Earnings Call: Q3 2017

Nov 16, 2017

Earnings release

Welcome to XPEL Technologies Third Quarter 20 17 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. I would now like to turn the conference over to your host, John Nesbitt of IMS. Thank you. You may begin. Good morning, and welcome to our call to discuss XPEL's financial results for the 2017 Q3. On the call today we have Ryan Pape, XPEL's President and Chief Executive Officer and Barry Wood, XPEL's Chief Financial Officer. Appraisal this call will make certain forward looking statements regarding XPEL Technology Corp. And its business, which may include, but not 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 and will or will be taken, occurred or be achieved. Such statements are based on the current expectations of the management of XPEL. The forward looking events and circumstances discussed in this call may not occur by certain specific dates or at all and could differ materially as a result of 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 risks 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 security results, forward 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 statements whether as a result of new information, future results or otherwise. Okay. With that, I will now turn the call over to Ryan Pape. Go ahead, Ryan. Thanks, John, and I'll extend my welcome as well to our Q3 earnings release call. As you probably guessed from our press releases and news the past couple of days, it's been a very active quarter for the company. I think as we talk about some of the other things we're working on, you'll see that's existed for quite some time through the quarter. So we had a great record breaking quarter. 3rd quarter revenue growing 31.6% to $17,800,000 Obviously, I'm very pleased with our top line numbers. It puts us back in a range that we're happy to be. And as we continue to execute on our get close to customer strategy. So we continue to see strong growth across all our product lines, see increasing demand internationally, particularly in Asia. As we've discussed in the past, our export sales are primarily sold through distribution partners where margins are lower. And that trend's kind of been true across the board. So we've seen the strongest growth in all the markets that have lowest margin either due to distribution, as I just mentioned, or currency. So if that's Asia through distribution, we've had a 30 plus percent growth in Canada. So that's obviously FX impacted lower margin. And then our European business is doing well and that's FX impact there too. So that's been true all year and is still true in Q3. So to the extent that this impacts our sales mix, so a higher percentage of our sales at lower margins for either of those reasons, Our overall gross margin will be impacted, and that was certainly was a contributor to our Q3 gross margin degradation. That said, we have a number of promotional pricing agreements that were established, particularly for some of these export customers and international customers, either due to currency impact or as a result of the supply challenges we had in 2016. And these are starting to roll off in Q4, and that will continue to happen going into the beginning of 2018. So that will be a net positive to gross margin. These tend to be some larger accounts. And if they're international or moving volume, they have particularly aggressive pricing for one reason or another. And so we're going to see some positive momentum on that the rest of the year and next year. We've also made a change to our DAP software pricing. As most of you know, our DAP database has 70,000 plus patterns and it's a huge differentiator and driver of our business. It allows customers to install our paint production film efficiently with less waste. So we've changed our DAP pricing in the U. S. And Rest of the World segment to incent and better reward customers who use our film. So put simply, the customers that buy our film pay a lower DAP price than those who don't through our cut bank program. So these changes resulted in some reduction in our access fee revenue of about 70,000 dollars in Q3 over Q2. So that's our highest margin revenue stream. So obviously, you feel that, but we've created a much more streamlined and manageable go to market strategy in the U. S. And rest of the world. And ultimately, even in spite of that, we expect to fully recover all that DAP revenue over time, and it's drastically simpler to implement and drastically easier for our sales team to manage. So we felt that this quarter, but there's a great streamlining effect there. We're also in the process of launching a next generation film, Ultimate Plus, which provides easier installation for our installers along with some of the enhanced optical properties we've been introducing over the past year. So as a result of launching that and with corresponding price adjustments, we expect to see a positive margin contribution from this change in the U. S. Market and in some of the international markets starting in January. So that's a good thing. We have plans to streamline our products mix going forward into 2018 to reduce the number of SKUs. So fewer SKUs creates greater efficiency, higher inventory turns within each product line. So this started in Q3, continues into Q4. We picked up a few low margin sales in Q3 as we work some of these product lines out and just as an incentive to move them. So a portion of that one time COGS expense in Q3 was related to writing off some of these remnant products or versions of