Greetings, and welcome to the XPEL 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. [Operator Instructions] please note that this conference is being recorded. I will now turn the call over to your host John Nesbett of IMS Investor Relations. Please go ahead.

Good morning and welcome to our conference call to discuss XPEL's financial results for 2021 first quarter. On the call today are Ryan Pape, XPEL's President and Chief Executive Officer; and Barry Wood, XPEL'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 their prepared remarks, we will take questions from our call participants. I will 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. Often, but not always, forward-looking statements can be identified by the use of words, such as plans as 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 XPEL. 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 results 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 XPEL. Although XPEL's 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 statement can be guaranteed. Except as required by applicable securities laws, forward-looking statements speak only as of the date of which they are made and XPEL 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'd 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 numbers 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, not in the rest of the world. But even with that phenomenal number for the quarter. 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. The 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 are strong, the U.S. car is 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 a small segment of our OEM business or dealership business that involves pre-loading the dealerships inventory. So those areas would have been more negatively impacted by the production shortages, 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 they're, when there could be a trough in new vehicle inventories before they rebound due to…

Thanks, Ryan. And good morning, everyone. Obviously it was a great quarter for us by really almost any measure. We broke $50 million in quarterly revenue for the first time in the company's history, finishing at $51.9 million. And product revenue in the quarter grew 89.2% to approximately $44.9 million which was another record high and in this product revenue category paint protection film grew 81% to $35.8 million which was again another record. The strong growth was brought pretty much broad base led by U.S. and China. And again, China was heavily impacted by COVID in Q1, 2020. And as Ryan mentioned, our window film product line had amazing growth of 131.7% to $7.2 million, which was another record and it represented 13.8% of total revenue. And while it's a typical to have a higher total revenue in Q1 and Q4, it is even more unusual to have a record quarter in this product line given the timing here. I also will note that our other revenue category, which we usually don't talk about as much grew 123.7% approximately $2 million. And this line item just as a reminder consists primarily of products ancillary to PPF and window film sales such as plotters, chemicals and tools. Our Q1, 2021 service revenue grew 49.5%, $6.9 million and our total installation revenue combining product and labor increased a little over 54% and represented 7.1% of our total revenue and we saw, we pretty much saw strong performance during the quarter and all of our company own installation facilities. Gross margin for the quarter grew at 77.6% to $18.3 million which was another record and our gross margin percentage was down slightly to 35.3% versus 36.3% in Q1, 2020 but it was up sequentially from Q4, 2020, which came in at about…

Thank you. We will now be conducting a question and answer session. [Operator Instructions] Our first question comes from Steve Dyer with Craig-Hallum. Please go ahead.

Thanks. Good morning and congratulations on the exceptional results. The gross margin was as you noted, really, really good this quarter, particularly given the China contribution. Does anything sort of change kind of given your new revenue run rate just in terms of your target? You've kind of talked 32 to 35. But you're now exceeding that number even with a lot of China exposure. Just kind of curious how we should think about your gross margin expectations for the rest of the year?

Sure. Yes, I think you're hitting on something very important, which is that it was exceptional gross margin performance in Q1 with the large China concentration. And historically, when we get to 20% of revenue of China or higher that really tends to hurt us on gross margins. So I think it's a mix of several things doing that. A lot of the work that we've been doing on managing sort of non-direct product costs that are in cost of goods, we're getting some benefit from that. The mix in product line we're trending towards a more favorable mix overall in terms of gross margin contribution with the addition of some of our other products and then areas within our existing pay protection window film lines that are generating more gross profit that are higher margin. So all those things are contributing along with the real concerted effort to manage this up over time. So when we talk about sort of the peak gross margin we've seen it's right, in that 35 to 36 range, that's sort of with lower China contribution, but that's the peak we've done, and then the range that kind of 32 to 35. That's where we're expecting to be on trend maybe in Q4 or towards the end of the year to really move up the top end of that range where we're not capped at a 35 or maybe 36. But, start to get that up to 37 -- 37.5 and then and then hopefully higher there. So I think what you're seeing now is sort of a preview of us being able to do that, like we've been talking about.

Got it. Just kind of, I guess a question on acquisitions, as you expand the distribution network, and now you're starting to have a lot of success really with the window film and so you have sort of two products working your way through here. As you look at acquisitions, I guess, A, would you look to do something larger? And B, are there ancillary products that you could buy, just given your reputation in the industry and the fact that you now have multiple products going down through there? Would you look to sort of expand horizontally?

Sure. Well, I think, first and foremost, we go to a lot of effort to build this geographically distributed in country distribution operation. I mean, it's very hard to do. And, we've been at it for a while and have had that as a stated goal going forward. So I think long term to get the absolute full benefit of that investment. It is the larger portfolio of products that will help do that. I temper the enthusiasm for that just saying that the core set we have now either with the additions we've made with protection window film, and on the ceramic coating side, we have a lot of work to do just to get adoption of those. So we're trying to balance the attention and focus that those need with the ultimate strategy of continuing to expand that. So you will see additional product line expansion. In terms of, acquisition and the size of acquisition, I think you'll see us certainly do bigger acquisitions going forward and including this year. I don't know that there are transformational acquisitions or there were necessarily seeking that type of M&A. But I think overall, there are some certainly larger opportunities relative to what we've done in the past. And that's part of what we're focused on now.

