Greetings, and welcome to the XPEL Inc. Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. Operator instructions: It is now my pleasure to introduce your host, John Nesbett of IMS Investor Relations. Thank you, John. You may begin.

Good morning and welcome to our conference call to discuss XPEL's financial results for the second quarter of 2020. On the call today are Ryan Pape, XPEL's President and Chief Executive Officer; and Barry Wood, XPEL's 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'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 XPEL 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 result of known or 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 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 statement can be guaranteed. Except as required by applicable securities laws, forward-looking statements speak only as of the date on 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 out of the way, I'll now turn the call over to Ryan. Go ahead, Ryan.

Thanks, John. Appreciate it. Good morning everyone as well. Welcome to the second quarter 2020 conference call. During our Q1 earnings call in May, I indicated we were seeing signs that the business in many of our regions is turning the corner after the pandemic after the 21% revenue decline we talked about in April. Well, I have certainly been pleased with our results in Q2, which by almost all measures was an outstanding quarter for us and a fantastic comeback from April, certainly well ahead of what could have been given the COVID-19 impact. Revenue for the quarter grew 19% over Q2 2019 to $35.8 million. It certainly topped our expectations. Revenue ramp-up acceleration began in May, and June ended up being a record monthly revenue month for XPEL. And just for context, June revenue was over double April revenue, so quite a swing. We will also review our performance by region. Some things have been similar across regions: a pronounced decline followed by a strong rebound. What's been inconsistent among regions is the timing of entering the decline and the duration of the decline. The China region continued the momentum we saw in April, as revenues grew over 200% to just under $10 million for the quarter. Obviously, China had an easy comp as Q2 2019 was a weak quarter based on the previous inventory build prior to that quarter, which we previously discussed. This was the second-highest revenue quarter for China after the $13.5 million we saw in Q4 of last year. As a reminder, we accelerated a few million in revenue from Q1 2020 into Q4 2019, just based on the timing of shipments. China auto sales were up over 10% during Q2, so we're certainly benefiting from that. Our forecast out of China has been consistent and strong. Obviously, there's still question in China as there is now in other parts of the world, how much demand is being driven by pent-up demand during shutdowns and how much is the new normal. Hard to say for sure, obviously something we're watching closely. At this point, we're expecting year-over-year growth in China compared to Q3, 2019 for Q3, which was the first quarter in which we saw significant increases last year, which also then translates to modest sequential growth in China from Q2 2020 to Q3 2020. As a reminder, in 2019 our China revenue was very back half loaded. So, obviously, we're very pleased with China. I'm very pleased to see how the market has performed coming out of a very severe shutdown, very severe COVID impact. Outside of China, our APAC business grew 7.7% for the quarter. Pandemic impact is very spotty in the APAC countries, so it's been pretty hard for us to forecast near-term impact there. APAC, which excludes China, has probably been the most volatile for us during the pandemic, so we have the least visibility about this part of the market. We also have large distributor orders, which are subject to timing comparisons. The U.S. business finished down only 2.3% for the quarter, which was a great result considering the U.S. was down 36% in April as we previously mentioned. The year-over-year decline in the U.S. dropped dramatically in May and we returned to year-over-year growth in June. That strong year-over-year growth continued in July. Similar to China, I have questions around whether we're satisfying pent-up demand or resuming a normal selling process. It's been fairly widely reported that cash down payments have increased on average for new car purchases in the U.S. as things have reopened. So this helps suggest the changing prioritization of spend as a result of the pandemic impact, but it's too early to call that for sure, but we have really seen the U.S. come roaring back, very happy about that. Canada U.S. dollar revenue declined 24.1% for the quarter. Canada had a strong lockdown compared to the U.S., particularly in Quebec. Our installation businesses in Canada are performing extremely well. We've added extra working hours just to meet the demand, so we're a little bit unable to square that fully with the overall trend in Canada. It was certainly unfortunate timing with our Protex Centre acquisition in February just before COVID, but it's performed very well exiting the shutdown beyond our expectations. In Continental Europe, we had a great quarter posting U.S. dollar growth of almost 47%. As we talked about in May, we saw fairly strong performance in the early days, and the EU lockdowns were not as universal in some of the countries particularly in the markets in which we do best. In that sense we lucked out, but it does highlight how different markets are performing relative to the timing in and out of COVID. As we previously mentioned, we have OEM projects in Europe that have yielded good results