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Operator
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.
John Nesbitt
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.
Ryan Pape
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.
John
Thanks, Ryan, and good morning, everyone. As Ryan alluded to, we had record revenues in many of our regions during the quarter. Q3 total revenue was up 29.5% versus Q3 2019 to a record 46.1 million. And on a year-to-date basis through September, revenue grew 22% compared to the same period last year. Product revenue in the quarter grew 28.3% to approximately 39.5 million, which was a record high for this category. And in this revenue category, Product revenue paint protection film grew 20.5% to $32 million. Again, this growth was broad-based and led by the U.S. region. And as Ryan said, we also saw another strong performance from our window film product line, with window film revenue growing 78.9% to $6.3 million, which was another record for us. And on a year-to-date basis, product revenue growth was 21.9%. Q3 2020 service revenue grew 37.3% for the quarter and 22.3% for the first nine months of the year. And in this category, software revenue grew 3.5% for the quarter and 7.2% for the first nine months of the year. And one quick note on our software revenue, as many of you know, our software is a significant competitive differentiator for us, and we continue to add users to our software every day. But depending on the channel, we may or may not charge for our software and save, for example, as we penetrate more and more dealerships. So we expect to continue to see low growth rates on this line item as we move forward. Cut bank credit revenue increased 17.8% for the quarter and 0.8% for the first nine months of the year. And as we've discussed in the past, our cut bank revenue, just to remind everybody, is the value assigned to the square footage added to customers' cut bank when they buy our film and it's effectively a reclass out of product revenue. And this increase and this strong performance was mainly due to the resurgence we saw in the quarter, primarily in the U.S. and Canada. Installation labor revenue grew 77.3% for the quarter and 60.4% for the first nine months of the year. Our total installation revenue, which combines product and labor, increased a little over 77% and represented 8.4% of our total revenue. Clearly our installation centers had a very busy quarter and we continue to see solid results from our various OEM projects across Europe. Training revenues for the quarter declined 7.4% due to continued impact from COVID-19, but we continue to see that rebound and expect more as travel restrictions are curtailed. Our training classes continue to be scheduled out and we've also reduced occupancy in some classes for safety reasons. This is another area where our revenue performance from quarter to quarter could vary depending on our channel strategy, where we may or may not charge for training for certain customers. Gross margin for the quarter grew 30.6% to 16 million, which was another record for us, and our gross margin percentage was up slightly to 34.8% versus 34.5% in Q3 2019, and it was up sequentially from Q2 2020, which came in at 32.8%. Our China revenue mix was about 20% in Q3, which contributed to this sequential improvement. Gross margin for the first nine months grew 22.6% and represented 34.5% of sales, which was slightly higher than the same period last year. And we expect to see gross margins in the 33% to 35% range in the near term, depending on the mix, but But we should begin to see some enhancement outside of this range as we move through 2021 as we execute on our planned initiatives around gross margin. Our Q3 2020 SG&A expense was $7.6 million, growing 15.3% versus Q3 2019, and represented 16.5% of total revenue, which for us was a record low. For the nine months into September 30, 2020, total SG&A expenses were up 16.3%, and represented 20% of revenue. Sales and marketing expenses increased 28.9% during the quarter as we ramped up our spending post COVID restrictions. These expense increases related mainly to the hiring of additional sales and marketing personnel and the resumption of some of our marketing activities. And on a year-to-date basis, sales and marketing expenses increased 27.8%. Q3 2020, general administrative expenses grew 10.2% versus Q3 2019. And for the nine months ended September 30, 2020, general and administrative expenses were up 11.7%. And clearly, we experienced tremendous leverage in the quarter, with EBITDA increasing 50.5% to $9 million, reflecting a 19.5% EBITDA margin. And both this dollar amount and the EBITDA margin were record highs for us. Our Q3 year-to-date EBITDA grew 30.5% versus the same period last year, reflecting an EBITDA margin of 15.6%. Q3 2020 net income increased 46.5% versus Q3 2019, the 6.6 million, reflecting a 14.3% net margin. Again, these were both record highs for Expel. EPS for the quarter was $0.24 per share, and on a year-to-date basis, net income grew 30% and represented 11.1% of total revenue. Q3 cash flow from ops was $2.5 million, with increases in EBITDA offset by other working capital changes, including increases in inventory. We exited the quarter with a little over $27.2 million in cash and about $19 million in inventory. And as Ryan alluded to, we plan to increase our inventory levels in the near-term quarters by $5 to $6 million, which will allow us to maximize certain cost efficiencies and sufficiently meet anticipated rising demand. I think we're doing a nice job of managing our working capital as evidenced by our continuing improvement in our cash conversion cycle trends, and we're well positioned financially to execute on our inventory plan as we move forward. So obviously a great quarter for us, and the revenue momentum has continued into Q4, and And notwithstanding the Q4 China comp and uncertainty about our shipping schedule, Q4 is shaping up, we think, to be another great quarter for us. And with that, operator, we'll turn the call over for questions.