products we decided not to otherwise commercialize. And I think that we'll see a little bit more of that in Q4, and that was in addition to some of the other changes. So operationally, we've made significant changes during the Q3, and these will have a positive impact on future results. We consolidated our warehouse operations from 3 facilities to 1 in San Antonio. So obviously, there was cost to do that and really one time COGS and SG and A to do that, majority in Q3. Some will be in Q4. But as you're going through that process and also trying to reduce SKUs, it's just a natural time to clean up inventory and get rid of if there's damaged product or obsolete products. So we feel some of that, but it's a substantial savings long term and a tremendously increased efficiency. So that was in Q3 and Q4 already. We've eliminated a 4th facility we had in San Antonio where we did a few other things, including our window film training. So we've been able to move that into our headquarters operation now that we've freed up space. So we've sort of drastically simplified the footprint here, which is good for cost and efficiency and everything else. So as a result of the consolidation, we expect to realize significant efficiencies on our processes, resulting in lower costs on a go forward basis, which will have a positive impact on gross margin. So I think it's important to remember that we have significant other costs more than cost of materials that make up our cost of goods sold. So managing those costs is an important factor. And we reduced our production team significantly in October as a result of the efficiencies from the facility consolidation. This is a savings to COGS going forward net of severance costs related to that. And that's we're talking 15 plus people involved in that. So these are major changes we've made. We also restructured our sales and operations team during the quarter, which we believe will better position us to scale in a more efficient manner. So as a result of these moves, we've incurred some one time costs related to severance relocation and recruitment. So this impacts our bottom line in the short term, but have a significant impact to the business going forward. So these costs were approximately $140,000 for the quarter and that's separate from personnel changes that impact COGS, so the production expense. This is an addition to that. So I can't really overstate the magnitude of changes we've made internally. It's not like anything we've ever done before. And we've also been able to integrate some of the folks from our acquisitions and key positions going forward. So I think these acquisitions aside from growing the business and all the other benefits from them, they really help develop the future leaders, a great reputation in Boise area for high quality service. They're the leading operator in the area by far. So we think consistent with the strategy, this lets us capitalize on that growing market, and it has really favorable characteristics and great market for these products. So it's really can we support more in that market? Probably, we can. And now that we're in control there, we have the ability to do that. So it's really a test of does our get close to the customer strategy, does our ability to operate in the market actually increase the addressable size of the market? That's the key question for Boise, Idaho, and I think the answer will be yes. So excited to see that play out over the next year. And then yesterday, we announced our intent to acquire 100 percent of Protex Canada, the top franchiser of paint protection and window film in Canada. So they have over 75 franchise locations in 4 provinces. The Protex franchisee since we acquired Parasol in 2015, they've been a great customer and we've had a 5 year exclusive supply agreement where all the franchisees have to purchase these products from us. So Protex has a revenue stream of royalties from franchisees as you might expect on sales and then a rebate from XPEL, Eddie, But then we would remit a royalty back to Protex as the franchisor. So you can imagine that, that rebate is particularly costly for us in a low Canadian dollar environment where we've been, due to U. S. Dollar product costs. So Protex Network has been growing their sales at a substantial rate. So the net effect of the Canadian dollar plus the rebate is substantial and the net effect of that combined really amounts to another situation where we have a relatively low export type margin. So in addition to the strategic nature of the acquisition, this will also positively contribute to the overall gross margin position. So in addition to that, obviously, it derisks the revenue we currently receive from the Protex franchisee continued growth. We've got a dedicated management team there, and we intend to support them and help them. But we also want them to run the business because they need to stay and be 100% for the Protex brand outside of Canada. It doesn't mean it won't happen, but it's not on the radar at this point. So overall, I think really a great deal for us, really helps us in a lot of ways. Long term, it will bring a lot of efficiency where we can leverage some of the back office teams for finance and accounting. But important to remember that as Protex, we're buying really a high margin revenue stream. And if you want to think of it as an acquisition and we're offsetting hit the COGS, if you don't think of it that way. So all in all, really good, really happy to do that. So I think as you could see, Q3 was pretty transformational. Like