Good morning, ladies and gentlemen, and welcome to the XPEL, Inc. Third Quarter 2021 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, John Nesbett, Investor Relations for XPEL, Inc. Sir, the floor is yours.

Good morning and welcome to our conference call to discuss XPEL's financial results for the 2021 third quarter. On the call, we have Ryan Pape, XPEL's President and Chief Executive Officer; and Barry Wood, XPEL'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 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, 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 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 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 XPEL. Although XPEL has attempted to identify 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 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. Okay. With that, I'll now turn the call over to Ryan. Go ahead, Ryan.

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, it 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 1, we acquired two businesses, Tint Net 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 Tint Net, 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…

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 growth – 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% to $56.9 million in the quarter and 70.4% to $160.6 million on a year-to-date basis. And in this product revenue category, paint protection film grew 35.2% to $43.2 million in the quarter and 63.5% on a year-to-date basis. Our window film product had another outstanding growth quarter, growing 80.9% to $11.4 million and 93.2% to $29.6 million on a year-to-date basis. And I'll also add that our FUSION product line had another record quarter and continues to do very well. Q3 2021 service revenue grew 74.9% for the quarter and 77.5% on a year-to-date basis. Total installation revenue from our company-owned installation centers in our OEM segment grew 107.6% and represented 11.8% of total revenue for the quarter. If you exclude our acquisition-related growth, total installation revenue grew 17.1%. And keep in mind, most of the PermaPlate Films business hits this line item. On a year-to-date basis, total installation revenue grew 98.6%, and excluding the acquisitions, total installation revenue grew 41.4% 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% versus Q3 2020 to $14.1 million and represented 20.6% of total revenue. And on a year-to-date basis, total SG&A…

[Operator Instructions] Your first question is coming from Steve Dyer from Craig-Hallum. Your line is live.

Thank you. Good morning, gentlemen. Nice quarter.

Good 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?

Yes. I think you – we tried to understand when we see what we've been experiencing and what we're watching is 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 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 that's – 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.

Yes. Got it. And then you talked about sort of your sale having more to do with the sell into the dealership as they put vehicles into inventory as opposed to selling it through to the customer. Just curious, are you seeing more dealers sort of pre-wrap the different pieces of the car or so forth and sort of pro forma charge people? Or how does it work as it goes?

Yes. 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 revenue. 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 – it 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 will 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 – these – several of these acquisitions we've done have just a different model where it is preloaded.

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 or the year after, et cetera, 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 wanted and now it's more of an installation and distribution thing? Or should we continue to look as well – would you look for different sort of product add-ons as well?

Sure. Yes. No, we definitely would not say that our product portfolio is complete from the 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 then this Tint Net, One Armor, even 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 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 midrange 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 will be more broad-based than just installation.

Got it. Very helpful. Thank you, guys and good luck, going forward.

Thanks, Steve.

Your next question is coming from Jeff Van Sinderen from B. Riley. Your line is live.

Good morning, everyone. And let me say congratulations on the strong performance. Kind of a multipart question here, if you can bear with me. You mentioned supply chain and pricing pressure. Wondering if you can elaborate on that a bit more, maybe dynamics of what you're seeing, steps you're taking to mitigate and then the outlook for that pressure, hopefully, to ease. And then, I guess, any metrics around that? And order of magnitude for your inventory levels to trend into FY2022?

Sure, yes. So, I think that, Jeff, like many people, I mean, you're watching what's going on with pricing really across the board. And it's pretty unpredictable and pretty broad-based and trying to then make assumptions on where does that go, I mean, even simple things like pricing of corrugate and other things that might go into boxes for products. I mean you've seen big spikes in those or even more entry-level labor and just the hourly wage increases. So, I think we've seen that. We saw that certainly in the quarter, we expect to continue to see that in some respect. But then, at the same time, in that environment that we're in, 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 predict, and it's been pretty hard to forecast. So, it's certainly something that we're watching there from a pricing standpoint. From overall supply chain standpoint, there have been shortages in the chemicals business and the feedstock that goes into different components of the products that have been pretty widely discussed this year and then even into next year, 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, 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 could 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, not saying that inventory won't even go higher than that into 2022. 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 we plan for based on the risks that we see as we currently see them.

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 your thinking about OpEx leverage next year, excluding incremental acquisitions.

Yes, 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 we've trended a bit higher on SG&A percent of revenue, but we still feel good about the 18% 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. So 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, still think that's a good target for us. And then add to that the gross margin profile that we still see is 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 be – have a really good operating performance going into next year, even in spite of the current environment that we're in.

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 PermaPlate and related segment to drive the PPF business? Maybe any initiatives planned in 2022 that are not going to give away competitive things? And I guess any milestones we should look for there?

Well, I think that our primary focus up to now has been just on simply getting the business integrated and functioning well. But then the goal for next year, and certainly for this year, too, is 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 Tint Net, One Armor 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 high-line 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 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.

Ok great. Thanks for taking my questions. And best of luck.

You bet Jeff, thanks.

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.

I want to thank everybody for joining us and for bearing with me today with my raspy voice. But great quarter, lots of good stuff going on, and a lot of thanks to our team for all the work they have been doing. It's been an incredibly busy time operationally, and everybody has done a really great job. So, thanks for joining us, we look forward to speaking with everybody again next year.

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.