XPEL, Inc.

Greetings. Welcome to the Exbel Inc. First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the call over to your host, John Nesbitt of IMS Investor Relations. Please go ahead.

Good morning and welcome to our conference call to discuss Expel's financial results for 2021 first quarter. On the call today are Ryan Pape, Expel's President and Chief Executive Officer, and Barry Wood, Expel's Senior Vice President and Chief Financial Officer, who 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. And I'll take a moment to read the Safe Harbor Statement. During the course of this call, we will make certain forward-looking statements regarding ExpoLink 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 plans, is expected, expects, schedules, 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 the management team of Expel. 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 Expel. Although Expel has attempted to identify important factors that could cause actions, events, or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events, or results to differ from those anticipated, estimated, or intended. No forward-looking statements can be guaranteed, except as required by applicable securities laws, forward-looking statements speak only as the date for which they're made and Expel undertakes no obligation to publicly update or revise any forward-looking statements, 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.

Thanks, John. Appreciate it. And good morning, everyone. Also, welcome to the first quarter 2021 call. Once again, we saw another record quarter for the company, revenue growing 82.7% to $51.9 million. Great number. Certainly exceeded our expectations going into the quarter. As we discussed during our year-end call, we did have an easier comp in Q1 given the 2020 COVID impacts, which are really just in China and not in the rest of the world. But even with that, a phenomenal number for the quarter. The Q1 revenue was higher not only than our Q4 revenue, but also higher than every quarter in 2020. So growth was strong across the board. U.S. business grew 64.6% to 25.6 million, another record quarter for the region. Sequentially, the U.S. revenue increased around 20% compared to Q4. Looking at that, Q1, U.S. auto sales were strong. The U.S. SAR was at almost 18 million in March on an annualized basis, and this certainly has been reflected in the results of the public dealership consolidators as well. So, It's been a great time to be in the car business in the U.S. Most of our business on the auto side is correlated with new car sales versus new car production. So we've done very well there. Some of our business is tied to vehicle production, whether it would be the small segment of our OEM business or dealership business that involves preloading a dealership's inventory. So those areas would have been more negatively impacted by the production shortages and although you certainly wouldn't know it from the results. It's possible the current record-setting U.S. new car sales trend could be negatively impacted at the end of Q2 when there could be a drop in new vehicle inventories before they rebound due to the semiconductor shortage and other lingering issues. U.S. new car inventories were down 13% since the start of the quarter. Whether that occurs or how that might impact our business remains to be seen. But more than anything, it likely just represents a cap for us in terms of our ultimate growth potential in Q2. And as inventories recover later in the year, as is expected, we would expect some of our dealership business to increase faster than the rest of the business, where it's more tied to deliveries from the manufacturers than sales to the end customer. The China business put up great growth in Q1, given the easy COVID-related comp, revenue coming in at $10.7 million. China auto sales, like the U.S., continue to be strong, pleased with how we're performing there. Given timing of orders, delays, ocean freight, air freight, all the factors that impact the China business, it can be pretty lumpy, but we've seen things kind of trend in the closest range over the past few quarters you've ever seen. So the business is doing very well there. Canada also had a good quarter, revenue growing about 19%. Some lockdowns continued into Q1, but the business has done well. Canada is also impacted by timing of some large quarterly orders into the dealership channel. Those were in Q1 of 2020, but will be in Q2 of 2021. European regions continue to perform very well. Continental Europe grew 54.8%. I've seen great performance in France following our acquisition last year. It just continues to reinforce the value of our various channel strategies and the ability to drive awareness and create demand through them. The UK region grew 60% during the quarter. Really amazing given the lockdown implementation in the UK. Really amazing results there given that. The APEC region, which excludes China, good quarter. Revenue doubled from last year. A bit of a COVID impact in APAC in Q1 of 2020, like China. So pretty easy comp, but still a good quarter. Latin America, another great quarter. Talk about it being led by our Mexico business. As we mentioned last year, we've shifted our responsibility for managing the rest of the Latin America region to a team based in Mexico. We're seeing a good impact from that. I think you're starting to see that in the