XPEL, Inc.

Greetings and welcome to Expel Inc.' 's third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A 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 Nesbitt, with IMS Investor Relations. Thank you. You may begin.

Good morning and welcome to our conference call to discuss Expel's financial results for the 2020 third quarter. On the call today, Ryan Pape, Expel's President and Chief Executive Officer, and Barry Wood, Expel's Chief Financial Officer, will provide an overview of the business operations and review the company's financial results. Immediately after the preparation, we will take questions from call participants. Let me take a moment to review the Safe Harbor Statement. During the course of this call, we will make certain forward-looking statements regarding Expel Inc. and its business, which may include, but not be limited to, anticipated use of proceeds from capital transactions, expansion into new markets, the 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 statements that certain actions, events, or results may, could, would, might, or will be taken, occur, or be achieved. Such statements are based on the current expectations of management of Expel. 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 unknown risk factors and uncertainties affected by the company, performance, and acceptance of the company's products, economic factors, competition, the equity markets generally, and other factors beyond the control of Expel. Although Expo is attempted to identify certain important factors that could cause actual actions, events, or results to differ materially from those described in the forward-looking statements, there may be other factors that cause actions, events, or results to differ from those anticipated, estimated, or intended. No forward-looking statement can be guaranteed. Except as required by applicable securities law, forward-looking statements speak only as of the date on which they are made. An Expo owner takes no obligation to publicly update or revise any forward-looking statements, as a result of new information, future events, or otherwise. Okay, with that, I'd now like to turn the call over to Ryan. Go ahead, Ryan.

