Good morning, everyone, and welcome to the XPEL Inc. First Quarter 2024 Earnings Call. [Operator Instructions] I will now turn the conference over to your host, John Nesbett, IMS Investor Relations. John, you may begin.

Good morning, and welcome to our conference call to discuss XPEL's financial results for the first quarter of 2024. 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. Now 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 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 be 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 item 1A Risk Factors filed with the SEC. XPEL undertakes no obligation to publicly update or revise any forward-looking statements, whether 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. Good morning, everyone, and welcome as well to the first quarter 2024 conference call. I think obviously, Q1 was a tough quarter for us. Revenue grew 5% to $90 million. U.S. revenue grew 1.9% compared to Q1 2023 to $52 million. We saw softness in the aftermarket to start the year. This is a continuation of the trend that we saw starting in late summer, which I think we've talked about generally. We're also now going to be lapping the stronger part of 2023, which was the first half. Our customers in the aftermarket are very diverse, and it's hard to generalize them as a whole. But for context, it was not uncommon to see dealers who were down 10%, 15% in the first quarter from the prior year period. And as we've said before, our internal company-owned locations are a good proxy for the aftermarket as well, and we saw the same type of weakness in those on a year-over-year basis in the first quarter. So obviously, some customers were down more than others, some grew depending on their business model and their new and lost customers as there always are, but a universal theme for many and many that I spoke to personally was a slow start of January and February in particular this year. And that was really across geographies, mostly folks in the U.S. that I spoke to personally, but East Coast, West Coast and in between. In terms of what we're seeing, I think, one, there is more consensus emerging of just weakness in the consumer overall. And this buyer makes up a substantial portion of our aftermarket business, where the dealership component in the aftermarket makes up a smaller portion, kind of seeing some of that echoed in earnings season and…

Thanks, Ryan, and good morning, everyone. Just to start out, I wanted to provide a quick reminder on the seasonality of our business. In all regions, excluding China, Q1 is typically our lowest quarter of the year. Q2 and Q3 can trade off being the highest quarters and then Q4 is less in Q2, Q3, but higher than Q1. And this holds true in China, except that Q4 tends to be their largest quarter. So given all that, comparing revenue sequentially versus Q4 is really not near as meaningful as it is in other quarters. Looking at the product lines, combined paint protection film and cutbank revenue declined about 1% in the quarter, again, owing to the China performance and lower U.S. demand. Our window film product line revenue declined 2.9% quarter-over-quarter to $14.5 million, which represented 16.1% of our revenue. But excluding China, the total window film revenue grew 10.3%, which is still decent performance even in a seasonally lower quarter. Our Q1 vision product line revenue, which is included in our total window film revenue grew 33.1% to $1.8 million. So again, good growth in a low seasonal quarter. And as Ryan mentioned, our OEM business continued to post strong results, with revenue growing just under 58% versus Q1 2023 to $4.6 million. Our total installation revenue, combining product and service grew 34.7% in the quarter and represented approximately 22% of total revenue. And as Ryan mentioned previously, many of our corporate store's revenue declined versus Q1 2023. So the total installation revenue was certainly buoyed by our dealership services business and OEM business. Our Q1 SG&A expense grew 36.2% to $28.6 million and represented 31.8% of revenue. Included in Q1 SG&A was approximately $1.6 million in net costs from our annual dealer conference that was held in…

Thank you very much. At this time, we'll be conducting our question-and-answer session. [Operator Instructions] Our first question is coming from Jeffrey Van Sinderen of B. Riley.

I wonder if you could give us your expectations for gross margin. Your gross margin was, I think, one of the highlights of positivity in Q1, maybe for Q2 and for the rest of the year, anything we should be factoring in for that. And then operating expense expectations for Q2 and the remainder of the year, just maybe giving us a better sense of how to model those.

Sure. Jeff, thanks for the question. Yes, I think we -- a goal last year was to really exit the year at around that 42% gross margin, and we started the year there. And so that's where we want to be or higher. And I think that in gross margin, we still have opportunity to improve that over time as we've talked about. What weighs against that is that you do have costs that are part of cost of goods that over a short period of time or a midterm period of time still more fixed. So that probably challenges us a little bit to go much higher than that in the near term, but we still have that opportunity. But the flip side is, there was nothing really that unique about Q1 that would prevent us from sort of maintaining that level. And I think on the SG&A question, as Barry mentioned, we really don't intend to go backwards in a meaningful way in our overall SG&A kind of at the run rate that you see. We want to make sure we're doing that efficiently and make the right trade-offs we need to do and prevent that from growing and certainly excluding some type of acquisition impact or something else that could impact that one way or the other with the expectation that we'll see growth and we'll grow into that cost structure. Now of course, if the environment were to deteriorate further in some way, we might take a different view. But we're really working hold the SG&A and get the most out of what we're spending rather than we are trying to reduce it sort of in total dollars, if you will.

Okay. That's helpful. And then I just wanted to hit on one of your comments in the prepared remarks. I know you spoke to what you saw in your own dealer units and what you saw in folks that you sell a product to your partners out there, if you will. And I think you said 10% to 15% decline, order of magnitude was not unusual in Q1. And so just sort of just positioning that with the improvement you saw in April, maybe you could speak to your level of confidence in getting to the 8% to 10% growth in revenues for the year.

