Welcome to the XPEL, Inc. first quarter 2019 earnings call. It is now my pleasure to introduce your host, Jennifer Belodeau with IMS Investor Relations. Thank you, Ms. Belodeau. You may begin.
Thank you. Good morning, and welcome to our conference call to discuss XPEL's financial results for the 2019 first quarter. On the call today, Ryan Pape, XPEL's President and Chief Executive Officer, and Barry Wood, XPEL's Chief Financial Officer, will provide an overview of the business operations and review the company's financial results. Immediately after the prepared comments, we will 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 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, 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 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 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 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. 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. With that out of the way, I'll turn the call over to Ryan.
Thanks, Jen, and good morning, everyone. Welcome to our first quarter 2019 conference call. I'll start by reviewing our performance by geography. Our U.S. business was very strong with 36% year-over-year growth. We continue to see pretty broad-based growth in the U.S. business, both by geography within the U.S. and type of business, as well as a mix of current customers and new customers. You may remember we launched our ceramic coating in the U.S. in March, so we had our first revenue there, and that's progressing very nicely for the U.S. business. We continue to invest in the U.S., both with an expanded regional sales team and as it pertains to our acquisition strategy, which has largely been paused for the past six months as we've gone through our U.S. GAAP conversion but will be a focus going forward.
Next, we'll talk about the international business. Overall, currency had a more significant impact in our year-over-year comps than it has in recent quarters for the international business. Q1 2018 was a real high point for many of the currencies we have exposure to. As we talked about in our last call, we expected significant year-over-year decline in China. That occurred in the quarter to the tune of 42%. Along with our record growth in China last year, there was also an inventory build in country at the distribution level. The build in inventory principally occurred March through August at a time the business in China was ramping. There was a need to get product in quickly via air shipment, also inventory more economically via ocean shipment.
We have better line of sight into the sell-through now and have that on a go-forward basis. Our China revenue for last year was highest in Q2 and peaked in the months of March and April. We're pleased we made great strides in offsetting the year-over-year China decline with growth in other areas, and as we've talked about, that replacement comes at higher margins. In April, for example, our total revenue was up approximately 10% with further improved margins despite the China declines. Obviously, we're just closing out May and June is yet to come, but it's a good trend to start the quarter. We expect to continue to see significant year-over-year declines in Q2 for China as that inventory evens out in the channel, and our overall revenue for the quarter will most likely be close to flat.
That said, we still expect to get relief from the overall trend in Q3 as we come off peak China sales for last year. We also have two new paint protection film products launching in China. This will be a nice complement to our existing product line and offer the customers and installers the choices and options that they want for that market. Additionally, we have another line of window film we'll be launching in China later this summer. In Canada, our revenue was down 20% on the quarter. This was really due to a rough February, specifically some large dealership programs that buy in bulk and deferred purchasing. In particular, they ordered aggressively in Q1 of the prior year, which made again for a tough comp. The trend in Canada has improved significantly since February.
In our Continental Europe region, we posted year-over-year growth of 11%. That's certainly off our recent trend. There are a few factors impacting that. First was currency, as Q1 2018 was the high water mark for the euro on last year. If we look at our Continental Europe sales in euros as opposed to the U.S. dollar equivalent in which we consolidate our financials, revenue grew 21% versus the 11% we reported today, a big impact from currency. Additionally, we also have an interesting mix of revenue in the European Continental Europe region. In 2018, we had a limited duration project for an OEM that occurred in Q1 and Q2.
Since that project's completed, that affected our year-over-year U.S. dollar consolidated revenue growth by another 12% for Q1 and even more if you look at it from euros. That'll feel a little bit of that in Q2 in terms of that project ending. On the other hand, we expect more of these types of projects in the future and are very active on them. Finally, our second-largest customer in the region provides services to fleets. They don't control the rate of delivery from the fleets they service. They were off about 15% year-over-year, so we felt that in the quarter for Continental Europe as well. We adjust for all those factors. We've been pushing closer to a 50% revenue growth rate in Continental Europe.