Got it. I will jump back in queue. Well done. Thanks, guys.

Thanks, Steve.

[Operator Instructions] Our next question comes from Jeff Van Sinderen with B. Riley. Please go ahead.

Good morning, everyone. And let me add my congratulations. So multi question for you guys. I'm just wondering if we can get a little more granularity on most recent trends you're seeing in the drivers of North American sales in terms of mix? Is it now weighted more toward more sales running through your existing account versus adding new accounts or vice versa? And then maybe just how does that same phenomenon differ by product line? Any help you can give us there?

Sure. Jeff. Yes. So I think when you look at the customer base we have, there's always a healthy mix of both. When you look at our aftermarket customer base their desire and propensity to reinvest in their business and grow it varies tremendously from customer to customer. And I don't think if you think about the profile of these businesses, I don't think that's necessarily surprising. So you see some that are very eager to grow that have put in place systems to hire and scale people to really adopt new products and expand what they're doing and then you have some that don't have the same aspiration to grow in that way. And so what that means for us is it's really market by market dependent sort of what you're seeing whether it's more growth from existing customers or more net new customers, because it really depends on the mix of customer types we already have. But suffice to say that it's a healthy mix of both. It has been both growth from existing and new customers and we would expect that to continue as well. In terms of the product line contribution, certainly when we're out with new products, say automotive window film, or the ceramic coating products, in the launch stages of those products, which were really a now like we were and still are to some extent with the automotive window film, there's a higher percentage of competitive win at the onset of a new product category. So we're seeing that with those now just like we did with paint protection zone when the company was much younger and then we expect over time that transitions more to just growth from existing customers and growth from people net new to that product line.

Okay, great. And then I know you spoke about inventory. Just wondering if maybe you can elaborate a little bit on that in terms of the outlook for you, flow of inventory for you, and also how you see the impact playing out relevant to new auto deliveries at dealers? I know, you mentioned kind of this Q2 phenomenon that might go into Q3. It seems like there's a lot of moving parts there. I guess, sort of maybe what is your, what is the most likely scenario that you think is likely to play out at this point for vehicle inventory flow and then also your inventory?

Sure. So I think that the vehicle inventory and the number of days inventory on new car lots for our business is generally not a factor. What's factor for us is how many cars are being sold. So even if inventory goes down and vehicle turn goes up at the dealership level, that's not a negative for us. In fact, there's some argue that he said that scarce inventory that reduces discounting and adds accessoriesation is actually a net benefit for us. And maybe we're benefiting from that. So as long as dealerships are able to turn inventory very quickly, and hit these really high annualized [indiscernible] numbers, even if inventory is low, or even if it were to go lower that helps us or it's a it's a positive thing. I guess the only cloud on that horizon is to the extent production were to fall such that it actually impacts the new vehicle sales, because there just aren't enough to hit that huge annualized [indiscernible] number, then that starts to be a negative for us. But I'd caveat that in the environment we're in that negative in that context is simply a cap on the upside and the great growth we're seeing. So I don't think we're expecting a situation where that's actually a detriment to the performance of the business. It just delays more upside. So how that impacts us it really depends. Not all manufacturers are impacted, the same, not all geographies, necessarily the same. And then our business is concentrated in little pockets here and there in terms of where we see is detached rates by geography if I make. So it's really kind of hard to say, but I think it is something we're watching. But I really would think of it more as a cap on what's possible in Q2, rather than some kind of complete, Black Swan event that causes something negative here.

Okay, fair enough. And then just one last one, if I get squeezed, they just wondering if the acquisition pipeline has changed for you at all? If there's anything you would say is shifted in terms of characterizing the environment for acquisitions. And then just anything in the latest thinking, sorry, latest thinking about Greenfield locations of your opening remarks?

Yes, so no, I would say from a pipeline strategy prospect standpoint really nothing has changed relative to acquisitions. I think when we look at the results that we have for the acquisitions that we've done, it really reconfirms that we'd like the strategy we have. We like our ability to create and execute and do that. So really, nothing's changed in terms of what we're going after what we're looking, like we said on the previous question, maybe the sizes get a little bit bigger, though we're very much focused on that. In terms of the installation business, we're really not interested in Greenfield activity there aside from some of the OEM projects that we're looking at doing. And that's really, because we think that we have a lot of customers and there are a lot of people in the industry that are sort of looking for their next step with their business either to help it grow or to transition or to plan for their future. And so we look at the acquisition strategies that touches our customers and people like that as really a way to help them and unlock value and unlock their time. And it's been the source of some of the best people we have in the company. So no really, the way to the installation outside the OEM is through M&A really exclusively.

Okay, excellent. Thanks for taking my questions and continued success.

Thanks, Jeff.

I will now turn the call over to management for closing remarks.

I'd like to thank everybody for joining us on the call and for your time and we'll speak with you next quarter. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.