Yes. Well, I think, frankly, we saw much better growth within that segment in April versus the arrogate we saw in the first quarter. So that's quite a change within that segment. Now April is one month. And if you've got some sort of hangover effects from the first quarter, maybe April outperforms May and June. I mean, frankly, we don't know. But we've seen more growth than we saw sort of declines in the first quarter. So I mean that's, you know, candidly, when you look at the data that we have, that's as far into the future as we can see. So I think that is a positive trend, but maybe one month doesn't a trend make.

Okay. Fair enough. And then just order of magnitude, I realize you guys you're selling to a lot of different -- you're getting film on a lot of different car brands, vehicle brands. Order of magnitude, were there any 10% size or 10% or larger vehicle brands in Q1? And maybe you can sort of speak a little bit more about what you're seeing in the EV brands. I know you mentioned Rivian, how much and which brands impacted your business the most? And anything you could say on concentration of those brands?

Yes. I think as we've talked about today and in the past, the distribution of this business is likely a lot wider than people might think. There's this idea that all of the revenue is concentrated in one brand or 2 brands or something. And that's really not the case. I mean, I think we talked about the type of make related concentration last year, like 5% or less. And so what I think is maybe not obvious that we continue to work to try and explain better is that you have all of these trade-offs, right? So you've got makes with huge volume like Toyota, but that have low -- much lower attach rates. Then you have brands like Porsche that have much lower volume but much higher attach rate. And the same is true with all the other brands. But when you put that together, you can have various measures of attachment, which look, there's many ways to think about it, content per vehicle versus some film per vehicle or versus using the bumpers as a proxy. We have all of this. But where you have these top brands that all by some of these measures, all have kind of the same aggregate volume. Now the attachment rate is fundamentally different. So I really just can't stress enough that there isn't a single point concentration risk into any one vehicle in this business, they all trade against each other. And when you get to enthusiast vehicles, we'll see higher attach rates in some brands than others that are ultimately meaningful to their results. I mean we'll see BMW attach rates by the measures we have that far exceed Mercedes. And so there isn't one thing driving that. There isn't one outsized brand. They all have their part in what we're doing here. And if we had an outsized concentration in any one make or one segment, we would talk about that.

Okay. I'll jump back in the queue.

Thank you very much. [Operator Instructions] I'm not seeing anyone else come in to queue at this moment. So I will now hand back over to management. Apologies. We've just had someone in the queue, and it's from Steve Dyer of Craig-Hallum.

This is Matthew Raab on for Steve. I guess I'll just start with China in Q1. Obviously, it was much weaker under $2 million. Can you kind of talk about what you see in Q2, kind of thinking about the revenue guide. It seems like it's much more second half weighted. Is that kind of the right way to think about that?

Well, I think it is in the sense that we have this sell-in versus sell-through dynamic that we've talked about sort of ad nauseam. But our goal is to eliminate that this year and to then have the ability to recognize our revenue in China as it occurs. And that's part of what we're trying to accomplish there and part of what we're trying to change to actually enable us to see even more growth in China. And that could take a number of forms in terms of what we do, vendor-managed inventory type process or others. And so all of that is part of what we're working on in China. When you got the bulk of the product for China coming from the U.S., you've always got lots of material in transit. You've got lots of inventory held at different points. And so that creates this lumpiness until you can actually sell through it. And that's what we're going to change. So our quarter-to-quarter, our sales into China really have almost no relationship to actually what's happening on the ground.

Okay. Yes, makes sense. And interesting commentary on the colored film. Can you kind of explain what sparked that move because you guys have been cautious in the past. Just curious why the change.

Well, I think you're at an inflection point here to say, does the application of colored films now fit more in with our business model, if you can use a technology and installation profile that more of our customers are familiar with. The incumbent products, the non sort of TPU-based products are fundamentally different in their physical characteristics, if you will. And so that leap from a technician or an installer standpoint is a further leap because it's not the same to install. But as you see the movement and the momentum around using a TPU-based color film, that brings it more into the realms of our current customer base and the labor that we've trained and the labor that exists in the market. So it creates an opportunity for that. The products itself, if you're using TPU as a substrate, they have the possibility of being more durable, the possibility of better optical properties and a better appearance. So that's attractive. But I think at the same time, where we're being candid about it is that I don't know at a consumer level that it fundamentally changes the number of people that want to change the color of their car. That's still something that is a bespoke option and not inexpensive. And so it probably appeals to a fairly narrow portion of the buyer. But as you're looking at other programs around accessorization and customization at the dealership level or the OEM level, there will be more opportunity from that. So the time is right to further advance that. And I think from a product line standpoint, you have to be mindful around things like colors maintaining many colors, requires a lot of inventory and colors come in and out of style, particularly in the aftermarket. So that's probably part of our conservatism and approach on that historically. But I think it's -- you're going to see some reordering of the industry in the aftermarket relative to colored films over time, just by virtue of this bifurcation in the technology that's used. And I think ultimately, that can play to our strength. So that's why expanding that sort of beyond black is something that's worth doing.

That's it for me. Thank you very much.

We will now be handing back over to management for any closing comments.

I want to thank everybody for joining us on the call today and thank our team for working really hard to set the business up for success and look forward to speaking with everyone again.

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