Greetings, welcome to the XPEL Inc. second quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Nesbett, with IMS Investor Relations. Thank you, sir. You may begin.
Good morning, and welcome to our conference call to discuss XPEL's financial results for 2019 second quarter. On the call today, we have Ryan Pape, XPEL's President Chief Executive Officer, and Barry Wood, XPEL's Chief Financial Officer. Ryan will provide an overview of the business, and Barry will review the financials. Immediately after prepared comments, we will take questions from our call participants. Let me take a moment to read the safe harbor statement. During the course of this call, we will make certain forward-looking statements regarding XPEL Inc. and its business, which may include, but are not 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 current expectations of the management of XPEL. 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, 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 statement, whether as a result of new information, future events, or otherwise. Okay. With that, I will now turn the call over to Ryan.
Thanks, John, good morning, everyone, as well. Welcome to the second quarter 2019 call. Overall, we achieved a record revenue quarter and surpassed $30 million for the first time, ending at $30.1 million or about 4.5% revenue growth over Q2 2018. I was pleased with our overall Q2 revenue growth, especially in light of the challenges in China we've talked about on previous calls. First, I'll review our performance by region. Q2 China revenue was down $6.3 million or around 67%, which is about what we expected, and in line with our previous comments. As we've noted, there was some significant inventory build that occurred last year, and we experienced our highest sales into China during March and April of last year.
The good news, however, is that despite the significant reduction in our sales to China for the quarter, owing to that inventory build last year, our in-country reporting indicates sales grew modestly for the quarter on the ground in China. That's quite a divergence in results, but a very positive one. We remain bullish on China and its future growth prospects for us. Turning to the U.S., the U.S. business continued its previous positive trends. We posted 55.5% growth for the quarter. U.S. market continues to perform well in all product categories, but to put up nearly 56% growth is incredible, and that's peak performance for us and a result of our team in the U.S. absolutely firing on all cylinders, and they're doing an amazing job.
We continue to get great feedback on our new ceramic coating product, XPEL FUSION . window film continues to be a growth driver for us in the U.S. in particular. We're very pleased with that U.S. performance. We've been adding to our U.S. sales team this year and last year, and we continue to do that and plan to do that for the remainder of the year and going into next year. We saw growth in Canada in Q2 in U.S. dollar terms at 18.1%. This was after a weak Q1. We talked last quarter about some large orders and the timing compared to the prior year causing us causing the revenue decline in Q1 for Canada. This was an expected reversal and a more positive trend.
In our continental Europe region, we posted Q2 U.S. dollar growth of 14%. Our euro functional currency growth is 21%. We're seeing pressure from the currencies again. As I mentioned on the last call, we do some project work in Europe, and we had two projects complete in 2018 Q2. If we were to ignore those two projects, our revenue growth was almost 35% in euro terms for the quarter. We expect some more of these type of projects, as we mentioned before, that relate to fleets and other things in the future, and that does add some volatility to the numbers in that business. Also this month, we've opened our first facility in Germany to help support our growth there and a variety of ongoing projects.
In the U.K., we reported approximately 14% growth in U.S. dollar terms. Again, a British pound functional currency growth is a little over 20%, which was off a Q1 sort of outperforming at 50% growth, but still a good result. We could see the impact here on the British pound also year-over-year due to Brexit uncertainty and other factors, but the U.K. business remains strong. In Asia Pacific, which excludes China, we grew at a little over 50% in Q2, after posting nearly 70% growth in Q1. Our team there is doing a great job of growing and servicing the region from within the region now. I'm very happy with how we're trending. This is pretty broad-based growth across many countries. It's not one country dominating that.
We're looking to add to our sales team across the region to support those activities. We're moving into a new office in Taiwan later this year as part of the expansion of that team. Good things going on there. In terms of the Latin America business, we posted 20.1% growth in Q2. As you may recall from our last quarter, Q1 2018 had increased sales year-over-year due to liquidation of discontinued products. That made for a tough Q1 2019 comp for Latin America, where we were down nearly 40%. That's run its course, and we're seeing growth. Within that, our business in Mexico is up roughly 130% year-over-year in Mexican peso terms, and has really good momentum. We're continue adding to our direct sales team in Mexico.
