Good day, everyone, and welcome to the XPEL, Inc. Third Quarter 2023 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, John Nesbett, IMS Investor Relations. Sir, the floor is yours.

Good morning, and welcome to our conference call to discuss XPEL's financial results for the third quarter of 2023. On the call today, Ryan Pape, XPEL's President and Chief Executive Officer; and Barry Wood, XPEL's Senior Vice President and Chief Financial Officer, will provide an overview of the business operations and review the company's financial results. Immediately after the prepared comments, we'll take questions from our call participants. A transcript of this call will be available on the company's website after the call. I'll 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 are not limited to, anticipated use of proceeds from capital transactions, expansion into new markets and execution of the company's growth strategy. Such statements are based on current expectations and assumptions, which are subject to known and unknown risk factors and uncertainties that could cause actual results to materially differ from those expressed in these statements. Some of these factors are discussed in detail in our most recent Form 10-K, including under the Item 1A Risk Factors filed with the Securities and Exchange Commission. 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.

Thank you, John, and good morning, everyone, and welcome from me also to our third quarter of 2023 conference call. We had another strong quarter. Overall revenue growing 14.4% to $102.7 million. This was in line with our expectations for revenue and what we discussed on our Q2 call. Also, as expected, China did have a nice sequential increase from Q2 or still a 7% decline from Q3 2022, which impacted the quarter-over-quarter growth rate and our non-China revenue growth in the quarter was 17.4%. Our U.S. region grew 14.5% compared to Q3 2022 to $59 million. Sequentially, this was essentially flat to Q2, which itself was a record quarter. Our U.S. business is now 57% of our overall revenue, so it's performance serves as a significant driver of our overall results. U.S. new car sales continued to be solid despite the higher interest rate environment. We did see a slight reduction in the rate of growth in our aftermarket channel this quarter versus Q2. But overall, Q3 2022 was the peak quarter for last year. And as you know, we watch the front lines of our marketing customers very closely. And our customers tell us their business has been relatively consistent this summer, but probably off the fever pace we saw in Q3 of 2022. I know that each of you covers many of you cover our business and the industry closely, so I want to take the opportunity to step back for a minute and discuss our channel strategy and how our multiple channels, in our view, complement each other and enable us to reach an expanding customer base. So as many of you know, paint protection film started almost exclusively in the aftermarket. And the consumer had to first find out about PPF then he would take…

Thanks, Ryan, and good morning, everyone. Just a little bit more color on our revenue. If you look at the product lines, combined paint protection film and cutbank revenue grew 8.4% in the quarter and was up sequentially a little under 4%. Our window film product line revenue grew 21.9% quarter-over-quarter to $18.8 million which represented 18.3% of our revenue. And this was the second highest quarter for the window film product line in our history, coming off a record quarter in Q2. Revenue for the Vision product line, which included the total window film - which is included in total window film grew 50% to $2.7 million, and this represented approximately 14% of total window film revenue and 2.6% of overall revenue. And sequentially, this was up approximately 12% over our previous high in Q2. Our OEM business also had a nice quarter with revenue growing a little under 62% versus Q3 2022 to $3.9 million, and this was down sequentially a little bit as production stops in August for most of our European OEMs for vacation. So the sequential decline was normal and expected. Our Fusion ceramic coating product revenue, which is included in our other revenue line, grew 35% for the quarter to $1.5 million and represented 1.5% of total revenue for the quarter. Our total installation revenue, combining product and service grew 34.2% in the quarter and represented 17.2% of total revenue. And on a year-to-date basis, total revenue grew 18.4%. Our Q3 SG&A expense grew 29.5% to $23.9 million and represented 23.3% of total revenue and included in our Q3 SG&A was approximately $0.6 million of costs related to onetime executive relocation and legal fees related to acquisitions that we discussed earlier. We also incurred approximately $0.5 million in onetime costs related to some research…

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

Thanks. Good morning. Just, I guess, first, on the inventory, do you anticipate any more inventory write-downs and then, I guess, even backing that out in the quarter, gross margin was a touch lighter than I think I would have expected. Anything else kind of to call out there in the quarter in terms of sort of things that caught you by surprise in the gross margin line?