There are a lot of exciting things going on there, and our team's working very hard. We remain very encouraged. In the U.K., we reported nearly 42% revenue growth. Like the euro, the pound also hit a high point Q1 2018, so we look at it and then if we look at the U.K. in pounds instead of consolidated as U.S. dollars, revenue grew 51% on a year-over-year basis for the U.K. Really good numbers there. Our Asia Pacific region, which excludes China, grew at nearly 70%. Obviously, this is coming off of a small base, but it's an area we're focused on, one that's getting enhanced support from our team in Taiwan pursuant to our acquisition last November. There's much work to be done here, but very encouraging signs.
Our Latin American region shows a decline of nearly 40%. As some of you remember from last year, we worked to retire our older lines of paint protection film, including our Xtreme line. We worked to liquidate that product in the 1st quarter of last year. If you exclude the two customers that participated in that liquidation who aren't regular purchasers, we saw year-over-year growth for the Latin American region at 61%. We're happy with that, and our performance from our operation in Mexico specifically. We're actively working to add salespeople to our team in Mexico for our direct sales model there, and Mexico remains one of our highest gross margin countries. Middle East was down slightly for the quarter. As you know, this area has underperformed our expectations last year. We think we're making good progress here.
Not present in the regional reporting is the fact that we've stabilized the margins in the region, we do expect growth for that region for the year. To comment overall on gross margins, we saw roughly three percentage point improvement from the prior year, which we would have expected to some extent with the China mix, it was also reduced by the aforementioned currency swings on a year-over-year basis. Overall, we are on a promising margin trend for 2019. Inventory was up substantially from year-end, around 25%. Given our strong cash position, we've moved to increase inventory to allow us to move our European business to ocean shipments versus air. This sets us up for significant expense savings later in the year.
We don't see much movement in the total inventory number one way or the other through the end of Q2, so it should end up close to where it was for Q1. On the product side, I mentioned XPEL FUSION ceramic coating has been very well received, as we talked earlier. It's a complementary product for us and for our customers and allows more dollars per vehicle for everybody involved. Overall, it's accretive to our margin mix. We continue to make progress on our XPEL VISION architectural film line. We'll be adding our Clear View Plus series soon, which are high-end, spectrally selective films. This is all part of having a complete lineup. That line of business is very product-intensive, and we have a lot of SKUs to serve the customers.
We also have several technology projects with our DAP, and we've staffed up the DAP development area as well to build some really compelling features for this line of business into our platform, which we will be able to talk about later this year. Lastly, we just concluded about two weeks ago, our 2019 dealer conference. It was an amazing two-day event. It was our best attended ever. We had attendees from 16 countries here in San Antonio. Eight breakout sessions, which included sessions on our DAP, installation techniques, a dealer roundtable, selling strategies, and marketing. As we always do, we had our paint protection and automotive window tint install competitions. Plus this year, we added our first architectural window film competition. We have no doubt that that will become as popular as the others are over time.
With a total of $24,000 in prize money for our customers this year, it was a big draw. The feedback was amazing. It's a perfect time when we have so many customers present for us to reiterate what we stand for and why we want to earn their business. If you're interested, you can check out a full recap of the conference on our website. With that, I'll turn it over to Barry. Barry?
Thanks, Ryan, and good morning, everyone. Before I get into some details on our first quarter results, I wanted to update you on our SEC registration process. Today, we filed amendment number two to Form 10. From a process perspective, since we're not yet effective, we were required to update our previously filed Form 10 with Q1 results, which are included with today's filing. I think we're making great progress on our SEC registration process and expect to be effective very soon. Once we're effective, our NASDAQ listing will soon follow. Let's take a bit more detailed look into our first quarter results. Total Q1 2019 revenue declined one point six percent to $24.7 million. Sequentially, Q1 2019 revenue was down $2.1 million versus Q4 2018.
While on the surface, our overall Q1 revenue growth is off from historical patterns, there are some very encouraging signs when you peel back the onion a bit, as Ryan alluded to some of this earlier. We're seeing very good core growth in most of our regions. For those regions that have been underperforming, such as the Middle East, we have a clear strategy to improve performance, and we've begun to see some of this improvement in Q2. Obviously, the sales declines in China have had a substantial impact on our top-line results, but we still see great opportunity for growth in that region as the inventory build works through the channel.
