XPEL, Inc.

Please stand by. We're about to begin. Good day, ladies and gentlemen, and welcome to the Expel Inc. second quarter 2021 earnings call. After the presentation, there will be a question and answer session. If you should require assistance during the call, please press star zero and an operator will assist you. It's now my pleasure to turn the floor over to Mr. John Nesbitt of INS Investor Relations. Sir, the floor is yours.

Good morning and welcome to our conference call to discuss Expel's financial results for the 2021 second quarter. On the call today, we have 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'll take questions from our 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 Expel, 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 plans, is expected, expects, scheduled, 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 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 other factors beyond the control of Expel. Although Expel has attempted to identify important factors that could cause actual 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. Acceptance is required by applicable securities law. Forward-looking statements speak only as of the date to which they are made. An Expel owner takes 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.

Great, John. Thank you, and good morning as well. Welcome to the second quarter 2021 call. I think, obviously, Q2 was an amazing quarter for us. Certainly exceeded our expectations going into the quarter. Revenue grew 92% to a record $68.7 million. Sequentially, revenue grew 32.5% from our previous record revenue in the first quarter of this year. Year-over-year growth rate was impacted positively by the COVID impacts of last year, but it was very strong by any measure and even independent of that. As you may recall, the U.S. and most of our other regions other than China saw significant COVID impacts in Q2 of last year. But again, it was strong across the board and strong across all of our regions, even factoring that in. In Canada, we had a great quarter, posting a record $8.9 million in revenue. As we mentioned in Q1, there was about a million of quarterly sales into the dealership channel that were pushed from Q1 to Q2. But even with that, great performance. In continental Europe and U.K., also had record quarters. Continental Europe grew 80% to 5.2 million in U.S. dollar terms, and U.K. grew over 200% year over year, looking at the impact from previous year's lockdowns. I'm really happy with this region, looking for ways to continue to invest both in Europe broadly and then in the U.K. organically and via acquisition. Our Asia Pacific region, which excludes China, Another good spot, past 2 million quarterly revenue in U.S. dollar terms, first time in history. This is still an area that we're very much focused on investing in. We think it's a very small region for us, has a lot of opportunity going forward. Seeing some COVID impact there, if you're following the news. So we watch that, but still very pleased with what's happened there. China had a very good quarter, revenue increasing 26.4% to 12.6 million. It's the second highest revenue quarter for the region. If you recall, China largely recovered in Q2 2020 from the impacts of COVID. China car sales were up over 10% in Q2, so that's certainly helpful. We probably brought in a million dollars or so of revenue into Q2 from Q3 based on timing of shipment, so we'll see that reverse in Q3, but great numbers nonetheless. The impact of COVID travel restrictions has impacted some of our activities that we had planned for China over the past 18 months, as you would expect. So we're really anxiously awaiting further relaxing of those restrictions. Now, I also note increased prevalence of COVID and lockdowns in China. So we'll be watching this closely to see if that has any impact going forward, but clearly too soon to tell at this point. Latin America region grew over 100%, still from a very small base. This is a big area of focus for us, like we've mentioned. We have a very active project to expand our direct sales capability in other parts of Latin America outside of Mexico, where we've had such great success with that. Middle East grew over 300%, huge quarter for us. We did 2.4 million, which is almost half of what we did in all of 2020. So that's been a focus area over the past two years. I'm glad to see really good numbers there. And last but not least takes us to the U.S. region. So revenue grew 112.8% compared to Q2 of last year to $34.3 million, highest revenue quarter ever for this region, and it constituted nearly 50% of our total revenues. In this number is about $1.9 million in new net revenue related to our permaplate film acquisition, and this excludes revenue that we had selling to permaplate film prior to acquisition. So total permaplate film revenue was over $2 million for the month, but in terms of net new revenue, we exclude our previous sales. So most of the growth was organic. Really great results. U.S. continues to to do really well in our home market here. A significant portion of Permaflate Films business is providing labor included installation of window films to mid-range car dealerships with a really high attach rate in terms of attach rate of product to new cars sold. In large part, that business is fairly distinct from our existing business. which doesn't index into the mid-range dealerships as often as high-line dealerships. So we really like that model in and of itself, but it also serves as