we said, we're pleased with the top line growth. I think the opportunities for revenue growth continue to be strong as we go forward. I think we can do good. I think we'll continue to do better. But overall, really a good quarter for us. So with that, I'll turn it over to Barry, and we can dig into the numbers some and then take some questions. Barry? Thanks, Ryan, and good morning, everyone. Before I get started here, period's results as if they we were using the prior comparative periods exchange rates. For the quarter, revenues increased. It was a record breaking quarter for us as where our previous quarterly record was $17,000,000 which happened in the second quarter of this year. As Ryan also mentioned, growth was strong across all of our major product lines. Our window film product line represented 10.3% of total revenue for the quarter and 8.5 percent of year to date revenue. On a year to date basis, revenues grew 23.4 percent to 47,500,000 dollars Gross margin for the quarter versus Q2 2017, which came in a little above 27%. This degradation was due to 3 main factors. First, as Ryan mentioned, the increasing mix of export sales. Secondly, as Ryan also mentioned, we recorded some write downs of inventory as we prepared for the consolidation of our warehouse facilities and also the product consolidation. And lastly, obviously, some margin degradation due to the debt pricing change Ryan referenced earlier as higher margin software revenue was replaced with lower margin product sales, albeit for very good business reasons. The combination of these three items accounted for the margin degradation we saw in Q3, especially relative to Q2 2017. But we see this margin degradation as an aberration and expect to the warehouse consolidation and the product consolidation, gross margin would have been right around 27%. So the impact on that was significant. This year to date margin degradation was due to supply overhang issues we discussed during our Q1 earnings call and also the Q3 items that I just mentioned. On the SG and A front, SG and A expenses for the quarter increased 37.7 percent versus prior quarter and 39.2% on a year to date basis. While we continue to invest in the business in Europe and other areas to build scale, we did incur one time costs related to the restructuring of our staff that Ryan mentioned, totaling about $140,000 Also, as we've noted in prior quarters, effective January 1, we changed our method of depreciating our fixed assets from the double declining balance method to the straight line method. And as we stated before, this change is made to better reflect how we consume the future benefits of the assets. This change accelerated depreciation of some of our older assets into 20 17 and the impact of this will lessen significantly beginning in 2018 and beyond. And the impact of this change for Q3 was about 90,000. So if you normalize for our onetime results represent about 18.6% of total sales, which we think is more reasonable given our continued investment to scale the operations. But again, while we're pleased with our progress thus far, we'll continue to focus on SG and A and invest where appropriate in order to maximize operating leverage. Another item we staff are European operations and which is obviously significant. But now that we've we kind of have the plumbing built there, our rate of SG and A growth will certainly reduce as we move forward, and we'll continue to gain operating leverage as sales continue to ramp up in that region. EBITDA for the quarter decreased $400,000 to $1,200,000 and decreased to $1,100,000 to $3,200,000 on a year to date basis. The Q3 decrease was due mainly to the gross margin degradation discussed earlier as well as the SG and A increase. If you factor out our nonrecurring items that would impact EBITDA, EBITDA would have been $1,900,000 for the quarter or a 24% increase over the prior year. Net income for the quarter decreased $280,000 versus prior year quarter, finishing at $440,000 On a year to date basis, net income decreased to $1,300,000 On a constant currency basis, net income was $430,000 for the quarter and $1,120,000 on a year to date basis. Net income, if you factor in our onetime adjustments, would have been right at about $1,100,000 a 35% increase over the prior year. Operating cash flow for the quarter turned slightly positive as we completed our planned inventory buildup pursuant to the execution of our strategy to place inventory closer to our end customers. On a year to date basis, our net cash used in operating activities totaled approximately $3,500,000 due again mainly to the outflows related to our planned inventory buildup. Our inventory turnover for year to date 2017 was about 3.2x I'm sorry, 3.0x versus 3.8x in prior year to date period. Our balance sheet continues to be very strong as evidenced by our liquidity ratios and our debt to equity ratios are continue to be optimized. We accomplished much in Q3, and we think we're turning in the right direction to set us up to scale efficiently in the future. And while we're pleased kind of with our progress thus far, we know we still have a lot of work to do and we'll continue to get that. So with that, operator, we'll now open the call up for questions. Thank you. We will now be conducting question and answer session. So a question about the ProTech acquisition. Can you just explain kind of what system wide? Sure, Alan. Good to hear from you. So I think when we haven't released the revenue number for Protex, but it's relatively minimal when you