results, and that'll certainly continue. Middle East matched you for revenue, just about $2 million. Good results there as well. So really hard to find much of an exception in the quarterly results by region. Really good results across the board. Very pleased. The individual drivers driving a lot of the performance in the different regions, but all in all, very good across the board. From a product line standpoint, Window film continued to outperform. Revenue growing almost 132% to $7.2 million, great for the segment. We continue to make progress on architectural window film, another record quarter. The dollars in the window film product line still concentrated in the automotive segment, as you know. Sequentially, the window film business was up almost 28% versus Q4, so really good results. On the ceramic coating side, our fusion product continues to do well. And again, like the vision, another record revenue quarter there as well. So we're certainly seeing the adoption of these new product lines accelerate and continue to do really well. So all in all, very strong results. Given the seasonality in the business, it's unusual for us to have sequential growth in Q1 from Q4. Normally, we'll see Q1 revenue decline from Q4 as it's typically the seasonally slowest quarter. In many respects, I think we're seeing the economy in overdrive. As a result, supply chain, logistics, the labor market, they're pretty messy at the moment. I think you're probably hearing that from a lot of people. The chip shortage is an impact. New vehicle production is a concern for the end of Q2, perhaps into Q3, as I mentioned earlier. But this is largely offset in our view by a seemingly voracious appetite for vehicles from consumers and positive momentum in our core products and their respective attach rates to new cars sold, and then excellent execution by our team. If you put all that together, we expect to grow Q2 2021 revenue approximately 65% when compared to Q2 2020. As you may recall, we saw COVID impacts begin in the US and Europe, rest of the world outside of Asia in Q2 2020, just as we saw China begin to rebound. So again, makes for an easier comp. So we'll see Q2 build on the Q1 momentum and certainly come in at higher revenue than Q1, but just maybe with a cap on the upside revenue growth for Q2 due to the possibility of inventory shortages. inventory shortages in the auto channel, that is. If we don't see the impact from those, then growth will be higher than that 65%. So I think a lot to be excited about and a lot to be pleased with in either case. As we talked about previously, we had planned increases in our inventory levels to drive efficiencies in the channel, mitigate risks of supply chain in the event of Other unknown events that would cause disruptions is really coming out of the learnings from the COVID impact last year. The increase in inventory levels really hasn't materialized yet. If you look at the balance sheet, just nominally higher from end of year. And it really hasn't happened due to higher than forecast demand consuming some of those additions. Overall, the supply chain is significantly disrupted today. partially from a surging demand as the economy reopens, and then also from the March winter storm that impacted Texas and the Gulf Coast petrochemical business, and that's really created a cascading series of problems. The possibility of shortages and a variety of components and raw materials lingers from that storm, but we've taken very strong action to mitigate the impact, and we do not expect any material impact at this point. The only thing that will do is create the possibility of some volatility in our inventory levels for the rest of the year. So we plan for a worst-case scenario in terms of disruptions lingering from those events, but expect a much milder impact. So we do end up with a larger inventory build because of the aggressive nature of our plans to mitigate those issues. That'll normalize over a quarter or two. But when you're growing like we are, You absolutely must have ample inventory, and we've pivoted to do everything we can to guarantee that that happens. I think, like a lot of things, also seeing an inflationary impact in pricing in a variety of areas, I mean, from components into products to corrugate and other things. Too early to summarize the impact of this or our response in terms of pricing, if any. But we don't expect substantial change in gross margin trend, nor do we expect to change our previous guidance of improving gross margins towards the end of the year at this point. Finally, regarding our acquisition program, we did not close any acquisitions in the first quarter. However, we remain very active and re-confirm our intentions for the year in terms of both the number of acquisitions and the dollars put to work. These are domestic, U.S., and international in scope, and they'll fit in the various categories we've discussed previously about our channel, go-to-market, or product-related. So, great quarter for the company. I mean, really exceptional quarter. And I'm pleased with the momentum. I'm humbled by our team. And, you know, the part that always goes unappreciated is when you really do overperform the Just how hard the team's got to work to make that happen in operations and in other areas. So, awesome job all the way around. So, with that, we'll turn it over to Barry and then take some questions. Barry, go ahead.