a great platform to take our other products, be it paint protection film and other future products, into these dealerships. Even though we're doing much of the labor ourselves in this permaplate film acquisition, that doesn't need to be the case for all other products. For example, as we work to integrate paint protection film into dealerships that have never sold it before, our independent expo dealers will be in a great position to do much of this work, and it's a perfect fit for them. So what you're seeing from us via this permaplate film acquisition and our other OEM activities is that, in many cases, we have to be increasingly agnostic as to how the product gets on the car. We need the best solution for the ultimate customer, And for us, such as these products can grow in attach rate. So there are trade-offs when we're doing labor, higher gross margins, but increasing operational complexity. But these are all a means to an end to see that the product lines grow. And in many cases where we're doing installation, we generate significantly more gross profit dollars per vehicle. Permaflate film's business is, is more correlated to new car inventory and the arrival of vehicles at car dealerships rather than new car sales, given the high attach rate in that model. So it's actually been impacted even more than the rest of our business from the low new car inventory situation. We're actually only operating today at about 75% capacity in terms of our ability to install these products in volume in that business. So as new car inventories recover, we may see the benefit of that first through this new line of business. Overall, we expect Q3 revenue to fall in a range between our Q2 revenue and a few million dollars less than Q2. It's not likely Q3 revenue will exceed Q2 revenue this year. Q2 was exceptional. I mean, it was red hot in so many ways. We've seen some evidence that customers are increasing stock, ordering slightly more product than the trend would suggest. This, we think, is mostly due to concerns about future price increases or possible product shortages. We've had tremendous planning on our team. We really had little, if any, product shortages across the board. But the same can't be said for the industry overall. Some of our competitors have been in a very tight situation. So we may have benefited a bit in Q2 from that fear, and that helped really take Q2 just over the top. Additionally, new car inventory being low is beginning to impact car sales significantly. In the U.S. for July, we saw new car sales down 8% from June based on lack of inventory. Aside from the permaplate and OEM business, lower inventory in and of itself is not a net negative for our business. And I think the results of this year really shows that. But to the extent low inventory translates into lower new car sales, that's where we'll see some impact or we could see some impact. And we've certainly talked about that, but I think it's possible we'll see that a bit in Q3. Obviously, all that comes against a backdrop of a blockbuster quarter and a great year so far. So just like we speculated earlier in the year, a lower new car inventory environment that results in some cap on sales of new cars really just serves to cap our growth, which still leaves us on a tremendous revenue run rate. and overall performance beyond what we imagined at the end of 2020. So overall, really pleased with the U.S. business. If we see it cool a little bit from the red hot Q2, that leaves us still in a tremendous spot and on a tremendous revenue run rate. Overall gross margin for the quarter finished at 36.7%. compared to 32.8% in the second quarter of 2020. As we've talked about previously, we expect to break out of that kind of historical gross margin range we've been in, 32 to 35%, starting in the second half of the year. And so, you know, we're seeing us start to do that here even in the second quarter. We're in a challenging environment with respect to costs. I think everyone's keenly aware of that in their professional and personal lives. But to the extent we have cost increases, we expect to be able to pass those along where we need to. So Q3, Q4 will be choppy in that way with respect to gross margin, but our guidance of increasing gross margin above our historical range as we exit 2021 is still very much intact. We're benefiting from a product planning that's been a long time in the making in terms of initiatives to improve gross margin. and also a mix of revenue in terms of product and geography that is trending towards higher gross margins. Consistent with recent quarters, we continue to drive tremendous operating leverage. EBITDA margin finished at 19.8% for the quarter. Net income margin finished at 14.8%. Finally, I'd add that we have a robust plan with respect to acquisitions around channel and product. very much consistent with everything we've done in the past and what we've been talking about. So this will probably take us into a small net debt position for a short period of time as we execute on this plan over the next 6, 9, 12 months. But we're seeing great things that fit our business. Maybe a little bit of pressure on pricing, but overall we still think we're able to do these acquisitions on very good terms for the business and in a very accretive way. So with that, absolutely great quarter, really excited, firing on all cylinders around the world. Great, great performance for our team, by our team. And I'll turn it over to Barry, and then we'll take some questions. Barry, go ahead.