With each passing day, we gain increased visibility into that market, which will only help us continue to grow there in the future. Q1 2019 product revenue declined four point seven percent to $21.1 million. In the product revenue category, paint protection film declined eight point seven percent to $18.5 million and represented 74.6% of our total revenue. This decline was mainly due to declines in PPF sales into China, resulting mainly from the 2018 inventory build that we talked about earlier. Window film grew 56.4% and represented seven point four percent of total revenue. Our window film product line continues to be another bright spot for us, and we expect to continue to increase that product line's penetration levels in the future. Total service revenue grew 21.3% to $3.7 million.
As we noted in our last call, our service revenue consists of access fees for our 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 training fee income resulting primarily from fees charged for attendance to our training classes. Software revenue increased 22.8% for the quarter, due mainly to the increase in DAP users versus prior quarter. Cut bank credits revenue increased approximately 20.4%, due mainly to strong product sales, primarily in the U.S. region. As most of you know, our software platform is a key competitive differentiator for us and creates a sticky relationship with our customers.
Our DAP software is highly valued by our customers because it helps increase installation efficiency, which drives down labor costs, thereby maximizing profits for our customers. Our ongoing growth in this area is continued confirmation of this intrinsic value that we deliver for our customers. Installation labor grew 17.4%, due mainly to continued strong demand in our company-owned installation centers. As a side note, total installation revenue, combining product and labor, increased about 17% and represented a little over six percent of our total revenue. Gross margin for the quarter grew seven point two percent to $8.2 million versus prior year quarter, and our gross margin percentage finished at 33% versus 30.3% in Q1 2018.
While some of this improvement is attributable to mix, we're continuing to be pleased with our progress we're making with our supply chain strategy. Gross margin has been and remains a top focus for the company. Our Q1 2019 SG&A expense grew 17.2% versus Q1 2018 and represented 22.9% of total revenue. Sales and marketing expenses declined slightly in Q1 2018. This decline was due mainly to timing of our annual dealer conference, which was held in the first quarter last year, and as Ryan mentioned, was held in the second quarter this year.
Q1 2019 general and administrative expenses grew 26.6% versus Q1 2018, due mainly to increases in personnel, occupancy, IT, and research and development costs to support the ongoing growth of the business and development of new products, and also we had increases in professional fees due mainly to the ancillary costs related to our continuing registration process. We incurred approximately $130,000 of one-time costs during the quarter related to our registration process, and we will still incur registration-related costs in Q2. Q1 2019 EBITDA declined approximately $260,000 at $2.8 million, reflecting an EBITDA margin of 11.5%. Our Q1 2019 net income decreased $229,000 to $1.9 million and represented seven point five percent of total revenue.
EPS for the quarter finished at $0.07 per share. Now you may also notice that our balance sheet has three new line items called right-of-use lease assets and current and non-current lease liabilities. These new line items stem from the adoption of ASC 842, which requires companies to recognize both assets and liabilities arising from capital and operating leases. In Q1 2019, we recognized total right-of-use assets of approximately $4.2 million and a corresponding offset to lease liabilities. The adoption of this standard had no material impact on our income statement or statement of cash flows and did not impact any covenants associated with our revolving line of credit.
As Ryan alluded to earlier, we did have an increase in inventory versus where we were at at year-end, due mainly to the planned inventory increases in order to facilitate more ocean shipments to our international operations. Cash flow from ops totaled $1 million for the quarter versus $0.7 million in Q1 2018, and we ended the quarter with $4.4 million of cash in the bank. We look forward to continuing delivering great results in the coming quarters. With that, operator, we'll now open the call for questions.
Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, you may 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 key. Please limit yourself to one question and one follow-up question. Our first question comes from the line of Brock Erwin with Clever Investing. Please proceed with your question.
Hi, guys. Congrats on the quarter. Thanks for some of that color on Canada and Latin America. That was good to hear. My question, though, is about gross margin. It was nice to see it up this quarter, it seems likely that most of the increase is probably related to product mix, especially with less low margin sales with respect to China. Continued margin expansion is a key focus area for the company. In that light, can you just talk a little bit more about specific initiatives that you're working on to improve your gross margins? Thanks.