for us and they were not overly impacted by the shutdowns. Our U.K. revenue declined 32% for the quarter. The U.K. had probably the most effective and comprehensive lockdown of all the regions in which we operate except for China, and it was one of the last regions to open back up, so the result is not surprising. In contrast to the U.S., as I mentioned earlier, we saw a steep decline in the U.K. during the month of May owing to their lockdown timing but we returned to growth in June. Latin America revenue declined 5.5%. Our Mexico business, however, has continued to grow for the quarter, which is notable as Mexico continues to be substantially locked down. Mexico is one of the last countries that we have exposure to enter lockdown and is still being impacted today. Q2 window film revenue grew 87.8% and represented 16.6% of total revenue. So this is a great result, obviously, an all-time high on a percent of revenue basis. And the growth there is really broad, so it's not attributable to just any one region. It's truly global for us. The growth is coming from the automotive segment. Our commercial and residential product line continues to grow, still a small part of the overall 16.6%, although we're seeing a lot of momentum there and we had record sales months for that product line in June and then again in July. So that's great, and we'll obviously be talking more about that going forward. Likewise our FUSION ceramic coating products also hit record sales in June and then again in July as we see increased adoption. We have product line extensions planned here for FUSION that will be released soon. And so we'll be talking more about that as well in the future. From a strategy standpoint, like we mentioned in May, we've also reinitiated our acquisition programs, which we did temporarily suspend at the beginning of COVID. We're in a good cash position and intend to deploy some of that cash throughout the rest of the year and further into those strategies both in the United States and beyond. Overall, gross margin for the quarter finished at 32.8% which was down from 35.3% in Q2 2019. That was primarily driven, as many of you are aware, by mix from growth from our 200% growth in China and slight revenue decline in the U.S. China represented about 28% of Q2 revenue whereas it was only 10% in Q2 2019. That being said, we also had some downward pressure on gross margin that related to COVID-19 during the quarter. Our installation labor from our installation businesses also hits COGS. During the shutdown, we continued to pay our team. Obviously, we knew that would have an impact to gross margin, but it is only the way we would operate. We also incurred additional shipping costs related to some strategies around mitigating AR exposure during the beginning of the COVID impact. And then also additional shipping costs really related to meeting the surge in demand once the various regions began opening up end of May and June. We saw nice leverage during the quarter with SG&A which finished at 18.4% of revenue. It's close to our internal target of 18%. We saw an impact to sales and marketing expenses during the quarter as many planned marketing events were canceled and we made the decision to temporarily suspend some other marketing activities at the onset of the pandemic. We previously announced last year our intention to add 90 basis points to our marketing spend on an annualized basis for 2020. It's unlikely we will fully spend that this year although we expect the sales and marketing expense to increase for the balance of the year off of the Q2 run rate. All this resulted in solid EBITDA and net income performance for the quarter which given the headwinds we saw in April was really great to see. While the Q2 momentum has continued into Q3 so far there's still obviously quite a bit of uncertainty as to the future impact of COVID and the fallout from COVID. China seems to be on firm footing at this point. U.S. business has obviously turned the corner. Like I've said we question to what extent we're seeing benefit of pent-up demand or consumers reprioritizing their spending. These trends will continue to play out, but I would certainly say it's been encouraging so far. As we look over the rest of the year, we're expecting growth in the high teens in Q3 compared to Q3 2019 based on what we're seeing in the U.S. and beyond recognizing that our China business ramped significantly last year in Q3 of 2019 compared to Q2. Finally, I want to again thank our team for their unwavering commitment to provide exceptional service to our customers. It's been really a very challenging year thus far from an operational perspective. And our teams really stepped up. I want to thank all of the operations team to obviously continue to show up and serve our customers day-in, day-out even during the pandemic. If you think about it, we pivoted from an environment in end of March into April where we're looking at every way to minimize expense to make sure we're on the best footing to one where we have to meet our highest revenue month ever in June. And that's all in a 90-day span. That's been incredibly challenging operationally. Obviously, these aren't jobs that can be done from home. So we really have a debt of gratitude to them on the team. As I've said before our team is really what sets XPEL apart. Very proud of the effort at every level and every area of the organization during these times. And I'm really proud that we can honor the commitment I made very early on that we would not have any reductions in our workforce as a result of this even when things looked far more uncertain early on, which we did. So, with that, I'll turn it over to Barry. Barry, take it away.