We're running a clearly differentiated game from anyone in Mexico with this strategy of building our direct sales team. It is very consistent with our overall get close to the customer strategy, and it's producing outstanding results. Mexico for us continues to be one of our leading gross margin territories by implementing that strategy. We're very happy with the progress there. Turning to the Middle East, that region grew 9.1% for the quarter year-over-year. That's an improvement over our 2018 and Q1 numbers for the region, but it's still underperforming and an area of focus for our management team. Worth noting, we've also improved the margin profile of that business, and that's contributed to our overall gross margin improvement.
That's a little good piece of news tucked in there. Speaking of gross margin, we finished the quarter with the highest gross margin in our history of 35.3%. This is due to several items that we continue to talk about and focus on, which is obviously product channel mix, bill of materials, product costs, and then our non-bill of materials items and COGS, and trying to have a clear strategy to manage all three of those. Clearly the strong revenue growth in the U.S. that offset the declines in China is a net positive for the overall gross margin profile.
Consistent with my previous comments, it's worth noting that we made this progress despite an overall negative currency environment, with each of Canadian dollar, the euro, and British pound down 4%-6% year-over-year for the quarter as compared to the U.S. dollar. We're getting good traction on our new products. window film represented 10.5% of our revenue for Q2, growing approximately 34% year-over-year. Because of our revenue and gross margin performance, coupled with our ability to relatively hold the line on OpEx outside of some kind of one-time things, which Barry will talk about, even the margin finished at 14.6%, so really nice results there.
With our increasing leverage and assuming a return to growth, we're budgeting an increase of our marketing expense, which is a component of our sales and marketing line item, by around 90 basis points of revenue on a go-forward basis. With our increasing operating leverage and gross margins, we believe we can do this over time without materially altering our SG&A % of revenue. I feel it's a very important thing to do for our brand, and this will create some really exciting new possibilities for us going into next year. Overall, I really like how we're trending, particularly looking at the sort of bottom-line performance, and particularly the performance in many of our regions on the revenue side.
Based on our expectation that most of our regions' performance remains strong and coming off the deepest end of the China inventory build in 2018, along with the strong start to July, we expect to return to close to 20% revenue growth for Q3. That's really exciting and good news. Finally, as many of you know, our shares began trading on Nasdaq on July 19th. We had members of our team, and I had the pleasure of ringing the bell on July 31st. It's a great day for our team and for our brand. We received really good feedback, helps elevate the profile of the company. Just to reiterate, what a great job our team did on the whole process of moving to the U.S. from Canada.
They did an amazing job, and it will pay dividends for the company for some time to come. With that, I will turn the call over to Barry to go into more detail on the numbers. Barry, take it away.
Thanks, Ryan. Good morning, everyone. As Ryan mentioned, total Q2 2019 revenue increased 4.5% to $30.1 million, which was the highest revenue quarter in the history of XPEL. Sequentially, Q2 2019 revenue grew $5.4 million or 21.7% versus Q1 2019. Absent the impact of China that we've previously discussed, we saw strong growth in most of our regions across all product lines. Q2 2019 product revenue increased 1.7% to $25.4 million. In this category, paint protection film declined 3.4% to $21.2 million and represented 70.3% of our total revenue.
This rate of decline was less than the 8.7% decline we saw in Q1, and was mainly due to declines in paint protection film sales into China, which were partially offset by strong paint protection film growth in other regions, which, as Ryan mentioned, was led by the U.S. Ryan also mentioned our strong window film revenue performance, which finished at one of our highest quarters on a percent of revenue basis since we began offering the product. It's good news there. Total service revenue grew 22.8% to $4.7 million. As we've discussed previously, our service revenue consists of access fees for DAP software, cut bank credits revenue, which represents cut fees charged for the use of our DAP software.
Installation labor revenue from the labor portion of installation sales at our company-owned installation centers, and finally, training fee income resulting primarily from fees charged for attendance at our training classes. Software revenue increased 23.7% as we continued to increase the amount of DAP users. Cut bank credits revenue increased approximately 19.7% due mainly to strong product sales led again by the U.S. region. Installation labor grew 23.5% as we continue to see strong demand in our company-owned installation centers. Total installation revenue, if you combine product and labor, increased about 23.5% as well and represented 6.5% of our total revenue. Training revenue increased to 55.9% quarter-over-quarter.
