Earnings Call Transcript - XPEL Q2 2025

Operator, Operator

Good morning, and welcome to the XPEL, Inc. Second Quarter 2025 Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to your host, John Nesbett of IMS Investor Relations. John, the floor is yours.

John Nesbett, Investor Relations

Good morning, and welcome to our conference call to discuss XPEL's second quarter 2025 financial results. On the call today are Ryan Pape, XPEL's President and Chief Executive Officer, and Barry Wood, XPEL's Senior Vice President and Chief Financial Officer. They will provide an overview of the business operations and review the company's financial results. After their prepared comments, we will take questions from participants on the call. A transcript of this call will be available on the company's website after the call. Please take a moment to read the safe harbor statement. During this call, we will make certain forward-looking statements regarding XPEL, Inc. and its business, which may include anticipated use of proceeds from capital transactions, expansion into new markets, and execution of the company's growth strategy. These statements are based on our current expectations and assumptions, which are subject to known and unknown risk factors and uncertainties that could cause actual results to differ materially from those expressed. Some of these factors are discussed in detail in our most recent Form 10-K, under Item 1A Risk Factors filed with the SEC. XPEL has no obligation to publicly update or revise any forward-looking statements as a result of new information, future events, or otherwise. With that, I will now turn the call over to Ryan. Please go ahead, Ryan.