No, Steve, I think we don't expect any more adjustments like that. I mean, obviously, over a longer period of time, there's always things would happen, but sort of nothing planned. In the quarter, you've got China mix, you've got a little FX. You've got lower labor utilization with some of the OEM August shutdowns and things like that. So nothing of consequence to point out, probably just a few incremental pieces like that.

Okay. And then your gross margin guidance for Q4 implies a pretty strong quarter even with a little bit lower revenue and the China mix, et cetera. Kind of help me understand - kind of what sort of gives you that continued confidence that gross margins will really be pushing that 42% number.

Well, I mean, we knew going into the year looking at it on a full year basis, what our expectations were, and we're really kind of running hot on that to start the year. And we've had planned what we expected in terms of a strong Q4 for China all year. We've talked about that we expected the year to be back-end loaded. So that's what our modeling continues to suggest. And then obviously, revenue mix, currency, these things will matter for the fourth quarter like they did for the third. But in aggregate, the whole year has been relatively consistent aside from, say, Q2 where we were really running hot on gross margin, pushing above that 42%.

Yes. A couple of more questions, I guess, just on the quarter. I guess I've not heard you call out onetime R&D expense for new product development before. Can you give any more detail sort of what that is? Is that product still in development? Any color there?

Steve, we've built over the past five years, a substantial internal R&D team, R&D, quality and adjacent functions, both by people and then investment in equipment. But we also utilize third parties for certain projects that either we don't have the internal expertise for that we're trying to move faster on. So some of that happens and it's not really noteworthy based on the timing of the expense and when it occurs. In this case, it just kind of happened to hit in this quarter with a slightly larger amount alongside these other sort of onetime expenses. So we called it out. But it really reflects sort of the continuing cadence of things we're doing, not a one-off, looking at how do we make our existing products better in the markets we're in. And then as we look at adjacencies, where else might we want to go. So I wouldn't call it out to any specific area we're focused on. I think we just really call it out due to the timing of how it presented.

Got you. Okay. And then I guess as you look forward to next year, I know you only guide one quarter out, but you've typically kind of been running in that 20-plus percent range for a long time, maybe that's aggressive in a year that it feels like we're going into a recession, et cetera. But I guess any interest in taking a big picture swipe at how you're thinking about next year?

Well, I mean, I agree with you. We've had the macro question, and I guess we really had that coming into 2024, too, if you picture yourself at this time last year or we had it coming into 2023 rather, and this year, I think, by all accounts for everybody, probably ended up stronger than was thought in November 2022. So I think with that caveat in mind, if we were to see kind of the tempo that we're in now continue, I think we would be looking in a 2024 environment at kind of a 15% to 20% sort of organic growth rate. That's kind of how we see it. That then subject to change from sort of the inorganic acquisition components. And then obviously, to the downside, it's the recession risk or the auto market lose a steam from the pace it's been on, that would potentially challenge that to the downside. But I think we see enough opportunity and we see angles for organic growth into the future to give us kind of that sustained organic growth rate? Are we going to hit 20% compounded organically year-over-year? That might be a little a little tough as you get to larger numbers. But I think if you could get to 15% to 15-plus percent, that would be good in this environment.

Yes, absolutely. And then lastly, I don't necessarily want to ask you to comment on somebody else's business, but you touched on the PPG, Entrotech joint venture. There's been some chatter just around their ability or progress in embedding I guess, PPF or a PPF like alternative into the paint. We've done quite a bit of work around that and have not seen anything remotely that would suggest that, that's happening, but give you an opportunity, I guess, to comment on it as you wish.

Sure. Yes. We watch these things closely. I can tell you that there's no known technology that puts film inside paint that we're aware of, and this is not something that our partners at PPG are doing. And so I think that what you're seeing on a broader basis is can you use films to augment or replace paint in limited circumstances. That's what's been kind of developing at a slow pace, probably for the past 10 years but that's a far cry from some theoretical technology to put film inside paint and that doesn't exist.

Okay. Got it. Thanks guys. I’ll pass it along.

Thanks Steve.

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

Good morning, everyone. So maybe we could just touch on your OEM business a little bit more. Maybe you can kind of give us your thoughts on how you see that business developing? I think you said you mentioned that you actually acquired a small OEM-related business, if there's any more detail you can give us on that? And just kind of overall, speak to your outlook for the OEM business.