consider that their revenue stream is royalties and rebates from us. So it's not an overall material amount. I think that they have a great presence in Canada, have done exceptionally well. Particularly in Eastern Canada, there is brand awareness around the Protex name like you don't see in very many places. Fundamentally, our goal is to sell product, and that's a key goal with the Protex opportunity as well as opposed to some where primary goal is to sell franchises. So we obviously want to expand the network there and we will and that's actually happening. But we want to do it and be smart about it because we have other incentives than just advancing the number of franchises via the product sales. So it's got to be good for everybody. And I think that what it represents in Canada and where it exists is, it's another option for customers who are looking for that extra level of support, the team on the ground to help and an identity product mix that is locked and set. And it works exceptionally well there, and it will continue to do so as we grow it in Canada. I think there's if you believe it works well there, there's certainly other places where it could work well too. But that said, it's been existence and existing in one form or another since the late '80s, early '90s in terms of predecessor companies in Canada. So there's a lot of history there, and it doesn't represent that we think there's a shift to that model or anything elsewhere. But it's certainly another tool in our arsenal and one we'll continue to look at. Okay, great. Thank you. Thanks, Alan. Our next question is from Adam Goldstein, Private Investor. Please state your question. Hi, guys. Congratulations on the revenue growth this quarter. That was excellent. Any would you say that kind of momentum is continuing into the Q4 or not? Yes. I think we have only the what visibility we have into the future that we have. It was strong in the Q3 and we expect strong revenue growth to continue. Okay. I got a question about how the accounting works for Protex before they were acquired. You mentioned rebates. Were the rebates accounted as a decrease in net revenue for XPEL? Or were they accounted for as an increase in COGS? Hi, Adam. This is Barry. They were accounted for as an increase in COGS for us. Okay. So it would seem that we as Ryan mentioned, it seems like that would cause an improvement in gross margin. But is it as you were saying the revenue stream is immaterial, so I guess we really shouldn't see an effect on gross margin then? No. I think as you stated, Adam, with the accounting, the net effect of that rebate and the consolidation, there will be a net effect to COGS on that. I mean, relative to or a positive effect rather. So relative to the overall picture, that's not insignificant, but you're still in a low Canadian dollar environment and you have these other factors drive it too. But the net effect is that over the next year and into the future, that will be a positive contributor there because the cost in SG and A that you pick up with Protex is more fixed than the rebate we pay, which scales directly with revenue. So as that operation has grown over time, they've been able to pick up the efficiency of more fixed SG and A, but increasing revenue in the form of the royalty from us and the rebate I'm sorry, the rebate from us and the royalty from franchisees. So our expectation would be that we get the benefit of that going forward now and fully expect it. Okay, great. My last 2, I guess, they're kind of requests. I wonder if you'd consider improving the disclosure a bit on a couple of things about rest of world separately, so we could understand the business a little better? Yes. That's something that's under review now for next year. Okay, great. One more thing on disclosure. Especially as you guys continue to do acquisitions of installers, it would be interesting to see how XPEL's business breaks down in terms of installation business versus the whole And associated costs from the installation side, but then you have this geographic component. So it needs to be the proper metric for dissemination. But it turned into a tremendous success on the product side because we were able to unlock the market and bring on a lot of new customers, I wouldn't be unhappy with that. So from that standpoint, when we're looking at it, we're increasingly looking at it as a P and L by market for the folks we have managing it. So our direction to our team for the Boise market, same as Las Vegas market or Houston market, is that we want you to drive performance of this market using everything we have at our disposal, which is service revenue and product revenue. But ultimately, we're not sort of internally biased to how that should be. The reality is it doesn't tend to go one way or the other. It will end up as a mix. So I think that looking at the service revenue component going forward probably does make sense. But ultimately, what we're trying to do is create geographic centered accountability for our team operating, whether it's a region or a local market and giving them the sort of tools and some of the autonomy they need to run that market best based on the type of customers in the setup. So I definitely understand your point. I think that folds in with the geographic reporting. And it's certainly, I think, a challenge even for us with access to all the information because you've got a lot of competing things and a lot of different ways to win, but certainly understand your point. Okay. Well, just one revenue is higher margin than