Thanks, Ryan and good morning everyone. Clearly, Q2 was a very solid quarter for us with revenues growing 19% to $35.8 million which is the second-highest quarter in our history. Included in this was approximately $0.3 million in new revenue net of product sales related to our February acquisition of Protex Centre in Montreal. And we also had about $0.2 million of revenue included in Q2 2019 related to our 2019 dealer conference that was out of period. If you normalize for those items, revenue would have grown approximately 18.5%. And total revenue for the first half of the year grew 17.1% to $64.2 million. Product revenue in the quarter grew 21.8% to approximately $31 million. And in this category, Paint Protection Film grew 14.6% to $24.2 million due mainly to the strong performance in China during the quarter. As Ryan pointed out our window film product line continued to overperform. Window film ended up being 16.6% of revenue which again was a record high. Q2 2020 service revenue grew 3.8% for the quarter and 13.7% for the first half of the year. And in this category software revenue grew 4.4% for the quarter and 9.3% for the first half of the year due mainly to increases in DAP subscribers. Cutbank credits revenue declined 21.9% for the quarter and 8.6% for the first half of the year. As we've discussed in the past our cutbank revenue is the value assigned to the square footage added to customers' cutbank when they buy our film. This effectively is just a reclassification out of product revenue. This decline resulted mainly from declines in product revenue in the U.S. and Canada where the cutbank program is more prevalent. Obviously less cutbank-affiliated product revenue means less square footage assigned to cutbank revenue and therefore less cutbank revenue. Installation labor revenue grew 45.1% for the quarter and 49.8% for the first half of the year. Our total installation revenue combining product and labor increased 45.2% and represented 8% of our total revenue. If you exclude the impact from the Protex Centre acquisition, total installation revenue grew right at 28.3% for the quarter. This growth is attributable to increase in demand for installed services primarily in Europe and that's mainly related to our OEM projects over there. Our U.S. installed business was flat for the quarter, while our Canadian installed business excluding Protex Centre declined substantially all due to COVID-19 impacts. Our training program resumed during the second half of the quarter and continues to ramp up here. Gross margin for the quarter grew 10.5% to $11.7 million. As Ryan mentioned our gross margin percentage finished at 32.8% versus 35.3% in Q2 2019. Gross margin for the first 6 months grew 17.4% and represented 34.3% of sales which was similar to the same period last year. Obviously gross margin can vary from quarter-to-quarter depending on our distributor direct customer mix, but gross margin improvement remains a top priority for us. Our Q2 2020 SG&A expense was essentially flat versus Q2 2019 and represented 18.4% of total revenue. For the six months ended June 30, 2020 total SG&A expenses were up 16.9% and represented 22.5% of revenue. Overall we realized about $0.7 million in savings from our expense management initiatives in Q2 in response to the pandemic and these were primarily in reductions in travel and sales and marketing. Some of this came naturally with the suspension of travel and cancellation of certain marketing events. We also took advantage where we could of government programs in all the jurisdictions where we operate. This yielded another approximately $0.2 million of expense offset. As we mentioned last quarter, we also elected to defer salaries from members of the management team which we did end up paying back during the quarter. So as we think about SG&A for Q3 and Q4 we're expecting slight increases to the Q2 run rate as some of these cost-saving initiatives are rolled back in and travel and other initiatives resume. Sales and marketing expenses declined 7% during the quarter. If you normalize for the dealer conference costs in Q2, 2019 which were out of period, sales and marketing would have grown by about 18.9%. On a year-to-date basis sales and marketing grew 27.3% compared to the same period last year. Q2 2020 general and administrative expenses grew 1.9% versus Q2 2019. For the six months ended June 30, 2020 general and administrative expenses were up 12.5%. You'll also notice an increase in our interest costs in Q2 and for the first half of the year. This increase is related to interest on the lines of credit that we drew down in late March, early April in response to COVID. We did pay all the lines back in June. As you may recall from last quarter, we did experience over $0.4 million in foreign currency loss late in Q1 that is reflected in our year-to-date number on that line item. We saw nice leverage in the quarter as reflected in our EBITDA and net income performance. Q2 2020 EBITDA increased approximately $1.3 million quarter-over-quarter to $5.7 million reflecting an EBITDA margin of 15.8%. This was our second-highest EBITDA quarter in our history. On a year-to-date basis, EBITDA grew 14% and represented 12.8% of total revenue. Q2 2020 net income increased 32.1% versus Q2 2019 to $4 million and represented 11.1% of total revenue, and EPS for the quarter came in at $0.14 per share. On a year-to-date basis, net income grew 14.7% and represented 8.7% of total revenue. Q2 cash flow from operations was very strong at $11.5 million buoyed by strong EBITDA performance and changes in working capital, primarily related to reductions in our inventory levels. This was by far a record quarter for cash flow generation for us. We did a nice job managing our inventory levels as we dealt with the rapid increase in demand during the latter half of the quarter, which certainly contributed to the strong operating cash flow performance. That being said, we exited the quarter with lower inventory levels than we like, so we anticipate building that back up as we move through the rest of the year. We also continue to study our targeted inventory levels and the possibility that we may be trading lower inventory for higher operational costs. We'll continue to be looking at that as we move forward. As I mentioned earlier, we did pay back our lines of credit during the quarter. You may also recall from our last call, we did close on a $6 million term debt facility with The Bank of San Antonio in May. In total, we have just under $26 million in cash on the balance sheet and we anticipate that will fund future acquisitions, while also providing us the flexibility to manage through any future COVID-19 pandemic uncertainty. Finally, I want to echo Ryan's comments regarding our team, and especially our operations team. We've done a great job serving our customers and really serving on the front lines there, so great work on that front. So obviously, a great quarter for us, and we're hopeful these positive trends continue as we move through the rest of the year. And with that, operator, we'll open the call up for questions.

