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spk05: Good morning, ladies and gentlemen, and welcome to the Expel Inc. Third Quarter 2021 Earnings Call. At this time, all participants are on a listen-only mode, and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, John Nesbitt, Investor Relations for Expel Inc.
spk00: Sir, the floor is yours. Good morning, and welcome to our conference call to discuss Expel's financial results for the 2021 Third Quarter. On the call, we have Ryan Pape, Expel's President and Chief Executive Officer, and Barry Wood, Expel's Senior Vice President and Chief Financial Officer. They'll provide an overview of business operations and review the company's financial results. Immediately after prepared remarks, we'll take questions from call participants. Okay, I'd like to take a moment to read 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, 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, occurred, or be achieved. Such statements are based on current expectations of the management of Expo. 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 well as for 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 Expo. Although Expo has attempted to identify important factors that could cause actual actions, events, or results that 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. An ex-baller takes 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'll now turn the call over to Ryan. Go ahead, Ryan.
spk04: Thanks, John. And again, I would extend my welcome to our third quarter 2021 call. Q3 was another strong quarter, even in the face of some headwinds relative to pricing pressure in the supply chain and, of course, new vehicle inventory. Revenue finished at $68.5 million for the quarter, which was basically flat relative to Q2. When you factor out acquisition-related revenue, Q3 was down sequentially from Q2 around 5%, which is right in line with what we were expecting exiting Q2. As we talked about on the last call, we did see some advanced buying in Q2, primarily due to concerns about supply shortages and the prospect of price increases coming. Looking at the regions, our U.S. region continues to outperform, revenue growing 69.5%. Factor out acquisition-related impacts there, U.S. revenue grew 49%, which is really a great result for our largest region. Q3 U.S. new car sales were actually the slowest in a decade owing to the vehicle shortages. So in that sense, we're really pleased to drive such organic growth in that environment. On October 1st, we acquired two businesses, Tintnet and One Armor, which have similar business model to the permaplate films business that we acquired earlier in the year. As you may recall, this is a high-volume window film installation business for dealerships. We like the business because it further expands our overall business into a mid-range market and provides a platform to grow our paint protection and other products into the dealerships covered by these acquisitions. Unlike the rest of our business, this business, being the TintNet One Armor and Permaplate Films that we acquired earlier, is really tied more to new car inventory than to new car sales. So as new car inventories have continued to lean out, this has had a temporary negative impact on this business because there are simply fewer vehicles to tint. We talked about this impact last quarter. But it does now seem that Q4 will be the bottom in terms of inventory. You're hearing this from many of the manufacturers and we're starting to see it in our numbers as well. So this is very encouraging. And we expect that we'll actually see revenue increase just as the vehicle inventories recover because that's the time that we're making the sale. in this business, we're operating at less than 70% capacity, which impacts our gross margin. We saw that a little bit in Q3 versus Q2, as we have to subsidize our labor force with extra compensation to make up for low inventories. So the tune right now of about a million dollars a year in extra expense. And simply put, that's there to ensure that we retain our labor, which is so important, of our team because, by and large, they're paid on the work that they do. And if there's lower inventory and less work to be done, we've got to subsidize that to retain our team. So no question we would do that. But that's right now about a million dollars a year, excuse me, an extra expense through COGS. Regarding the permaplate films acquisition, you'll note that we incurred the majority of our expected integration expense during the quarter. This should be complete by year end, a little bit left to go in Q4, but most of that was, as we had previously indicated, most of that expense was incurred in Q3. Our Canada region had another great quarter with revenue growing 40.3%, 8.7 million. Strong performance in the U.S. and Canada, our two highest penetrated regions. It's really great to see and suggest we'll continue to see tax rates and penetration continue to increase. In Canada, we did acquire several businesses on October 1st around installation and distribution. You know, these are really textbook kind of acquisitions for us in keeping with our get close to customer strategy. We've always been very committed to the Canadian market, and these acquisitions are consistent with that. There was also a software business, which is similar to our DAP, which was acquired. It would provide patterns and software used to cut paint protection film. That software will be combined with our DAP soon, really by year end, bring more patterns and add folks to our design team so we can continue to design, you know, more and more coverage for more and more vehicles. And that will really cease to exist as a separate product by year end is the current plan. So I'm really happy with those acquisitions in Canada. Our China region grew 12.5% over Q3 to 10.6 million. As we mentioned on the last call, there's about a million of revenue accelerated to Q2 from Q3. China's new car sales were down 13% from the prior year. So China will be one to watch over the next year, especially with all the other macro news coming out of China. In Europe and UK regions, both had strong