Sure. Thanks for the question, Brock. Yeah, I think two points on that. There is part of what we see with the Q1 numbers is related to China mix. There's really more going on with the margins than that, and some of that I think is obscured in Q1, just looking on the currency side. I mean, when you look at the effect the euro and pound exchange rate had on the overall growth rates, I mean, you feel that in terms of the income statement, right, in the gross margin line. I think from that standpoint, we really are making more progress than just what the mix would show. The ways to do that, obviously, there's sort of three components. All are equally important to us, not all equally applicable in every situation.
One is, you know, absolute bill of materials product costs. You know, how do we reduce the actual cost to make the product that we sell? We have a number of initiatives to try and do that and manage that, and we have some success with that. The second is there's a whole host of ancillary costs that hit COGS that we would not call those bill of material product costs, some shipping expense, some production labor, other inventory adjustments. These are things that we have control over in some cases. If it's packaging or whatnot, perhaps we can negotiate better. If it's operational, we can become more efficient, we can reduce overtime, we can manage the workforce better. That's kind of area number two.
The last piece, obviously, is just selling price and making adjustments market by market and product by product, where we think that's appropriate. Obviously, if we can hold or reduce product cost, bill of materials cost and reduce our other elements of COGS and simultaneously raise prices, you know, that's sort of the trifecta in terms of improving margin. I think that there is more positive going on than what Q1 reflects once you adjust for currency, and we think that we're gonna see even better results on the margin side for the rest of the year based on the trend right now.
All right. Thanks for answering the question. That's it for me.
Thanks, Brock.
Bye.
Our next question comes from the line of Adam Goldstein, a private investor. Please proceed with your question.
Hi. Ryan, you mentioned that in April, revenue was up 10% compared to the prior year, but then said that for the whole quarter, you expected it to be about flat. Could you just expand on that a bit? Is April better than May and June, or?
Well, you know, at this point, we're just closing out May, and as we've learned long ago, you know, you never know what the month is until it's done. That's been a constant with this business. Obviously, June is what June is. You know, we don't get a lot of advanced warning and advanced forecasting. I think, you know, the point that we're trying to make is that, you know, April was a very, very positive month in spite of the other declines that we've seen, more promising than some of the months to date. At the same time, we still expect based on overcoming that inventory build last year, that's a significant headwind for the rest of the quarter. We don't know what June holds per se.
I think we're relatively looking at it relatively conservatively that it would not be unlikely to kind of end up flat. At the same time, you know, we've got encouraging signs in the rest of the business.
Okay, just another question here about seasonality is that typically in the U.S. business, and I think in most of it, Q2 was historically your strongest quarter seasonally. Is that also the case in China and like other Asian markets or other international markets in general?
Yeah. Normally, I think, you know, Q2 or Q3 was peak revenue last year as an example. There's no question that in most of the markets where we're operating, we do better in the warmer months. Most of our business is sort of, you know, Northern Hemisphere concentrated, so we do see that trend. You know, in China, for example, January, February, Chinese New Year is typically weak. Canada, we see significant slowdown due to the weather. U.S., we see slowdown, but more moderate. In most of the big markets where we are, yeah, it's that Q2, Q3, if you ask the people in the business, that's typically sort of peak season for them.
Obviously, if you go back further than last year, you know, with just with our overall organic growth, I mean, we've beaten Q2, Q3 with Q4 many times, but that's based on the growth of the business. I think if you're really looking at it just on a seasonal basis, you know, it's Q2, or more likely kind of Q3 peak to the season.
Okay, one last thing. I noticed that in the SEC filing, there's no constant currency discussion. Verbally, you mentioned, you know, to better understand how the regional breakdown works, it helps to discuss revenue on a constant currency basis. I don't see that in the filing itself. Will that be in future filings?
Well, we had removed the sort of constant currency calculations that we had in the past few years to sort of permeate all of our disclosure, just because a lot of times we felt that they weren't really as useful to the reader. Some of the real currency oscillations that impacted us 2016, 2017, you know, it wasn't as pronounced one way or the other, so it just didn't seem quite as relevant. Obviously now with Q1, it is relevant. It was actually one of the reasons that we did so well, you know, 99.5% revenue growth in the prior year. You know, we benefited from it then, it makes that comp harder.
I don't think at this point we have a plan to bring back that constant currency measure throughout the disclosure. I do think, you know, as it's relevant, sort of to understand the regional growth, we'll continue to talk about it and bring it up like we did today.
