But that really doesn't have much to do with the rate at which we would onboard net new customers.

Okay, that's helpful. And then maybe finally, if you could just touch on new product introductions, anything you could tell us there?

I think we're broadening the offering, and also going deeper in what we have. I don't want to steal any of the team's thunder for what they'll be releasing to our customers at the dealer conference, but I think incrementally some net new products, and then going deeper, more options and more depth within the things we're already doing. Selling more to your existing customers across all channels is probably one of the best-selling strategies. If you can make your customers more effective and sell more, you get more leverage on those relationships. So to the extent that we can broaden our product offering to be even more of a complete supplier to more of our customers, that's something that we want to do, and that's part of what we're working on, and probably part of what we'll be releasing to our customers this weekend.

Your next question is a follow-up question from Steve Dyer.

Thanks. Just a quick follow-up. You gave a lot of puts and takes on the various operating expense lines. Big picture is kind of this $26 million, $27 million run rate, sort of a good level to kind of grow off of, or I kind of got mixed up with all the one-timers and so forth, but how should we generally think about that going forward?

Yes, I think, to Barry's comments on that, we're talking, I think, in Q4, he was really referring to more the incremental SG&A inherited by the acquisitions we did versus sort of one-timers. I mean, yes, there's optimization to be done there, and there's one -timers embedded in that, but I think that comment was more about sort of the permanently embedded SG&A. So I think if you ignore kind of the two big seasonal hits that we have being the dealer conference and then the big trade show in Q4, what we would be looking for is kind of, yes, the run rate SG&A, but then the growth of that moderating as we move forward from where we've been in the past.

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'd like to thank everyone for attending today and really thank our team. We've got a huge presence in our headquarters today from around the world for our customer conference, dealer conference this weekend, and it's going to be amazing. And thank them all for being here and all their hard work. And look forward to speaking with everyone again next quarter. Thank you.

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