quarters. Europe grew just under 30% to $4.7 million in U.S. dollar terms. while the U.K. grew 34% to just under $2 million in U.S. dollar terms. Asia Pacific grew 35.7% compared to Q3 of the prior year, which is a good result. I think that we continue to see more impact from COVID-related challenges in that region more so than others, but it does appear that some of that is continuing to lift. Latin America continues to do well, growing 75.6%, still off a small base. But, you know, as we talked about coming into the year, we've put more effort and all of Latin America led out of our Mexico office. And I think we're seeing some benefits from that. So clearly the right strategy there. So in total, the acquisitions completed on October 1, we'll add revenue of about $17 million U.S. dollars term. and post-Synergy EBITDA of about $4 million on a run rate basis. We expect to fully see that as we exit Q1, get into Q2 of next year. And then finally, recently, we announced the acquisition of UK-based Invisaframe Limited, which is a provider of bicycle frame protection kits. So there's a lot left in the world to protect, And it makes sense for us to place some bets on where we can expand the reach of the brand and our products into other applications. And particularly in this case where we had an established customer using our product into this adjacent space and we had demand from our existing customers. So we like the idea of this as an adjacent protection market because It both opens up new customers in terms of bicycle shops. It is additional products for our current customers to sell. And, in fact, many of them would. People will bring all manner of thing into our current customers' locations to protect it. And then it also adds a direct-to-consumer component to the business, which we do a little bit of. But this has a larger direct-to-consumer component. So the Invisaframe will add a little over $2.7 million in U.S. dollar terms. And we're really excited about that. In our research, we found a lot of connectivity between some of these bike buyers and our existing car buyers. So a good market for us to try and expand into. And this Invisaframe will conclude all the acquisitions that we have planned for this year. And with one exception, all the acquisitions completed this year, there have been at least two years in the making and were delayed by COVID and other factors. So really, this didn't materialize this year. These have all been discussions that we've been having for quite some time. So really happy to get them done. And like I said, that'll conclude what we're doing this year. And then obviously have other things we're looking at for next year. And as you may recall, we've been really focused on supply changes here as a possibility of delays and shortages looms really across all industries. And this started for us when we took a very aggressive posture early on around the March freeze in Texas and the impact in Houston, the Gulf Coast. And it's really paid off. Our customers have experienced essentially no disruption. in terms of product stock outs or product availability from us. And that really can't be said for others in the space or some of our competitors who have had substantial problems this year. It doesn't appear overall that the supply chain situation has really fundamentally improved and perhaps in some ways it's even more problematic now. as we look going into next year. So we continue to maintain an aggressive posture in terms of inventory going into next year, really to protect the business and protect the customers. So you saw us build quite a bit of inventory Q3 from Q2, really just owing to how low inventories got with the record demand in Q2. But we're anticipating inventory around 45 million for the end of the year. We expect Q4 revenue to be just a bit higher than the Q2, Q3, or perhaps that much higher if we continue to see recovery and new car inventories materialize like we expect. Because as those inventories recover, that's revenue that we'll have at the time those deliveries are made to dealerships, even more so than when they're sold. We're talking about gross margin for the quarter. We finished at 35.7% compared to 34.8% in Q3 of 2020. This was down sequentially from Q2, which came in at 36.7. We talked about a bit of this earlier, but we have started to see, like many others, broad pricing pressure really across the board. So whether that's from packaging, to labor, to shipping, just really throughout the supply chain. And so we felt some of that in the quarter. And then also the additional labor cost relative to our dealership window tinting business, the permaplate films business, like we talked about earlier, that really offset some of the continued benefit we have in terms of mix. So That's why we felt a little bit of margin degradation from Q2 to Q3. Despite the pressures on margin we've been seeing, we still remain confident that we'll be able to increase gross margins out of our historical 34% to 35% range by the end of Q4. And then we continue to expect gross margins to go higher in next year and to be approaching 40% by mid-year. So even with these kind of near-term impacts, when you look at the overall mix of product mix and then what we're doing with supply chain, it really doesn't change our expectations for continued increase in gross margin for next year. So we received many price increases, but We've also put in price increases in many markets. So starting in Q4, depending on the geography, but to the tune of 3% to 4%, it's not universal across the world, depending on the local market conditions. So that will serve for now to more than offset cost increases that we've been receiving or are expecting. And it'll help keep us on track for that gross margin profile that I was just talking about. So all in all, another good quarter for us, lots of moving pieces, lots of work for the team on all of the acquisitions that we've done and the integration work that that takes. It's a big commit for everybody. So really much appreciate, very much appreciate the work and have done a great job. So with that, we'll turn it over to Barry and then take some questions. Barry, go ahead.