Operator
Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. The confirmation tunnel indicate your line is in the question queue. You may press star 2 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 start key. Our first question comes from the line of Steve Dyer with Craig Helms. Please proceed with your question.
Steve Dyer
Thanks. Good morning. Another really nice quarter. Congrats to you both.
Ryan Pape
Thanks, Steve.
Steve Dyer
Very comprehensive review, as you always do, so just a few for me as it relates to China. It sounds like some of this is a little bit your decision when you ship. Is there a little bit of destocking going on, or how would you kind of classify sell-through versus sell-in in China in Q3 and then anticipation in Q4?
Ryan Pape
Sure. Yeah, so I think as you're familiar and many of you followed, you know, the The inventory expansion or contraction on hand in China is always a big driver of these numbers. We had a period in the past where we really saw inventory build in China. The reality today is that coming out of the COVID impact, we took steps, whether it was employees lost to attrition, but operationally, we slimmed down a bit. And then coming out of that, at the end of Q2 and into Q3, it's really been operationally challenging for us just to have process and convert and ensure we have enough inventory. So with China, where we're selling through a distributor and there's a product in the channel, we have the flexibility to make decisions like delaying shipments by a couple weeks, which might you know, buy us time or buy us satisfaction with other customers or allow us to get other things out on time. So we definitely are taking advantage of that to meet our overall operational needs. So when you look at the Q3 decisions into Q4, yes, that's absolutely our decision to delay those orders by really just, you know, a few weeks or a month. that has the effect of shifting to Q3, Q4. As a result, there is less inventory in the channel than there would have been otherwise, but it buys us significant flexibility operationally. And we wouldn't do that if it had a negative impact to the customer, but it just doesn't at this point. So we're taking advantage of that flexibility to provide sort of the best overall service to all our customers globally. Yep, got it.
Steve Dyer
I guess jumping to the U.S., you know, your business, I think my math was revenue up 40% year over year, and I think overall car sales, which I know is not a one-to-one comparison because you guys do some aftermarket stuff, but overall car sales were still down 10%, even though they were up much nicer than in Q2, but Your Q3 business, did it feel like there was some pent-up demand given that Q2, a lot of things were shut down, or was that you feel like you're just gaining that much sort of penetration in the new business?
Ryan Pape
No, I would say we don't feel like Q3 is a result of pent-up demand. We really had that question when we looked at June, which was so strong, and then last July, which was really strong. We said, okay, coming out of some of these shutdowns, maybe that's the pent-up demand. But the reality is what we saw in the balance of Q3 really wasn't any different. So I don't think it's a result of pent-up demand. I think it's just a result of everything we're doing, you know, adding the new products, the different product mix, the growth in attach rate, the paint protection film, and just sort of the core blocking and tackling that we're doing.
Steve Dyer
Great. I guess, good segue, with respect to the window film, that's now a $25-odd million run rate business and growing extremely quickly. What do you think that business looks like in 2021? I mean, it's probably not realistic to be growing close to 100% every year, but it's still fairly early stages for you guys. How do you think about that?
Ryan Pape
Yeah, I mean... We certainly wouldn't say we're going to maintain the same growth rate on a bigger base. But for us, as we're taking market share and executing in that product and doing it globally, you know, not all regions are equally penetrated, it's still going to result in a significant growth opportunity for us. And as it's smaller, probably still bigger. continues to grow faster year over year than paint protection does up until the point it becomes, you know, probably even a larger percent of our overall sales. So we have big expectations for growth there next year to continue.