Thanks, John, and good morning, everyone. Welcome to our third quarter 2020 conference call. By all measures, Q3 was the best quarter we've ever had at Expel. We had record revenue, $46.1 million, coupled with record net income of $6.6 million and record EBITDA of $9 million. Revenue for the quarter grew just south of 30% and was led by robust 40% year-over-year growth in the U.S. region, our largest. Momentum we saw beginning in the second half of Q2 carried over into Q3, which was great to see. The revenue growth was broad-based. As I mentioned, our U.S. business grew 40% year-over-year to $22 million. which was a record for the region. In fact, we had records in almost every region and almost every financial metric this quarter with just a handful of exceptions. We've seen good performance in the U.S. auto industry in Q3, generally speaking, with really tight inventory for those that follow the sector and really tight dealer inventory overall. for us could be a blessing or a curse depending on how you look at it. But in the current dynamic, it certainly hasn't caused us a problem. We've seen that momentum in the US business carry into, so far into Q4, which is very encouraging. China region was flat quarter over quarter and down about 6% sequentially versus Q2. This was a bit less than our previous estimates as we talked in Q2, as we ended up pushing several orders from Q3 to Q4 due to our own operational needs and a busy quarter. Sales in China from our distributor to the rest of the network in China were up over 30% year over year according to our in-country sales reporting. And China auto sales have continued to do well and grow during the third quarter, so momentum seems to be continuing there. At this point, it's an open question as to China revenue in Q4. mainly due to timing of shipments and making up for delays we incurred in Q3. China Q4 2019 was the highest revenue in the history for China that we've had at 13.5 million. So it would be a tough comp for us either way, as expected, due to the acceleration of orders from Q1 2020 into Q4 2019 that we've been talking about over the course of the year. So for Q4 2020 for China, we could end up with sequential gains off our Q2, Q3 run rate for China, which would still leave us a little bit off from Q4 2019, or we may see some orders push due to operational reasons, in which case Q4 will be closer to Q2 China revenue of around $10 million and will be set up for a really awesome Q1 2021 for China. So irrespective of the shipment timing in Q4 versus Q1, we expect the 30% plus or minus in-country sales growth that we've seen in Q3 to continue. So a very strong performance in China. This will be a big driver of our overall top-line revenue growth for Q4 in terms of timing, but the China business is performing great. We're seeing increased adoption of our other products now beyond just paint protection film. Outside of China, our Asia Pacific business came back with nice growth of 24.4% as the region recovered from the pandemic. As we mentioned previously, this region can be volatile. It's small size for us, and we have a lot of distributors that we sell through everywhere but Taiwan. Also, that creates some volatility, but we expect continued good performance there in Q4. Canada returned to solid growth during the quarter with U.S. dollar revenue increasing almost 26% as the country came out of their lockdowns in Q2. I'll note the performance of our ProTech Center acquisition, which we completed in February, exceeds our expectations, which is really great and helped contribute to a good quarter. And we have a really great team in Quebec who's performing excellently. In continental Europe, really knocked it out of the park with revenue growth of 88% to a record $3.7 million US dollar terms for the quarter. This strong growth, again, it's broad-based across all countries in which we operate and sell to in our European segment. As product awareness and adoption increases in the region, we want to make sure that we're there to meet the demand, and we have been. Growth also helped by continuing success of some of the OEM projects we have, in play at the region as well. You may recall last month we announced our intent to acquire assets of France Auto Racing, which is a distributor of ours serving France. We did close that acquisition last week. And France is another under-penetrated market for us. Consistent with our acquisition strategy, which centers around this notion of getting close to the customer to provide better service and drive increased product adoption, the acquisition of our distributor in France is certainly consistent with that strategy. France will be managed as part of our Netherlands-based European headquarters. We welcome our new team members in France and look forward to growing that team next year. As we've mentioned in the past, we still expect to use up our excess cash and our cash flow from operations primarily on acquisitions, and we have multiple acquisitions that we're currently pursuing. Our UK region came back strong, coming out of one of the most restrictive lockdowns, growing 43.5% for the quarter, which was also a record for the region. Perhaps there's some pent-up demand, but the momentum has continued into Q4. We'll be watching the UK and COVID restrictions in Q4. They've reported some resurgence and government taking escalating steps, but they seem to be more measured than they were the first time around. Latin America revenue declined just under 7%. Again, with the exception of Mexico, Latin America is comprised of largely distributors, and so you've got order timing. But our Mexico business continues to perform well, and in U.S. dollar terms, doubled revenue this quarter compared to Q3 2019. So this was another region that faced severe lockdowns, and the reemergence out of that in Mexico has been really strong. We're also planning on moving the management of our Latin America region to our Mexico office in 2021. This is a big move for us, really looking at the rest of Latin America, which we expect will help drive development of the market, leveraging obviously common language for the most part and other operational efficiencies. So that's a big plan for next year. And finally, the Middle East had strong growth, 72%, which was another record. Once again, we had tremendous performance of our window film product line in the quarter, which grew just under 79% to 6.3 million, representing 13.7% of total revenue. As in past quarters, growth here is broad-based across regions for sure. Our vision product line will not get material to our overall total revenue, continues to make solid progress. We had highest revenue of vision since launch during the quarter. We're working hard with the new product, and you'll certainly be hearing more about it in future quarters. It's an exciting area of growth for the company. We also had record sales for our automotive ceramic coating product Fusion Plus during Q3. In October, we launched five new Fusion Plus product line extensions to complement our core ceramic coating product. These are designed to protect glass, wheels, plastic trim, and other surfaces. This gives our customers more opportunity to increase their revenue per vehicle while simultaneously provides more coverage options for the car owner. So another important add to that channel as we build out that product line. Also of note in the Fusion Plus product line is a marine product. That's really to complement the automotive lineup. And marine applications exist across our product line. Paint protection film, the coating, as I just mentioned, and for window film. So we're going to look to focus on this next year to really highlight and develop these applications. As we talked about previously, we will be increasing our inventory levels between now and the beginning of Q2 2021. We're doing this for two reasons. First, we will immediately realize cost efficiencies that outweigh any carrying costs of additional inventory. And the ramp-up after COVID-19, we and our customers resorted to expensive air shipments as demand recovered faster than we had planned. This weighed on shipping costs that for us show up in COGS and SG&A. Even in Q3 with really the outstanding gross margin SG&A numbers, those are still negatively impacted actually by those excess logistics costs. And secondly, having more inventory in our various locations will mitigate risks that we've identified coming out of our analysis of COVID-19 impact. While we did not suffer any direct supply chain impact, like we've been talking about the past two quarters, we believe there's still risk we can further mitigate should similar disruptions happen again. So we're looking for increased inventory level into Q2 of approximately $5 or $6 million above our current run rate. More on-hand inventory will also let us move faster in a situation of higher than expected demand, like we saw in Q3 that necessitated pushing back some of the orders to China. In the case of China, there was no end customer impact from delaying those orders, as China has plenty of inventory in the channel. But we should build more margin for error in our operations going forward, and increasing inventory will help do that in a modest way. Barry will provide some more color on gross margin and SG&A, but I'd like to specifically note that our SG&A as a percent of revenue finished it at 16.5% for the quarter, which was a great result for us. We talked in Q2 that we benefited from some reduction in SG&A due to the COVID-19 impact on travel, marketing, and some other areas that we saved. That largely reversed in Q3 with the exception of a handful of marketing events that weren't held, which aren't overly material. So we're really kind of back with a few exceptions, including some reduced travel expense to a more normal SG&A run rate. So it's really great performance. And as I've said in the past, our strong revenue growth coupled with good gross margins and that SG&A management drives tremendous leverage. And that's what we saw in Q3. This is the result we're striving for in our business. Now, levers will vary from quarter to quarter, but clearly Q3 was a phenomenal quarter in this regard and really not remarkable in terms of what we did and what we intend to do in future quarters. As I mentioned earlier, we have that uncertainty in terms of timing of China shipments for the balance of the year versus Q1. We expect continued strong results across our other regions like we've been seeing this year. For that reason, we won't be providing revenue guidance for Q4, except to say it will certainly be lower growth rate than Q3, given the Q4 2019 China comp, and depending on the timing of the shipments around year-end, what's Q4 and what's Q1. Finally, we just completed our 2021 planning process, really excited as ever about the growth opportunities that lie ahead. I know I say it on most calls, but I couldn't be more proud of our team and their efforts to serve and take care of our customers. That's what really sets Exfil apart and I'm really honored to be part of it and look forward to continuing that for the long term. So with that, I will turn it over to Barry and then we'll take some questions. Barry, go ahead.