the product revenue. So like if I'm just dollars they spend, I guess, I'm guessing that the fraction of those dollars that go to the product is kind of small compared to the overall paint protection. Yes. I think what you're saying is that for us in aggregate on the service revenue of installing the product, we have a higher gross margin on that and higher revenue dollars per car, both, than we do when we sell the product. So I think that's accurate. Now the difference in those type of operations is you've got facilities, you've got different personnel expense, so you have a higher fixed costs probably for that incremental revenue too. So if you were a marginal operation or a marginal time of year or a bad month or whatever you say, you still got a hurdle rate to go through for your fixed costs. So the dynamic there is a little bit different. But overall, I think you're correct that we see a higher gross margin from the installation business than we do product sales business and higher revenue per vehicle. That's correct. Okay. All right. So great. So it does I mean that is a great reason then to sort of disclose that better so that we can see those 2 types of revenues. But all right, that should do it. Thanks for taking my call. Sure. Thanks, Adam. I'm a long time shareholder and I appreciate the primary focus to increase sales and decrease cost of goods. My question I've got 2 questions. 1, are you either of these 2 purchases involving stock are you paying in stock for any of these? Hey, Max, good to hear from you. No, these are cash and they tend to have a significant seller finance component over a number of years. Okay. So I was I asked that in anticipation of my second question. I find that your Web site is absolutely atrocious. I hate to say that. It's I cannot if you go to your Web site, I cannot find who the corporate officers are, corporate directors. And I think that being the first thing that somebody would look at your company needs vast improvement. And I'm just wondering, if you're going to take a look at it, I don't know how potential investors would look at this company when they can't get information. And it's been frustrating. I've asked this question many times. 3 or 4 years ago, I asked if you guys are going to go to the U. S. Market. Do you have any plans in that regard to get off the Canadian market? It would be a benefit to you to improve the share price significantly if you told the story much better. So I don't know if that's a question or a comment. Yes. Well, I think all the feedback is good. I think as far as I know, last I checked, management team and directors should be listed on the website. So if that's not there, we'll certainly take a look at that. I think that first thing first story I want to tell on the website is about the product, not about the company. So understand that's me operating from a different perspective than you are, but your point is well taken. So I think we can look at that and probably dress that up substantially. I think that we've talked about it before. And long term for this company, it makes sense to list in the U. S. And the resources to do it along with 1,000 other things, and stacking that up with all the competing priorities that we need to make the business better and grow the business and all the other things. But I think there's a unanimous agreement that that's in our future and that we're going to do that. Okay. James, are you there? Good morning, guys. Can you hear me? Good morning, James. Okay. Yes, my question is just about you made the Protex acquisition. You're streamlining the SKUs. And obviously, this is going to be fairly different business kind of in the near future here going forward. And in order to make those decisions that you made, you must have some view on what this is going to do incrementally to gross margin. So I was wondering if you have a view of where gross margins go from here over 2018, 2019? Yes, that's my question. Yes. So I think that the hardest area for us to forecast is where is the growth and where do we see the growth? So the reality is that if you look at this year, we have Canada growing very nicely, unlike the previous year where it was growing slower. We have Europe growing nicely and we have Asia and China growing very nicely. They're all 3 growing faster than the U. S. In the past several quarters. So if that continues or the rate of growth there continues, you obviously see lower margin contribution than you would in the U. S. Business aside from the ability to raise prices in those markets or gross margin, certainly the Q3 adjusted gross margin, which looks a lot like Q2, we're trying to get to the point that that's the absolute floor and we're moving in the opposite direction. So our sense is that through the pricing adjustments and some of the contractual adjustments we are doing, the changes in 6 months that we're going to be in a position to see gross margins begin to increase into end of this year or beginning of next year. And that's not just from pricing and mix in Protex. It's from things like optimizing our production costs, which is the changes that we've made there may be worth half or a point of COGS for the year if they were annualized. So there's lots of ways that impact that. So to say where is it going to be for 2018, I can't tell you what it's going to be. I do know for given customers and given regions that we're making improvements there where it was and where it will be. But I don't know the mix what mix is going to be next year between U. S. Growth and