spk03: Thanks, Ryan, and good morning, everyone. Q3 revenue grew 48.6% to $68.5 million versus Q3 2020. And included in this was about $4.8 million or so of net new acquisition-related revenue. So organic revenue growth was approximately 38.4% for the quarter. So really strong performance there. And on a year-to-date basis, revenue grew 71.4%. Product revenue grew 44.2 percent to $56.9 million in the quarter and 70.4 percent to $160.6 million on a year-to-date basis. And in this product revenue category, paint protection film grew 35.2 percent to $43.2 million in the quarter and 63.5 percent on a year-to-date basis. Our window film product had another outstanding growth quarter, growing 80.9 percent to 11.4 million and 93.2 percent to 29.6 million on a year-to-date basis. And I'll also add that our vision product line had another record quarter and continues to do very well. Q3 2021 service revenue grew 74.9 percent for the quarter and 77.5 percent on a year-to-date basis. Total installation revenue from our company-owned installation centers and our OEM segment grew 107.6 percent and represented 11.8 percent of total revenue for the quarter. If you exclude our acquisition-related growth, total installation revenue grew 17.1 percent. And keep in mind, most of the permaplate films business hits this line. On a year-to-date basis, total installation revenue grew 98.6 percent. And excluding acquisitions, total installation revenue grew 41.4 percent on a year-to-date basis. And Ryan spent some time on gross margins, so I don't really have much to add here other than we did have approximately 0.3 million in one-time costs related to our integration activities that hit gross margin that will not reoccur in the future. On the SG&A front, our Q3 2021 SG&A expense grew 85 percent versus Q3 2020 to 14.1 million and represented 20.6 percent of total revenue. And on a year-to-date basis, the total SG&A expenses were up 65.3 percent, representing 19.2 percent of revenue. And included in Q3 SG&A expenses are approximately 0.5 million of integration and other one-time costs that, again, will not reoccur in future quarters. Q3 2021 EBITDA increased almost 27.1 percent quarter-over-quarter to approximately 11.4 million, reflecting the EBITDA margin of 16.6 percent. And if you exclude the integration and other one-time costs here, EBITDA would have grown 35.1% to 12.1 million, reflecting an EBITDA margin of 17.7%. And on a year-to-date basis, EBITDA grew 98.4%, represented 18.1% of total revenue. Q3 2021 net income increased 26.1% versus Q3 2020 to 8.3 million, reflecting the net income margin of 12.2%. And EPS for the quarter was 30 cents per share. And if you exclude the integration and other one-time costs, that income would have increased 35% to 8.9 million, reflecting that income margin of 13%. And again, if you exclude the integration and other one-time costs, EPS would have been 32 cents per share. And on a year-to-date basis, that income grew 108%, reflecting that income margin of 13.4%. And our year-to-date EPS is 92 cents per share. Cash flow from ops was $1.1 million in the quarter, which was quite a bit lower than what we've done in prior quarters, primarily due to our increase in inventory levels. We did close out the quarter with minimal debt, but that will obviously change in Q4, given our recently announced acquisitions and our decision to continue to increase inventory to hedge against potential supply interruptions. But even with that, we're in a very strong financial position to continue to execute on our acquisition initiatives and our other strategic priorities. And finally, I'd like to really give a shout-out to our team who did a great job integrating permaplate films, and we're well down the road in getting the recent acquisitions integrated. And as Ryan mentioned, we do not anticipate closing any acquisitions for the rest of the year as we continue to focus on finishing up on our integration initiatives that are currently ongoing. So it's been a very busy few months for us, and we look forward to continuing our momentum in Q4. And with that, operator, we're now open to call up for questions.