While training revenue represents a relatively small percentage of our overall revenue, it is a good leading indicator of continued demand for our products and services. Our training classes are almost always full and continue to be booked out several weeks. Gross margin grew 24.1% to $10.6 million in Q2 2019, and our gross margin percentage finished at 35.3% versus 29.7% in Q2 2018. As you'll recall, gross margin finished at about 33% in Q1 2019, nice progress there. Our Q2 2019 SG&A expense grew 30.5% versus Q2 2018 and represented 22.1% of total revenue. Sales and marketing expenses grew 39.7% versus Q2 2018.
Included in this amount was approximately $500,000 f or our annual dealer conference that was held in May this year and was held in Q1 in 2018. If you normalize for the sales and marketing expenses would have grown about 8.8%. Q2 2019 general and administrative expenses grew 26.8% versus Q2 2018, due mainly to the increases in personnel occupancy, IT and research and development costs to support the ongoing growth of the business and the development of new products. As well as increases in professional fees, due mainly to the costs related to our U.S. registration process. We incurred approximately $300,000 of one-time cost during the quarter related to our registration process. As you all know, we completed our registration process and Nasdaq listing in July.
Consequently, we'll have some overhang of registration costs in Q3. Normalizing for the dealer conference costs and these SEC registration non-recurring costs, overall Q2 SG&A expense would have grown right around 15.6% and represented 19.6% of total revenue, which gets us closer to our 18% target. Q2 2019 EBITDA increased approximately $0.6 million to $4.4 million, reflecting an EBITDA margin of 14.6%. Q2 2019 net income increased approximately $0.5 million to $3.0 million and represented 10% of revenue. EPS for the quarter was $0.11 per share. Q2 2019 cash flow from operations was $2.1 million, which is more than double Q2 2018. Our inventory levels closed out the quarter at $15.3 million compared to $13.6 million at the end of Q1 2019.
As we discussed last quarter, we have increased our inventory levels to facilitate more lower-cost ocean shipments to our international subsidiaries. Our financial position remains very strong, with our net debt still at zero. Now that the Nasdaq listing is behind us, we anticipate amping up our acquisition activity, which will be the primary use of our excess cash as we move forward. As we announced last week, we've decided to delist from the Toronto Venture Exchange effective at the close of trading on August 30th. All this really means is that shareholders or potential shareholders will only be able to trade on Nasdaq and will no longer have the option to trade on the TSXV after August 30th. There is no action that needs to be taken by any shareholders as a result of this decision.
With that, operator, let's open the call up for questions.
Thank you. We will now be conducting a question and answer session. Due to time constraints, we ask that all callers limit themselves to one question and one follow-up. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Brock Erwin with Clever Investing. Please proceed with your question.
Hey, guys. Great work on the gross margin improvements. That's the highest I've seen since I've been following the company, and it could be a record, I'm not sure. Anyways, congrats on that. Anyways, I was wondering a little bit more about that. You mentioned it was attributable to the improvement was attributable to product mix as well as decrease in unit costs. I'm just wondering, going forward, do you think there's room for further improvement, or are you guys happy with that 35% level that you're at right now?
Well, I think I'd answer that two ways. I'm certainly happy from the standpoint that we've made great progress, particularly year-over-year. But I think our desire to see that improve doesn't end at that number. Certainly, probably for the near term, that's kind of a max out in terms of gross margin, particularly as we're seeing activity in China pick back up. Obviously, that's a, that's reduces the overall gross margin profile and then in the, in the sort of weak, strong U.S. dollar, weaker the currency environment we're in. I think that's, you know, that's sort of probably peak performance for us for right now. But I think, you know, we're looking at, we get through the remainder of this year and into next year.
You know, we certainly have our sights set a little bit higher than that, but that's probably where we'd end up for now in sort of peak performance.
Okay. Awesome. Thanks. I was just gonna ask about the cash. You mentioned acquisitions. I'm just wondering how soon do you guys think that might start to pick up? When do you think the timing of that might occur?
Sure. I think as we probably talked about before, just operationally getting through the U.S. registration, we put a lot of that activity on hold. Certainly, we have a lot of good prospects and a good funnel of opportunities that persisted throughout that time. We're very active on it now. Can't say whether anything will happen the balance of this year, although that's possible. We're certainly back to focusing on that as a key part of our overall strategy.