China growth. I'd love to be able to forecast it, but we get very limited information to be able to do that, but that's going to be the ultimate driver of the consolidated gross margin. So do you guys have an internal target that you use to make decisions like of where you think that's going to be? Yes. But we have targets by segment. So I have a target for Europe, I have a target for Canada, I have a target for China and I have a target for the U. S. But what I don't know, I have a guess on the mix, right? But ultimately, I don't get to choose the mix and the requisition, but what in practice is saying what is our market price? What does our sales price in Canada need to be relative to the market, relative to the competition? What does our price through distribution need to be to China to be competitive and allow our distributor to make a margin? Those are the things we can control. How well each of those perform relative to one another, we can make a guess at it, but to a certain extent, we're along for the ride. Okay. I don't want to beat this too much, but I'm going to ask just another part on gross margins here. Do you think it's more reasonable to expect the gross margins that we experienced in Q3 here? Or do you think it's more reasonable to expect something closer to what was observed in 2016? No, I don't think Q3 as a go forward is what we're expecting. We're expecting to move back to sort of 2016 and hopefully beyond that as we work through all these initiatives. Okay, perfect. And then my last question kind of relates to your response to my first question is, and you mentioned again is that your priority has continued to be like the top priority is revenue growth. And I'm wondering if you could just outline again why you see that as your top priority? And then if you ever see yourselves shifting to be more conscious of margins and having that as a top priority? Well, I think that focusing on growth to be a growing company and grow a company to a certain scale is certainly a well understood concept. I mean, we could maximize our gross and net profitability as a $50,000,000 a year company and hop along like that. But that certainly doesn't come close to satisfying my vision for this company nor I think what all shareholders can realize if we grow. So yes, you have gross margins and the incremental gross margin on a given sale and what that does to your aggregate, but you still have the net margin of the business, which even a low gross margin sale, theoretically contributes to that net margin as your overhead costs are fixed. I could tell you my salary hasn't increased with sales from $3,000,000 in 2,009, wish it had. But so all of those things are opportunity and it really depends what kind of company do you want to become. And for me, we can become a much larger company, which ultimately generates a lot more net operating margin. And if that means we accept lower margin sales to China or lower margin sales to Canada due to FX in the meantime, I think that's great because all of that pays dividends over the long term as you raise prices, lower costs and keep your operating expenses expense growth constrained. Okay, perfect. That's all for me. Thank you. Yes. Thanks, James. Our next question is from Jason Hirschman, Private Investor. Please state your question. Hi, Ryan. Hi, Barry. Thanks for providing some clarity around the restructuring charge and all those changes going on in XPEL. It's impossible to keep up practically. Got one question you on margins and then I'll move on to a totally different topic. So you mentioned in your commentary that there's some pricing contractual agreements for overseas markets or I think you said rolling off in the next few months. Are they going to be reset to a new level Or are you implementing a completely new pricing approach for those contractual agreements? No. I mean, put simply, there are some key customer concessions that were made in 2016 due to limited inventory availability when we had our supply issues. So with some of those key accounts, it's pretty simple. The price is going up and they tend to be low margin accounts, so low margin sales. So those have sort of an outsized impact for that customer base. Are you increasing expenses and investments in these installers that are temporarily driving down profitability or even all the way to breakeven and so that you can sort of spur them to faster growth? Well, I wouldn't say that's true on a location by location basis, but it's sure true just with the aggregate investment we're making in the business. I mean, we've so if we bought the Protex business, for example, and then simultaneously, we've established a window film training center that's got people dedicated to it. So that has the net effect of probably muting the net contribution from that acquisition as an example. So I don't think that the investment that you speak to is necessarily happening at that to eat up any incremental margin from that business directly. So I think it's not tied to that, but tied to just the other initiatives and things we're doing. It looks to me just looking at the numbers that the gross margin issues are just purely because of mix between different geographic regions, mostly whether it's in China's lower margin, let's say. But the SG and A investments or higher SG and A is because of investments made in Europe and in the United States, in your sort of direct markets. Is that a fair characterization? Yes. I think that's accurate. When you look at the installation businesses as well, if we were to