Thank you. We will now be conducting a question-and-answer session. Operator instructions: Our first question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your question.

Thanks. Good morning, guys. Really appreciate the detail always, so thank you. Just a couple for me, window film looked like it really sort of began to inflect in the quarter. So, I guess, kind of a two-parter there. As you look forward, and through half of Q3 does that feel like there's some catch-up in there given it's still relatively speaking a small number, or is that a number you think you can grow off of? And I guess just as you look at the categories for Q3, would you expect to get to that high-teens number—sort of similar growth rates of the different categories—or is there a deviation there?

Yeah, Steve. No, good question. I think when we look at that there's nothing in this quarter that we would say is out-of-period or abnormal relative to the trajectory on the window film business. So, I think we expect that to continue to grow alongside the rest of the business going forward. I would not expect that there was any catch-up on window film for any reason in the quarter that wasn't present for other product lines. I think what you're seeing there is just more and more adoption of the product both in automotive and architecture really across the world, and it takes time to win the customers. It takes time to show them that this is a good product, and we're really just seeing the fruits of that now continue to develop.

And you make an interesting point. Is architectural starting to be a more meaningful piece of that mix, or is it still quite small?

No, it's still small, but it's becoming more meaningful. We expect to talk more about that and have a number of investments and other things planned, but we did see record sales for the architectural in June, and then another record in July. With any new product that's what we expect because it does take time to win new customers, allow them to evaluate it, and then build on that. While the automotive window film has been in our product portfolio for several years now, it's not surprising to me at all that we really see that continue to grow now as opposed to winning all the business when we initially launched it, and I think we'll see a similar thing with the architectural film and then the other products we've got.

That's helpful. And then as you look towards the next quarter, you gave very good granularity, and maybe I missed this, but just as it relates to gross margin, how should we think about China mix in Q3 relative to Q2?

