XPEL, Inc.

Good morning, ladies and gentlemen, and welcome to the Exbel, Inc.' 's first quarter 2022 earnings call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, John Nesbitt, Investor Relations for Exbel. Sir, the floor is yours.

Good morning, and welcome to our conference call to discuss Exbel's financial results for the first quarter 2022 earnings. On the call today, Ryan Pape, XBEL's President and Chief Executive Officer, and Barry Wood, XBEL'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. I'll take a moment now to read the Safe Harbor Statement. During the course of this call, we will make certain forward-looking statements regarding XBEL 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, 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 management of Expel. 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 factor, competition, the equity markets generally, and many other factors beyond the control of Expel. Although Expel has attempted to identify Important factors that can 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 statement can be guaranteed, except as required by applicable securities law. Forward-looking statements speak only as of the date in which they are made. An expo owner takes 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, now to turn the call over to Ryan. Go ahead, Ryan.

Thanks, John. Appreciate it. Good morning, everyone. Welcome to the first quarter 2022 call. We're off to a good start in 2022 for the first quarter. It was a record quarter for revenue and gross margin. Revenue grew 38.6% to $71.9 million, and we had strong performance in most of our regions. Sequentially, revenue was up about 2.5% from Q4. which was good to see given a 29% sequential decline in China due to lockdowns. And many of you know Q1 is seasonally the weakest quarter for us. And we haven't in every year always exceeded Q4 revenue in Q1. So we're happy that we did this time. And as you recall from our last year-end call, we weren't sure if that would happen this quarter. So that was definitely positive and happy to see that. The U.S. business grew 62.4% to 41.6 million, again, another record quarter for the U.S. region. The U.S. Q1 new vehicle SAR was down about 16% versus Q1 2021 and relatively flat against Q4. We saw some modest volume improvements in our dealership services business at the end of the quarter, and this was encouraging, but the inventory rebuild that we hope for, still very much a work in progress for the industry, and probably pushes beyond Q2 as we'd originally thought, and, you know, obviously a moving target. But despite the anemic SAR, for reasons we know, which is primarily related to new car inventory shortage, we saw good growth, which suggests we're continuing to see attach rates grow for our products and to take market share. So all in all, a lot to be happy with the U.S. business against the broader backstop. Our company-owned installation facilities in the U.S., which really they act as surrogates for what our customers are seeing, generally saw record sales in March. In fact, almost all of them did, all-time records. And given this, we expect continued strong performance in the U.S. in Q2. And the results we see in those locations are really a proxy for many of our aftermarket customers, so we expect the same from them. We remain in a really unique environment where these retail aftermarket sales continue to do great, as indicated by the company-owned sales I just mentioned and what we're seeing from our customers. The dealerships, however, are a mixed bag where our revenue is more inventory coupled at dealerships, which is through our dealership services business, we have more pain which we know and as we've been mentioning when we're talking about the performance of our acquired businesses over the past few quarters. Some dealerships have been able to use the shortage of inventory to increase the attach rate of our products into their vehicles sold. But this is mostly for dealerships that were already carrying our products but had room to increase the attach rate. So that's been a positive to counter the other negative. However, we're also competing with an invisible accessory at these dealerships, which is the ability for the dealerships to place market adjustments on top of the MSRP, which bring the dealership record profit, but without doing anything. So it's a complicated time to get a full read on the market with these competing inputs. But as you see, the results have been good either way. And in many respects, the good and the bad are balancing them out to be decent for us. So we feel good about that for the U.S. business. Outside the U.S., we saw solid growth in most of our regions, including record revenue for the Europe, U.K., Latin America. Continental Europe was up sequentially, and both were up. U.K. was up quite a lot from Q4. All good numbers there. Europe's been doing better than we thought, really, with the war in Ukraine and knock-on effects there. So we're happy with that. And sequentially, Canada was down a bit from Q4, which is certainly normal for the seasonality in that market. As most of you know, lockdowns have returned to parts of China due to COVID. And this reduced revenue in China for the quarter to $8.9 million. And we'd already talked about how we thought China would be a bit back-end loaded. for the year and then obviously took this turn of events with the lockdowns. Unlike the 2020 lockdowns, however, this is not ground business to halt around the entire country, which is what happened in 2020. But the lockdowns and the ensuing port congestion will reduce China sales in Q2 by at least 5 million from our original plan and may reduce than from Q1 levels. It's a very fluid situation, so we don't know fully what to expect. And I think as you see how the markets react to the news out of China every day and the oil market, no one really knows what to expect. But there will be a continued impact in Q2 from Q1, and then hopefully we're able to move beyond that quickly after that. In the case of the previous lockdowns, in 2020 and things resumed very rapidly coming out of lockdown in China. And so for the regions affected this time, you know, we don't really know whether to expect that again or not. But we continue to watch. We did launch, as we talked about in the last quarter, launch one small OEM program in March. This is for a new manufacturer, which is great in Europe. And our larger planned OEM program, which was the second that we were launching, has been delayed. several months due to supply chain issues with the OEM. Kind of no surprise there in keeping with a lot of the talk. So that's a drag on us a little bit until we start to see revenue from that in Q2 or Q3, depending on the exact timing. So a few months delay there. But we're still focused on that line of