All right. Thanks, guys. Good luck for the rest of the year.
Thank you.
Our next question comes from the line of Adam Goldstein, a private investor. Please proceed with your question.
Hi, guys. My first question is on SG&A. Barry mentioned an 18% target, Ryan mentioned a 90 basis point increase in your budget for sales and marketing. Could you clarify that? Is the 18% target inclusive of this additional sales and marketing? Does that 18% include the annual expense like dealer conferences and expenses that you guys do every year?
I think that's a good question. Our overall target of 18% is really unchanged. As we, as we look at the business, you know, going out the period of time, we're still focused on that target. I mean, you obviously see kind of the trend this year with lower revenue growth and the other added costs. You know, we've moved a bit away from that, sort of the first two quarters of this year. We still feel that that's a, that's a good midterm target for us. The increase in marketing costs as a percent of revenue doesn't really change that target. It might change it in terms of the implementation and the timing. You know, it might move that out a quarter or two to achieve that.
It doesn't ultimately change where we think we can go with the business. I would say that, relative to dealer conference and these other things, yeah, all that's part of, we're counting everything sort of in that mix on an ongoing basis. I think Barry's simply pointing out that, dealer conference expense just shifted quarters on us for 2019 versus 2018.
Okay, great. Another question here is on the, you had looks like 23% growth in installation labor. Is that all same-store sales growth, or was there an acquisition that was responsible for some of that growth? Also, with the training, you had a 50% increase in training revenue, which is fabulous. Does that translate to roughly a 50% increase in number of people trained, or was it more like you're just able to charge more money as opposed to giving free training?
Sure. Yeah. A couple things. Let me answer your training question first. Generally, the increase in training dollars means we're training more people. A decrease in training revenue doesn't necessarily mean we're training fewer people, just depending on where we're doing the training and how that's structured. Generally, that means, yes, we're training more people. And part of the reason for that is we're beginning to do training in other areas outside of just paint protection film. Obviously, we, within, you know, past two years, we've added training for automotive window film. Within the past quarter, we've begun doing training for our architectural window film.
Just had our first classes in the U.S. and Canada there, and we'll be adding ceramic coating training for our XPEL FUSION line also. That's part of what you see there. Overall, you know, I think that if training revenue goes up, that's a, that's a good sign. If training revenue doesn't go up as fast, it's not necessarily a bad sign. It's kind of how we look at it. On your question relative to the installation increase, last year, in August, I believe, we bought two small franchisees that we had in Canada as part of the Protex network. There's a small amount of inorganic growth in that, by and large, that's organic growth.
Okay. Well, thank you. I've got one more question if later they wanna put me into the queue.
Well, go ahead. Go ahead now.
Okay. Yeah, it's impressive the other revenue growth went, looks like 50% growth up to $1 million in other revenue now. That's kind of interesting. Can you give us a little more color on that? Like, is it mainly the architectural film or is it mainly your new ceramic coating?
No, Adam, this is Barry. On that, you know, that's kind of the catchall of the non-film products and whatnot. Think about plotter sales, chemical sales and things like that.
Where does the other stuff I mentioned come in?
Yeah, I'm sorry, Adam. Yeah, I wanted to finish there. It is the coating that's in there as well. That's all part of that equation.
Does the architectural film count as window film?
It counts as window film, yes.
Okay. Ceramic is part of other, but the architectural film is. Well, is architectural film a significant portion of window film now, or is that mainly the automotive window film?
That's mainly gonna be automotive window film. As you know, we're continuing to build our architectural window film product line.
Okay. Well, thank you.
Thank you.
As a reminder, if you would like to ask a question, press star one on your telephone keypad. Our next question comes from the line of Aaron Lanni with Medici. Please proceed with your question.
Hi, Ryan. Hi, Barry. Congrats on the uplifts and solid results. My question is, in your filings, you mentioned increased competition in China being kind of a factor in that market. I was wondering if you can explain maybe how competition in China is perhaps different from your other markets and how you're adapting to that. Thanks.