Ryan L. Pape, CEO

Thank you, John, and good morning as well, everyone, and welcome to our second quarter 2025 call. We had a record quarter in Q2, with revenue growing 13.5% to $124.7 million. I think this exceeded our expectations going into the quarter and in the environment that we're in. We had an easier comp in China given the orchestration of the revenue in the previous year. But even factoring that in, revenue growth would have been about 11% in a more normalized environment. So really good. I think the U.S. region grew 8.4% to $70.4 million for the quarter, which was also a record and good. Obviously, Q2 in the U.S. was quite exciting, punctuated by tariff anxiety to start. For those who follow the car market, this jumped the U.S. SAAR in the first part of the quarter and then it slowed in the end as some consumers tried to front-run pricing fears in the new car market. Our view is really mixed as to whether that helped us, hurt us, or what the impact was. Obviously, we would prefer a more stable environment month-to-month. But I don't think it was overwhelmingly positive for us because some of those gains in the front half of the quarter were given up in the second half. If you look at the new car SAAR for the quarter, I think it was up modestly, like 2% to 2.5% from the prior year. I think this is just more of the same in terms of this choppy and uncertain environment that we've been in and expect to continue to be in. Canada region revenue grew 7.4% for the quarter. As we discussed previously, Canada started the year very slow, but this has been recovering. It was similar to how the U.S. started in the prior year. July for Canada was quite good, the most on track this year. I think we hit our internal budget for Canada for July, which was set last year. So that's good. We've seen a pattern like this ripple through all the markets in which we serve, and it's just something we have to deal with and stay the course and maintain what we're doing in spite of the volatility. China revenue came in at $7.7 million. This is sort of in the range we've been talking about in terms of the more normalized cadence of revenue recognition we get now instead of the choppiness we've seen in the past. We're finalizing our strategy for the China market. We expect to have more to discuss on that very soon. We also saw strong performance in our remaining regions: Europe, India, and the Middle East, which all did well for us, with the exception of Latin America where we saw a revenue decline quarter-over-quarter. This is really due to some large distributor markets in South America where the timing of revenue is inconsistent. We're working to move to a direct sales model in the largest car markets of the world. And so as we look at a market like Brazil, that's something that we're focused on this year as well. We had a good first half of the year from a revenue perspective, particularly in light of all the uncertainty and tariff noise. Q3 revenue should be in the $117 million to $119 million range, again, based on what we know today. As you may recall, Q3 '24 was our highest revenue quarter in history up until this quarter. It's a challenging comp, but we see Q2 and Q3 trade off year-to-year. It's the peak quarter of the year from a seasonality perspective. Q3 last year was the first quarter where we saw more stable revenue patterns in terms of our China revenue. So we'll be lapping that a little bit, but we're certainly glad that we have that predictability with all the changes we've been working through. Overall I really think we're performing quite well in this environment relative to our competitors and even others in the broader space. The team is really executing. Everyone knows where they see opportunity and where they need to work really hard. It's certainly a challenging environment, but we're really executing well. I think on a global basis, our shift to a very focused and decentralized P&L model around our various regional leaders is proving successful and showing results. Things will remain volatile. But if we've got the right ownership of every area of the business and good leaders, they will solve the challenges we see. I feel the best about the internal workings of the company right now than I have in probably two years. We're certainly excited about that. Continued good performance at the gross margin line. The quarter came in at 42.9%, which is up 6 basis points sequentially. This is down to the prior year's second quarter, mainly due to a revenue mix where we had higher China, which is distributor revenue this year than last year. We still expect the opportunity to trend this gross margin upward going forward as we continue to work through all the initiatives we have. We've talked about the tariff impact in our business, and that is expected to be minimal. We can work around that developing situation. I can't rule out some short-term noise as things occur, but I think as you see here, we have stability in that front. Our overall architecture of the business is just not exposed to what we're seeing on a broader scale. Our SG&A growth in the quarter is largely driven by overhead added in the second half of last year related to our distributor acquisitions in Thailand and Japan. As we discussed, these are important markets for us to build a direct presence. We now have facilities and employees in-country upon which to build a bigger base. Additionally, we incurred about $1.6 million in one-time costs in SG&A for the quarter. Some of you may remember, we discussed this in the first quarter. We had some restructuring costs to reorganize the business coming into this year. Some of those costs were borne in Q1 and the remainder in Q2. We also had quite substantial costs in the quarter related to legal and due diligence for M&A that we've been pursuing, as we've discussed. Those costs will not reoccur. So $1.6 million in total. If we normalize for those, EBITDA would have grown 14.7% to $25 million, about 20% of revenue, which is good. We generated just under $28 million in operating cash flow in Q2, really driven by the strong results overall and a slight reduction in inventory. We ended the quarter with approximately $50 million net cash on the balance sheet. We're advanced in several M&A opportunities. We're starting to see some opportunity here in terms of valuations for things that interest us. Many have asked, and we've seen those be real stubborn, I would say, given the overall macro situation. But we're beginning to see that change a little bit and starting to see a few distressed assets that might be of interest to us. I have strong confidence in our plans in terms of capital allocation here for the rest of the year. Going into next year, this remains a top focus for the company and the Board. We're extremely prudent and diligent. We're not going to be a footnote in the history of doing bad M&A and ruining a company. I feel very good about the process we're going through on this, and it will continue. We're experiencing really good momentum with our personalization platform, where we sell installations of products online and refer them to our installer network. Volume continues to grow, substantially even in the past two months. We're seeing very good end-consumer satisfaction. We're investing a lot in this platform to continue to drive it forward and make it applicable to more use cases, ultimately to help drive the attachment of our products and others. This has been part of our ongoing investment in our DAP system. It's all run through the same platform. I think this is an emerging success story for us and one that we're very focused on expanding the use cases. On the product front, we've talked in recent quarters about several new products. We've taken most of them to market. We'll be launching a set of colored paint protection films at the end of this quarter or the beginning of next. It's a nice adjacent product set for us and something that we're pursuing. We'll have features in the DAP and elsewhere to help maximize this opportunity for our customers. So all in all, a good quarter. Our team is performing excellently, and I look forward to a strong second half of the year.

Barry R. Wood, CFO

Thanks, Ryan, and good morning, everyone. I just wanted to add just a little bit more color on the top line performance in the quarter. Our total product revenue increased 13.9%, while total service revenue increased 12% quarter-over-quarter. On a year-to-date basis, revenue grew 14.2% to $228.5 million. Our total window film product line grew 27% in the quarter, driven primarily by our automotive window tint which grew 22.5%. Our newest product, Windshield Protect, which is a windshield protection film, also contributed to that solid performance. Our gross margin for the quarter grew 11.8% to $53.5 million, reflecting a gross margin percentage of 42.9%. On a year-to-date basis, our gross margin grew 13.6% to $97.4 million, and that was a gross margin percentage of 42.6%. Our total SG&A expenses grew 19.3% to $34.2 million quarter-over-quarter, and this was right at about 27.4% of total revenue. Sequentially, SG&A was up 4.4% versus Q1. If you normalize for the one-time costs that Ryan alluded to, SG&A would have grown 13.7% quarter-over-quarter. Moving forward, our SG&A growth rate should moderate as we lap our acquisition-related SG&A expenses that Ryan mentioned earlier in the second half of the year. On a year-to-date basis, SG&A grew 16.9% to $67 million. Ryan talked about EBITDA for the quarter earlier, but I'll also note that, on a year-to-date basis, EBITDA grew 12.9% to $37.8 million, reflecting a 16.6% EBITDA margin. Net income for the quarter increased 7.8%, reflecting a 13% net income margin. Normalizing for the one-time costs, net income would have grown 16.7% quarter-over-quarter. EPS was $0.59 per share for the quarter. Normalizing for the one-time items, EPS would have been $0.63 per share. On a year-to-date basis, net income grew 14.3%, reflecting a 10.8% net income margin. And year-to-date, our EPS is $0.90 per share. We're pleased with the quarter and excited to see what the rest of the year holds. Operator, we'll now open up the call for questions.