business as an additional way to grow awareness of paint protection and bring paint protection film to consumers that have never seen it before. So at this point, we would affirm, even with China situation, our previous guidance of revenue growth in the 30% range for the year. And we expect Q2 to be in the $80 million range, plus or minus, which is definitely lower than we would have expected in Q1 after we adjust for the China COVID impacts I mentioned earlier. I was pleased with our gross margin performance in the quarter. We finished a gross margin of $27.7 million. It's quarterly high for us and gross margin percentage was 38.6%. And as we discussed in prior calls, a combination of product and channel mix has been benefiting us. Impact from some price increases that were region specific and then improvements and bill material costs of goods for some of our products. All of this comes together and is contributing to our improving gross margin profile we've been talking about. So still expect to see continued improvement in Q2 and beyond this year, and still expect to hit 40% gross margin in the second half of the year, and that's not changed. You know, that comes with still pressure on gross margin and costs in general, just as we see price increases and still have reduced capacity in our dealership services business, where we have extra labor, which reduces gross margins. However, we have seen some improvement in that. So when you add that as a negative along with the other work, we're very pleased with the progress in gross margins that we're making and that we're going to be at 40% in the second half of the year. Our new product initiatives have also been advancing quite nicely. We released the Ultimate Fusion, which is a hydrophobic film. It's been very well received. In fact, started in the U.S. and then just now in the past 30 days are we releasing that globally. And this is a specialty film that has a super hydrophobic coating, which really combines the benefits of our ultimate plus paint protection film and our fusion ceramic coating. You know, this is a component of our future product portfolio. It'll, you know, maybe it's long-term 10 to 20% of the mix, so it won't dominate that business, but it is a nice addition. Additionally, a lot of focus in the past few quarters on really launching in earnest architectural film business and expanding the product line. It's a very skew-intensive, very wide product line. And it's really coming together, Q1 revenue doubling from Q4, so really starting to pick up the momentum there. And as some of you may know, that's a business with really two distinct sets of customers for us. We've got customers in the automotive space who really started their business in the window film space and are in both automotive and these architectural films. Sometimes people think it's a completely distinct set of customers, and that's just not always the case. And then there are customers who are focused solely on these architectural products, architectural film. And we've been winning some of those accounts, and those are really the higher volume, more prestigious accounts. And so with the product line expansion that we've been doing and the focus over the past year, you know, we're now a viable partner for those businesses and starting to see some success with them. So very encouraged by that, and that will continue to develop throughout the year. Our inventory level for Q1, we ended a little under $75 million in inventory. And for those watching the balance sheet, you know, this has been – over the past two years, sort of a 25 million, 50 million, now 75 million over the past 18 to 24 months. So big, big increases in inventory. And we've been particularly concerned about TPU resin availability, which goes into making the extruded TPU film, which goes into making paint protection film and going into 2022 production. on some of this resin was really forecast to be flat for the year for a variety of reasons over 2021. So into a growing market, that obviously had been and was a concern. And then more recently, there were concerns that the actual production capacity was going to see a reduction over the previous year due to various shortages and the broader chemical market and other factors. And, you know, the other side is we've been building inventory, others have been building inventory, so you have this overall dynamic in the economy where you've seen such massive inventory build, which has probably contributed to some of the pricing dynamics we've seen and shipping expense, and now everybody's sort of coming to terms with this. But as a result of concern with that TPU residence shortage, we planned aggressively to – build inventory to mitigate that impact. That's what's been occurring with us really over the past six to nine months. So we expect inventory to peak in Q2, although the timing is slightly less certain given the lockdowns in China. But generally, we expect to release cash from inventory over the second half of the year. And at that point, we will either have built sufficient reserve inventory to counter any supply shortage or The feared shortages will not have materialized because they were exacerbated by others building inventory that maybe they didn't need. And either way, we'll be in good shape for our customers in terms of ensuring we have ample supply. And the only difference will be the rate at which we release cash from inventory. And in the second half of the year, that could be a $20 million reduction, plus or minus, depending on how that actually plays out. That's a strategy there. From an EBITDA standpoint, grew 29.6% to 11.9 million. That was an EBITDA margin of 16.5%. Like we talked about before, we held our annual dealer conference in February where we had about 510 employees, which was up from 350 at the last conference in 2020. We didn't have it in 2021. So there was about a net cost of that about $800,000 in Q1 that wasn't present in Q1 2021. Also had a $400,000 project we completed. So it was $400,000 in professional fees that won't reoccur in the quarter. So if you normalize for those, our EBITDA would have been, EBITDA margin would have been approximately 18%, and EBITDA would have grown about 42%. So that, you know, really good numbers there. So we continue to make good progress towards our goal of a 20% EBITDA margin by the end of the year and naturally driven in large part through the anticipated revenue growth and then the gross margin objectives that we outlined earlier. So all in all, very solid quarter under the circumstances, very pleased with the effort by our broader team. Everyone's very creative and working hard to work around all of the different things that we see in the market and doing a fantastic job. So with that, I'll turn it over to Barry and then we'll take some questions. Barry, go ahead.