Sure. Yeah, it's a good question. I think, when you look at the overall, market strategy and competitive position globally, you know, China is certainly the most unique market. It's unique in the sense that there are more brands, in this space and probably most others than you would see in most other markets. There's just an overproliferation of different brands. That sort of leads to a very aggressive and competitive market in terms of the marketing tactics, in terms of strategy around the product. I think, you know, our approach in dealing with that, some of it is sort of our textbook playbook that we might run globally, we've got to support our partners in China.
I think probably the number one way that we've done that and continue to do that is in terms of product differentiation. We have several products that are China-only products, really targeting the specific needs and wants of the consumers there. That sort of is a strategy around addressing the competition, the competitive aspects, but also in terms of just servicing that market in the way that it needs to.
All right. Thanks. My other question was, I was wondering if you can give us an update on your efforts to diversify into non-automotive film.
Sure. The two primary efforts there are around our architectural window film. You know, that we've not yet broken that out as a percent of our overall window film sales. It's still a very modest component obviously, we're seeing good progress on the window film side in general. We've got a number of product line enhancements and other things coming, some really unique things coming on the architectural line as we come into next year. That would be one. The second is our RX Antimicrobial Film that we acquired last year. We've really been in the process of sort of rebranding that and relaunching that as the XPEL product. We're starting to get a little bit of traction on that.
Those are our two main and very public areas outside of automotive. You know, we have a variety of other non-automotive uses that we see through our customer base that are perhaps, you know, not directly supported by us. Sort of the next evolution of looking at the non-automotive component of the business is, you know, are there other uses that are currently being put in place by our customer base that we can elevate to a supported use, perhaps with specific products or product differentiation. We're really looking at our customers for some of the best ideas there, of which there are a lot. Still small percent of total revenue, non-automotive, but continues to be a focus of ours.
All right. Perfect. Thanks. If I may, just a last question. The growth in your U.S. market continues to be extremely strong, which is kind of counterintuitive because it's also your most mature market. I was wondering if you can talk about kind of the growth runaway that you see in the U.S., given that PPF penetration is probably creeping up on that 10% level.
Yeah, I think, you know, forecasting growth in that U.S. business is tough. It's easy when we kinda look backwards and project forward, but, you know, that business is composed of thousands of individual operators. I think the, you know, the dynamic in the U.S. that you have to consider now is obviously we have paint protection film business growing. We have the Automotive window film business growing, where we're taking market share there. We have the ceramic coating business growing. We have sort of the labor component and the installation business growing. We have a lot of opportunity and a lot of angles for growth in the U.S.
You know, when we look forward, it's very difficult for us to, you know, accurately forecast what is our go forward growth rate in the U.S. I can tell you that, you know, as we looked at 2019, we didn't expect Q2 2019 to be 56% revenue growth. You know, our well-thought and researched view is it would be lower than that, but still a very significant double-digit growth. I think the point is we don't have a lot of specific visibility, but we do have a lot of angles for growth, and we have by far our biggest sales team in the U.S.
That's part of what we wanna replicate elsewhere in the world because you just need, you need time, you need man-hours to be able to take an ever-growing product portfolio and get it in the hands of the dealer. That's where the U.S. business really has a leg up on all of our other regions that we have the most people attached to it. That's clearly a, you know, something we've taken note of and, you know, part of our operating strategy going forward to try and replicate that everywhere that we can.
Okay. Thank you very much.
Our next question comes from the line of Tim Chatard with Quantum Capital. Please proceed with your question.
Just got a question on how your supply agreement works with the manufacturer of the of the film. Is it, you know, I think in the 10-K, you talk about a minimum purchase amount, but is it linked to any commodity price? I don't know if it's public information who the supplier actually is, but I'm just curious.
Yeah. No, there's no direct linkage to any particular commodity price in any of our pricing agreements. You know, clearly there is some input from commodity prices into some of the raw materials used to make paint protection film and window film to a varying degree. There's, you know, a lot of different suppliers involved, and none of the component prices sort of directly tracks oil price, for example, but maybe some of the other feedstocks and other components. No direct linkage there. We do have a agreement for our primary manufacturer that would renew in next March.
It's not public information who that is.
Yeah. It's all in the Form 10.
Who is it?
Entrotech is the Yeah, Entrotech is the supplier in the Form 10. That's correct.
Okay. Thanks.
We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments.
I want to thank everybody for their time today and look forward to speaking with you next quarter. Thanks a lot.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.