spk05: Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone now. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold a moment while we poll for questions. Your first question is coming from Steve Dyer from Craig Hallam. Your line is live.
spk02: Thank you. Good morning, gentlemen. Nice quarter. Morning, Steve. Just as it relates, you guys are performing really, really well, particularly given the situation with new vehicle inventory and sales. Do you feel like are you seeing any difference in take rate or any other things that maybe dealers are doing to push the product and the service? It just seems like that should be having more of an impact to you guys than it is sort of all else equal.
spk04: Yeah, I think, you know, We tried to understand, you know, when we see what we've been experiencing and what we're watching is, you know, how much benefit are we getting from just the continued momentum of the products being adopted like paint protection film and the growing attach rate versus, you know, extra work, extra incentive by the dealers who are in such a position to be able to accessorize the vehicles more because of the low inventory. So it's obviously some of both, and we get the benefit of that. And so we obviously see the benefit of that weighed against the other part of our business where the low inventory is maybe a negative, and that's where you get to the net balance where it's been pretty positive in spite of that low inventory situation.
spk02: Yeah, got it. And then, you know, you talked about You know, sort of your sale having more to do with the sell-in to the dealership as they put vehicles into inventory as opposed to selling it through to the customer. Just curious, are you seeing more dealers, you know, sort of pre-wrap the, you know, different pieces of the car and so forth and, you know, sort of pro forma charge people? Or how does it work as it goes along?
spk04: Yeah, so if you look at our business historically, even from a year ago or two years ago, really all of our sales were tied to the sell-through for the most part because you're generally selling the products at the time the vehicle is sold, or at least that's when we're generating revenue. That's really historically was the vast majority of the revenues. Where that's changing a bit is with our OEM business and then with the permaplate films and the other related acquisitions we did. Because in those cases, from an OE standpoint or from these permaplate films, in the permaplate films business, with that business, we're exclusively preloading the vehicles as they're delivered to the dealership lot. So that's in direct contrast to our historical business and it's really tied almost entirely to inventory in that sense. And in a similar way, the OEM business, while it's a small part of our overall revenue, is the same way in that it's tied to new vehicle production. And if that's delayed because of supply chain shortages or part shortages, that'll impact that as well. So you really have That mix now, which just didn't exist before, but is now a component of the business. So it's not really, Steve, so much that it's changed with our core business, but rather that the acquisition, several of these acquisitions we've done have just a different model where it is preloaded.
spk02: Got it. That's very helpful. Last one for me, and I'll pass it along. As you look at potential future acquisitions, be it next year, the year after, etc., are you looking sort of more along the lines of installation and buying up chunks of that like you've done more recently? I mean, in other words, do you sort of feel like you have the product portfolio where you want it, and now it's more of a you know, an installation and distribution thing? Or, you know, should we continue to look as well? Would you look for different, you know, sort of product add-ons as well? Sure.
spk04: Yeah, no, we definitely would not say that our product portfolio is complete from the, you know, be-all, end-all standpoint. So there are definitely other adjacent businesses that we're interested in. So I would not foreclose anything on the product side. I think with the acquisitions we did this year with the permaplate films and this 10-net one armor, you know, those were relatively unique businesses. There aren't a lot of those type of businesses with that scale and that business model around. So obviously we acquired those, but not a whole lot of other ones like that. But I wouldn't define, you know, our strategy going forward to say it's going to be dominated by, installation. That's just kind of where we've been focused this year. And like we said in the prepared remarks, we've had discussions with these businesses going on over two years. And it was really a strategic decision for us to say we want to expand the platform to get into more mid-range dealerships, whereas historically our paint protection film business is more high-line. And as part of growing paint protection film and also window film and other things, we needed a platform to do that. So these acquisitions helped us do that strategically. But then what we're looking at after that, it'll be more broad-based than just installation.
spk02: Got it. Very helpful. Thank you, guys, and good luck going forward. Thanks, Steve.
spk05: Your next question is coming from Jeff Van Sinderen from B. Reilly. Your line is live.