I think our sense is that the China mix is going to be very similar, maybe slightly less in Q3 than Q2, but we don't expect a big substantial swing one way or the other. So, it's probably comparable or slightly less as an overall percent.

Got it. One more for me and then I'll turn it over. As you talked a little bit about M&A, as you think about that as sort of your strategy, the same — which is smaller installation centers — or is there any deviation? Would you look to go bigger? Would you look to do product extensions? Any sort of change of plans there at all?

I think we're open to bigger, but in our space bigger is a bit harder to find. There aren't a lot of prospects there. Product line expansion is always a possibility, but we've got this great portfolio of products now that we really need to expand and double down on. If it was product related it would probably be more built around something we're already doing. So, more than likely that leads us to our bread-and-butter channel strategy which is installation and then distribution in other countries in which we want to operate directly.

Got it. Okay. Nicely done guys. Thanks.

Thanks Steve.

Thank you. Our next question is from the line of Jeff Van Sinderen of B. Riley. Please proceed with your question.

Hi, good morning everyone. Let me add my congratulations on the strong metrics for Q2. I know you touched on this a bit in your prepared comments, but any more color on how you're thinking about how much of the rebound is pent-up demand, I guess what you're looking at there to determine that, and how sustainable you think the growth rate that you've experienced is going forward all else being equal?

Well, I think we're looking at it kind of two ways. We're trying to look at it and say how is the automotive business performing in the countries in which we operate and then how long-lasting and durable has that been? You've seen in China where you had relatively good sales numbers for many months now as opposed to one really good month following opening up. To a lesser extent we're looking at whether we are seeing pent-up demand solely from customers of ours that had lower inventory during the pandemic. We sort of alluded to that fact for Q1 where we saw our DAP usage trend higher than our film purchasing suggesting there was a bit of a destock with our customers. That may very well have happened, but given how little inventory most of our customers carry, I think it's pretty negligible. At this point, I think we feel pretty strong that we're seeing something that isn't just a rebound to satisfy that pent-up demand. In the world we're in today, there are a lot of factors — many of them anecdotal — but there are a lot of factors that I think are driving car ownership and driving a lot of the things that would ultimately help our business. One of the concerns has been particularly in the U.S. the inventory levels at new car dealerships have been really low. Would that impact the business? We sort of thought maybe if it would we'd see that in July. We didn't really see that so really good results in July as well. So, knowing the limits of what we can know we feel pretty encouraged that we're not just satisfying a month or two of demand for when things were shut down.

Okay. Good to hear. And then I know you mentioned kind of how you're thinking about acquisition targets. But just wondering are you seeing — or are you sensing that maybe opportunities are improving around acquisitions given the current environment?

I would say so. I think this process — whether you're someone in our industry or us — it exposes your vulnerabilities and weaknesses. I think that when you look at the profile and the type of acquisitions we look at, that point has been acutely made to a lot of people. So, I think that does help us in that process. We had talked earlier that we kind of had a hard time closing some of the deals we were looking at because we just thought the valuation was not meeting our criteria coming into this. I think we're a little bit optimistic that's going to help us open that up. But that will be proven out really over the rest of the year, if we're right about that.

Okay. Good. And then, just one more for me, if I could squeeze it in. How should we think about your marketing plans for the second half?

We proactively cut a number of things at the pandemic onset as a lot of companies did. And then, we're also subject to a lot of canceled activities relative to our event marketing, which is a pretty big component of our marketing. So we had things we decided to curtail and then things that were just curtailed on us. Many of the events that we would look at in the second half of the year have been canceled. So those are expenses that we're probably not going to have. On the flip side though, some of the other digital marketing and other things that we do that we may have curtailed, we either have resumed those or will resume and expand upon those. We're definitely going to see an increase from the first half run rate or more specifically probably the Q2 run rate. But I don't think it will meet the expanded amount we talked about last year, wanting to really drive that 90 basis points increase in total spend. I don't think we'll meet that for the year, just because in many of the ways we spend the money, we literally can't.

Got it. Thanks for taking my questions and continued success.

Thanks, Jeff.

There are no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

I'd like to thank everybody for joining us. Thank you for your time, and we look forward to speaking with you next quarter.

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