Sure. I think, Jeff, we tried to give a lot more color to how we view the channel and our remarks this time just because we do see all of these pieces as complementary. And on an individual unit basis, you could cannibalize one unit from one channel to the other. But net-net-net, we see this as a way to grow awareness and reach beyond the traditional enthusiast buyer that has dominated our business. So from that end, I see more opportunity with the OEMs, it's not going to come to dominate the business, but it certainly has the ability to grow on a percent of total revenue basis, and it's really complementary to everything else we're doing. And I think to understand about to any product that's installed even if it's installed, centralized in an OEM environment, you still have to be - you still have to have the ability to service and repair it in the real world. And so that's another area where you have the OEM business intersect the need for the aftermarket channel. So it's something we're going to continue to pursue in view of trying to create more awareness and expand the buyer for paint protection film, and it likely will grow on a percent of revenue basis. But it's not going to go to dominate our revenue. It's just going to be one piece of the overall pie.

Okay. And then maybe if you could give us any more color around what you're seeing in China and perhaps speak to I guess, how you're evolving the China business, a little more understanding and color around that? And then I think you also mentioned India so maybe a quick thought on approach to India.

Yes. Jeff, I think if you look at all the lessons we've learned in our business over the years is that we know that we do exceptionally well when we get as close to the customer as possible. And that's led us to participate in the channel in a variety of ways, but including acquiring distributors in various countries and setting up in country. And for us, China was really always the exception to say that's the caveat to that strategy. And I think where we are now is saying, well, we need to have a much more open mind in terms of the best go-to-market for China to support the distribution there and really set it up on an even stronger platform for growth. And so the first thing we're doing is getting our team assembled. We've been working very closely with our mass distributor in China and really put together a plan that says, how do we make this whole thing better. And I mentioned in the prepared remarks about the lumpiness of sell-through and sell-in. Well, maybe we can do things around the inventory planning and inventory in country to make that easier for everybody as one example. The other side is we just - we've got to get much closer to the business, the kind of COVID 2.5 years, you had much of the world not present in China from the outside and the market there continues to do its thing. And so we've got to be increasingly present and increasingly close to it. So I think we're very active on that. I would expect to see what we're doing there evolve next year for the better based on all the feedback we get and whatever modifications to the go-to market. And I guess similarly to India, India is a market that we have very little revenue from today, but we see the great prospects for development as the country development - country continues to develop, and per capita incomes grow and the number of people at higher incomes continues to grow. And I think one of our lessons candidly from China applied into India is that we need to be on the ground and we need to be present not to say we have to - there's no room for local distribution, and there's no room for a bifurcated go-to-market strategy. All those things are on the table. But we need to be there and be present at the very beginning. And so that's what you're seeing us do with India. We're relocating a leader from Texas to India to lead that. And I think you see that with the lessons we've had from distribution around the world and then also, in particular, lessons learned in China, where you had a market that was rapidly developing. So I think you can kind of look at those in a similar way.

Okay. Thanks. That's helpful. And then just one more quick one. Are there any more extraordinary items that you anticipate over the next couple of quarters that might impact the P&L?

Well, I would say that we anticipate no. But everything that we're doing is with the long-term view of the company in mind. So to the extent our acquisition cadence continues or increases or accelerated, you're going to see things like legal expenses if the product development and the research and development activities we have could be further accelerated by outside resources like what you saw in the second half of this year, we're going to make those decisions even if we feel it quarter-to-quarter. But all that said, there's nothing on the horizon to identify at this point, but we're always going to side on the long-term view of the company versus the short term in making those decisions.

Okay. Fair enough. Thanks for taking my questions. I'll take the rest offline.

Thanks Jeff.

Thank you. That concludes the Q&A portion of the call. I will now hand the conference back to management for closing remarks. Please go ahead.

I'd like to thank everyone for participating today. And really thank our entire team, we've had an amazing quarter. We've seen huge development in our team and the people really going deep to further the initiatives we have, including folks taking on a lot more responsibility. And then those that we've got relocating to other parts of the world to help drive the XPEL vision elsewhere. So couldn't do without them. Thank you very much, and look forward to speaking to everyone soon.