spk01: Good morning, everyone, and let me say congratulations on the strong performance. Kind of a multi-part question here, if you can bear with me. You mentioned supply chain and pricing pressure. I wonder if you can elaborate on that a bit more, maybe dynamics of what you're seeing um steps you're taking to mitigate and then the outlook for that pressure hopefully to ease and then um i guess any metrics around that an order of magnitude for your inventory levels to trend into fy 22 sure yeah so i think that uh jeff like like many people i mean you're you're watching what's going on with pricing um really across the board and it's it's
spk04: pretty unpredictable and, and pretty broad based and, and trying to then, you know, make assumptions on where does that go? I mean, even, even simple things like, uh, uh, pricing of Corrigan and other things that might go into the boxes for products. I mean, you've seen big, big spikes in those or even more entry level, uh, labor and just, and, and just the hourly wage increases. So I think we've, you know, we've seen that, um, We saw that certainly in the quarter. Expect to continue to see that in some respect. But then, you know, at the same time, in that environment that we're in, you know, pushing forward our own price increases to offset that. So I don't know that I could say what the trajectory of that is, maybe any better than anyone else going into next year. I mean, I think it's been pretty volatile and pretty hard to Pretty hard to predict and it's been pretty hard to forecast. So it's certainly something that we're that we're watching there from a pricing standpoint from overall supply chain standpoint, you know, there have been shortages in the chemicals business and feedstock that goes into different components of the products that have been You know pretty widely discussed this year and then even into next year still a we're still being advised of these shortages and things that go into the resins that go into TPU and these sort of structural problems that have emerged. So, you know, our approach has been that let's build inventory to protect ourselves from this. And so certainly we'll continue to do that, like we talked about going into year end. And then even while we're in the fourth quarter here, still make decisions on what we're planning for after that because we know that things can fall apart very quickly if you don't have enough product for your customers. And we saw that with a number of our competitors over the past year. So I think not saying that inventory won't even go higher than that into 2022, You know, some of that it needs to just to grow commensurate with our sales since we've seen such a large increase in sales over the past year. So some of that is really to be expected. And then beyond that, really, what do we plan for based on the risks that we see as we currently see them?
spk01: Okay, that's helpful. And then if we could just touch on OPEX for a moment in Q4, what we should expect, and then maybe You're thinking about APEX leverage next year, excluding incremental acquisitions.
spk04: Yeah, I mean, we've seen, like Barry talked about, integration expenses for the acquisitions and then actual just direct acquisition expense in terms of legal and other things that go into that in Q3. And we'll have some of that in Q4. But, you know, we've trended a bit higher on SG&A percent of revenue, but we still feel good about the 18 percent target that we're budgeting towards as giving us the ability to fully invest in the business and grow and do more things while allowing for maximum leverage to the bottom line. That's still the target, I think, as we get through some of these more near-term expenses that we've had relative to these acquisitions looking into next year. So I think that's a good target for us. And then add to that the gross margin profile that we still see as quite favorable and on track with what we've been talking about this year, in spite of the price cost increases. That puts us in a position to have a really good operating performance going into next year, even in spite of the current environment that we're in.
spk01: Okay, great to hear. And then if I can squeeze in one more, just maybe anything else you can say about the plan to evolve the permaplay and related segment to drive the PPF business? maybe any initiatives planned in 22 that are not going to give away competitive things. Um, and I guess any milestones we should look for there.
spk04: Well, I think that our, our primary focus, uh, up to now has been just on simply getting the business integrated and functioning well. Um, but then the, the, the goal for next year and certainly for this year too is, you know, where we can to begin, trying to integrate some amount of paint protection film into those customers that we've acquired via the permaplate and the other one-arm acquisitions. And that could be smaller coverage paint protection film than what we might do today in the aftermarket or what we might do today in highline dealerships. But the goal is, can we get some paint protection film attach rate into those dealerships that maybe have none today? And what's the easiest way to start that for one of these dealerships that has come in through that business model? It could be a small wear and tear type coverage. It could be a variety of things, but try and get in there with something through those relationships and then grow that over time. And that's going to be our focus for that business going into next year.
spk01: Okay, great. Thanks for taking my questions and best of luck.
spk04: You got it, Jeff. Thanks.
spk05: We have no further questions from the lines at this time. I would now like to turn the floor back to management for closing remarks.
spk04: I want to thank everybody for joining us and for bearing with me today with my raspy voice. Great quarter, lots of good stuff going on, and a lot of thanks to our team for all the work they've been doing. It's been an incredibly busy time operationally, and everybody's done a really great job. So thanks for joining us. I look forward to speaking with everybody again next year.
spk05: Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
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