Greetings, and welcome to the XPEL Inc. 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. [Operator Instructions] It is now my pleasure to introduce your host, John Nesbett with IMS Investor Relations. Thank you. You may begin.

Good morning and welcome to our conference call to discuss XPEL's financial results for the 2020 third quarter. On the call today are Ryan Pape, XPEL's President and Chief Executive Officer; and Barry Wood, XPEL's Chief Financial Officer, who will provide an overview of the business operations and review the company's financial results. Immediately, after their prepared remarks, we will take questions from our call participants. Now, let me take a moment to read the Safe Harbor statement. During the course of this call, we'll make certain forward-looking statements regarding XPEL 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 as expected, expects, scheduled intends, contemplates, anticipates, believes, proposes or variations including negative variations of such words and phrases or state that certain actions, events or results may, could, would, might or will be taken occur or be achieved. Such statements are based on the current expectations of the management of XPEL. Forward-looking events and circumstances discussed in this call may not occur by certain specified dates or at all and could differ materially as results of known or 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's attempted to identify important factors that could cause actual actions events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. No forward-looking statement can be guaranteed. Except as required by applicable securities laws, forward-looking statements speak only as of the date of which they are made and XPEL undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. With that, I'd now 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 XPEL. We had record revenue of $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 US region, our largest. Momentum we saw beginning in the second half of Q2, carried over into Q3, which is great to see, the revenue growth was broad base. As I mentioned, our US 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 US auto industry in Q3 generally speaking, with really tight inventory for those that follow the sector. Really tight dealer inventory 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…

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 US region. And as Ryan said, we also saw another strong performance from our window film product line with window film revenue growing 78.9%, the $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 as 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 say 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. Cutbank credits 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 Cutbank revenue just to remind everybody is the value assigned to the square footage…

[Operator Instructions] Our first question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your question.

Thanks. Good morning, another really nice quarter, congrats to you to both. It's a 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 classify sell through versus selling in China in Q3, and then anticipation in Q4?

I think as you're familiar and many, you follow the inventory expansion or contraction on hand, and China was 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 distributor and there's product in the channel, we have the flexibility to make decisions like delaying shipments by a couple weeks, which might 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 a few weeks or a month, that has the effect of shifting to Q3 and 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 the best overall service to all our customers globally.

Got it. I guess jumping to the US and 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 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 getting that much certain penetration in the new business?

No, I would say we don't feel like Q3 is the result of the pent up demand. We really had that question, when you looked at June which was so strong, and then 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 on the balance of Q3 really wasn't any different. So I don't think it's a result of the pent up demand, I think it's just the result of everything we're doing. Now, adding the new products, the different product mix, the growth in attach rate to Paint Protection Film, and just the core blocking and tackling that we're doing.

Great, I guess good segue with respect to the window film, that's now an odd $25 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?

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, 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 continues to grow faster year-over-year, then Paint Protection does up until the point it becomes probably even a larger percent of our overall sales. So we have big expectations for growth there next year to continue.

Got it. Last one for me and I'll hop back. 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 small tuck in, and certainly creative by the looks of the model. Is there anything out there transformational that you could or would do, or is the game plan to continue to do it the way you've been doing it, small, tuck ins, installation centers, etcetera? Thanks.

Thanks, Steve. Yes, 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 that -- either adding product or doing something to expand the product line. I think that more than likely that's going to be what you see from us. The transformation opportunities, I think, are probably fewer and farther between. But that doesn't mean they don't exist. But that's certainly not the primary focus of our M&A strategy.

All right, thanks. Well done.

[Operator Instructions] Our next question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed with your question.

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 an indirect element there. And also multiple question here. Also, maybe touch on adding new products to existing dealers and what you expect there going forward. Thanks.

Thanks, Jeff. I think that 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 with Paint Protection Film from our current dealers and customers. We're always adding new product dealers. But 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 customer base is so varied, some can be much smaller than others, but the fact is that number continues to grow. And then, we see increased adoption of the new products by our current dealer days. 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 earned 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 the 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 a bit of a reversal in the dealership market and 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.

Terrific, that was just my multi-part question. As far as the architectural window film, didn't hear you mentioned much, I'm just wondering if there's an update on that?

We had a 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 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 the 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 can squeeze it in; any other thoughts on growing your EU business next year?

The European market, when you compare to US or Canada, our revenue per capita is still significantly less. So we're focused on 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 we're cognizant that doing that in Europe is going to be different than how we do that in the US. Hence, things like getting on the ground in France, which is required for the language and culture and to develop the market. 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. Thanks for taking my questions and continue the success.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

I want to thank everybody for joining us today and look forward to speaking with everybody next year. I appreciate it.

Ladies and gentlemen, this doesn't do today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.