acquire and then consolidate installation business, there's a portion of that, that is cost of goods, be it labor required to install the products. That's cost of goods. But then you have really businesses that per revenue dollar versus selling a roll of film have a higher SG and A component per revenue dollar than selling a roll of film does also. So be it a facility, an electric bill, things related to facilities and premises. So that results in higher SG and A expense for those facilities, but that really should be offset with higher gross margins from the installation business. But I think you're right in that as Barry talked about, I mean, close to 30% of our SG and A increase in Q3 is related to the European operation. Well, that's huge and that's substantial. And we've made a major investment there, and that business continues to develop. But that business by itself, like us overall, they've got to grow through that cost structure. And they're going through that cost structure in an environment of the bad FX condition too. So you feel that, but you do that and you do a few other moves investing in the U. S. Business or the corporate side, and that's where that SG and A growth is driven from. Now you've introduced a brand new film in China called, and I'm going to try and say this with some emphasis, Zeus, also an improved Ultimate Plus in North America. I think these films are modestly higher priced than Ultimate Luxe in China or Ultimate in North America, right? And secondly, how are they doing? No. So yes, so we've got an additional product in China that is higher priced. That's really a couple of months into that. That's doing well. That's contributing to sales growth there. You're correct in that. And that is a higher margin product that was added. And then the Ultimate Plus in the U. S. Is really the next generation of the Ultimate film, and that will coincide with some pricing adjustments there. We think it's actually quite an improved product in terms of installation characteristics. It's important when you think about the product, everyone thinks about what does a consumer think of the product, and that's very important. But consumers think about sometimes the installers are telling the consumer what products. So if you can bring a solid win to the installer, that's tremendous. And so that's what with the Ultimate Plus and the changes we've made to make it easier to install, that's really who that's geared towards. And finally, any initial thoughts or reflections on the Slack Glass business? Is this going to become like a window tint sized business? Or is there any guidance you can give us just about the quality of the Yes. So just to recap, so everyone knows what you're talking about, but a component of the window film business that we've launched is a flat glass or commercial and residential film business. And this is attractive to us for a couple of reasons. In terms of addressable market size, it's very large. It gets us over time exposure beyond automotive, which has always been a sort of tertiary priority for the business. And then we have a built in ready made way to access that additional line via some of our existing customers. So that product line is brand new for us. We've just started some of the initial announcements and sales of that. We certainly over time have very high expectations for that. And if you look at our 10 plus percent of revenue as window film today, the vast, vast, vast majority of that 95% plus is automotive film. So to expect that over time on the commercial and residential side, we can build a substantial business there, That's what we expect. Okay. Well, I appreciate all the answers and thanks for all the hard work. Yes. Thanks, Jason. Our next question is from Meredith Brill with Brill Capital. And I was wondering if you could give some information about the timelines of the rollout in the U. S? Yes. So the ultimate product over this past year and then this final change, which adjusts the installation characteristics, that's sort of the most substantial change to the installer. Some of the other changes benefit installer and consumer alike. So we've started selling that product to select customers over the past 60 days. And then in December and into January, we're going to be pushing hard to roll that out and work towards moving many or most of the customer base in the U. S. Over to that product. Okay. And Canada as well? Canada as well, yes. Yes. Okay. And is that concurrent with some sort of price adjustments or? Yes. Yes. So that will be for most customers, at a higher price, which will increase the margin on that product for us. Okay. Great. And you're going to keep, I'm assuming, the ultimate, just as a backup until everyone sort of migrates? Yes, we are. And it will be somewhat based on customer feedback, how that coexists and what the time frame is. We've got a real initiative to simplify the number of SKUs. There's the ultimate product, which we all talk about, but then we've got essentially 4 or 5 other products that we sell different product in China, which is even a further different product. So we have to be real mindful of that. So the goal is to probably transition that completely at some point, but we'll wait and work with the customers and see how that goes over the 1st couple of months of next year. Okay. Thank you very much for taking my call. Okay. Thanks, Meredith. Ladies and gentlemen, we have reached the end of the question and answer session. Thank you. This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.