Our next question comes from the line of Andy Pritchett with Edgebrook Partners. Please proceed with your question.
Yes, congrats on the strong U.S. growth. Can you share what is driving U.S. growth? Is it mostly from new installers coming on, or is it mostly from additional volume from existing installers?
Sure. Well, I hate to sound like a broken record relative to the U.S., but it's been remarkably consistent over time, which is, you know, a healthy mix of both. You know, if you look at our overall customer base, there's a really long tail in terms of customer size, customer volume, and growth aspiration. If we said, you know, what is the average growth rate of our existing customer base, you know, it ends up sort of a less meaningful number.
We've seen a really healthy combination for a long time, and the way we're looking at it internally is we really stack up all of the various metro areas against each other, and we're trying to look at measures of penetration, you know, sort of per capita, per metro area, and then how best to get there. If we have really strong customers that are growing at really good rates or that we can help grow, that's a great way to get there. There's some markets that are just clearly under-penetrated. There's only so many folks offering the products. In that case, there's a more intense focus on adding net new people.
It continues to be a mix, dominated by some customers who have a huge appetite for growth, that grow, you know, sort of far in excess of our overall growth rate, some that grow but at more modest rates, and then continued addition of new customers. I think big picture, you know, we have to expect that we need to continue to always add new customers just to meet the demand that's out there. You know, it's not possible to do that simply with the current customer base. That'll always be a focus of ours.
Okay, great. Maybe I missed it, but can you share what month you are targeting for the NASDAQ listing?
Do you wanna mention that, Barry?
Yeah. Andy, you know, we're, you know, obviously we filed our amendment number two today. There's a review process for that that occurs. You know, I would expect that we would be effective soon. I can't say exactly when that is, and we're really beholden to the timing of the SEC. Once we become effective, then the NASDAQ listing should follow very soon thereafter. That's all we know at this point.
Our next question comes from the line of Jason Hirschman, a private investor. Please proceed with your question.
Hi, guys. How are you doing today?
Hey, Jason. How are you?
Okay, very good. I got one question and one follow-up for you. Just basically, the first question is asking a little bit more detail about the U.S. sales. I was wondering, you know, that strong growth, how much of that is perhaps due to a heightened push into the dealer channel as opposed to the independent installer channel?
I think, you know, if you look at it overall, and we've not yet broken out those numbers, we're seeing sort of direct sales to dealerships increase at a slightly faster rate than the rest of the U.S. business. In terms of what we're seeing, that is having a net positive impact. It doesn't radically diverge in terms of growth rates into the aftermarket versus into the dealership direct. The main reason is that, you know, half the time the products are sold by a dealership regardless of who they're installed by, be it the dealership or the aftermarket.
You know, you kind of see that growth even as dealerships are selling more of the product and pushing more of the product, you see that growth split. We are seeing increased activity from the dealerships at a rate higher than the overall growth rate.
Okay. My follow-up question actually is about a very small line item on your income statement, which is the training service revenue, which is about $162,000, and which is still year-over-year good growth. I was wondering if you can give me a little bit more color on that. Is that because of just additional training sessions in the U.S. or in continental Europe or Asia? I just view that as perhaps sort of a leading indicator of the overall demand for PPF and XPEL products.
Well, I would tell you for sure that the number of people coming through our training sessions is an important leading indicator and one that we follow closely. From that measure, we're doing more training, however you look at it. In the U.S., we've increased our capacity. We've obviously added window film training in the past two years. We've done in Canada, one of our first architectural training classes. We will be adding ceramic coating training soon. Then we've also in the past two years, done a lot more training and added a lot more training capacity in Europe specifically. We have a lot of classes both out of the U.K. and the Netherlands facility. In terms of the number of people we're training, that is important, and that is increasing.
You know, most of the time, there's a correlation between number of people trained and that training revenue, but not always. You know, we're open to negotiation for training if it brings us a really good opportunity. I would definitely encourage a focus on are we training a lot of people, that's critically important. I wouldn't focus quite as much on how much revenue we derive from doing that.
Okay. Well, thank you very much.
Thanks, Jason.
There are no other questions in the queue. I'd like to hand the call back to management for closing comments.
I wanna thank everybody for your time, for the first quarter results. We look forward to speaking with you next time. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.