Steve Dyer
Got it. Last one for me and I'll hop back. Just as it relates to the M&A environment, you have a little bit of cash. Most of what you've done from an M&A perspective has been you know, sort of small tuck-in and certainly accretive by the looks of the model. Is there anything out there sort of transformational that you could or would do, or is the game plan to sort of continue to kind of do it the way you've been doing it, small, you know, tuck-ins, installation centers, et cetera? Thanks.
Ryan Pape
Sure. Thanks, Steve. Yeah, I think that we're always open with the platform we have now to something transformational, but the reality is that Most of what we see are all tucked in relative to our channel strategy. And then to a lesser extent, related to the product set, either adding product or doing something to expand the product line. And I think that more than likely, that's going to be what you see from us. The transformational opportunities, I think, are probably fewer and farther between, but It doesn't mean they don't exist, but that's certainly not the primary focus of our M&A strategy.
Steve Dyer
All right, thanks. Well done, guys.
Ryan Pape
Thanks, Steve.
Operator
As a reminder, it is star one to ask a question. Our next question comes from the line of Jeff Van Zenderen with B. Reilly. Please proceed with your question.
Jeff Van Zenderen
Good morning, everyone, and let me add my congratulations on terrific Q3 metrics. Can you speak a little bit more about some of the underlying channel trends in terms of dealers added versus selling more product through existing dealers and maybe give us a sense of whether you're adding more independent dealers, more auto dealers, any metrics you can share there? I know there's a sort of an indirect element there. Yeah. Sorry. I was just going to say, and also the multi-part question here. Sorry about that. Also maybe touch on adding, new products to existing dealers and what you expect there going forward? Thanks.
Ryan Pape
Sure. No, thanks, Jeff. Yeah. So I think that, you know, the dynamics that we're seeing are pretty consistent with what we've seen even over a longer period of time, which is that it's really a mixture of multiple factors. We see growth in the core product, the paint protection film from our current dealers and customers we're always adding new product dealers but you know as you know and you see we don't talk a lot about number of dealers because we just don't find it a very useful metric in and of itself because the composition of our of our customer base is so varied some can be much smaller than others but the but the fact is that number continues to grow And then we see increased adoption of the new products by our current dealer base. Window film is still a new product for some. The ceramic coating products are new. And I think the thing that we all have to remember is that just because you're our customer already doesn't mean that by default we deserve the business when we come out with a new product. We've got to earn the business. And that involves working with our customers, showing them about our products, the new products, and hopefully wowing them on why they're better and why they're a good fit. So that process continues as we move forward. And then I think on the last part, there are more and more dealership relationships that we have. That's a component of our strategy. We do see a lot of adoption in the dealerships with window film. In some cases, we're actually leading with window film and then looking to add paint protection later, only because many of the dealerships from an in-house perspective are more familiar with window film because it's more established. So that's kind of a bit of a reversal in the dealership market than what you might see in the aftermarket. But it's all of the above, and it's very consistent quarter to quarter. There's no remarkable shift in that trend for Q3.
Jeff Van Zenderen
Okay, terrific. That's it for my multi-part question. So as far as the architectural window film, didn't hear you mention much on that. Just wondering if there's an update on that.
Ryan Pape
Yeah, no, we had record quarter there. Still a small percent of our overall revenue, but that's an area we continue to focus on. We are tracking there how many how many dealers that we have carrying the product, because in order to do some of the marketing and accelerate some of the marketing we want to do, we need a critical mass of installer base to benefit from that. So we're actually making good progress with that. You'll see a lot more coming from us in terms of highlighting that product and the applications. There's a lot more content coming out from us now, really in the past 90 days. So that's a big push for next year to do that and build that to a critical mass. okay great and then one more if i could squeeze it in just any other thoughts on on uh growing your eu business next year any other thoughts uh yeah i mean the the the european market uh when you compare to us or canada you know our our uh revenue per capita is still significantly less so we're focused on kind of our core strategy there of getting our own people in the right places to build a network, to build relationships, and build out each country. And, you know, we're cognizant that doing that in Europe is going to be different than how we do that in the U.S., hence things like getting on the ground in France, which is required, you know, for the language and culture and to develop the markets. And in Europe overall, we're looking to do that in even more places next year within Europe because we think that's instrumental to the strategy and we know that it works. Okay, great.
Jeff Van Zenderen
Thanks for taking my questions and continued success. Thanks, Jeff.
Operator
There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
Ryan Pape
I want to thank everybody for joining us today and look forward to speaking with everybody next year. Appreciate it.
Operator
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.
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