Operator, Operator

Thank you very much, Barry. Your first question is coming from Jeff Van Sinderen of B. Riley Securities.

Jeffery Wallin Van Sinderen, Analyst

I guess the first question I had was, any more color you can share on the dealer service business trends?

Ryan L. Pape, CEO

Yes, Jeff, thanks for the question. This continues to be a bright spot. We see revenue there growing faster than the aftermarket channel at present. I think there are many reasons why that might be the case, but that trend certainly continued in Q2. We have now in the U.S. relative stability in terms of new car inventory. The post-COVID era created a lot of volatility. There was concern about tariff-induced inventory challenges which could impact us because we're sometimes attaching products at the time vehicles hit the dealership lot rather than when they are sold. That hasn't really materialized in a super negative way. So we've been doing great. I think July was an all-time record for that in terms of the number of vehicles, revenue, and pretty much every other metric. We see expansion opportunities in other markets too, working with a couple of large groups and other countries for something similar. So it's been a bright spot. We have the opportunity to layer on our referral and personalization platform to help the dealers do even more upselling through that business. So a bright spot overall.

Jeffery Wallin Van Sinderen, Analyst

Okay. And then just to follow up a little bit on what you just hit on, maybe you can delve a little more into the personalization platform initiatives that you're working on now and what we might see develop there.

Ryan L. Pape, CEO

Well, I think the fundamental challenge of this business has been and is awareness where the products we sell are virtually or actually invisible—they don't market themselves going down the road. You have an industry in the aftermarket that's very offline and analog. Most sales are made on the phone or in shops. While they are effective at selling that way, they miss many consumers who are perhaps not thinking of that approach first in an Amazon-type world. Our platform helps reach consumers through partnerships with OEMs and dealerships, presenting product information, video, and compelling reasons to buy. We can facilitate an online transaction running it through the network. The ultimate goal is to increase attach rates in participating vehicles and provide a solid revenue source for our participating installers. It's a way to grow the business and reach more consumers. Feedback has been good. Continued investment and development with other partners are necessary, but we see this as a great opportunity for our industry.

Jeffery Wallin Van Sinderen, Analyst

Okay. That's helpful. Finally, if I could ask, is there anything on mix, gross margin, or OpEx considerations for the second half that we should keep in mind as we think about quarterly progression?

Ryan L. Pape, CEO

No. The trends we see—first quarter is usually the slowest. The second and third are our peak revenue quarters of the year. In the fourth quarter, we typically see a decline in the U.S. business. Our overall cost structure is stable outside of the things we mentioned earlier on the call. The gross margin profile is consistent. Absent any unexpected issues from the tariff side, no big movement is expected for the rest of the year.

Operator, Operator

Our next question is coming from Steve Dyer of Craig-Hallum.

Matthew Joseph Raab, Analyst

This is Matthew Raab on for Steve. Just want to start on M&A. Ryan, you have $50 million of cash on the balance sheet, which I think is the most cash you've ever had as a public company. It sounds like you've got your eye on something or multiple opportunities. Any other hints you could give us at this point? And any thoughts on sizing—are you looking for more bolt-on acquisitions or something larger?

Ryan L. Pape, CEO

Yes. Our approach remains consistent. Our primary focus remains on consolidating international distribution to serve directly the markets we want to operate in. We've largely done that; however, a few exceptions remain, like China and Brazil in terms of the top car markets. This remains an active interest for us. We're also looking at M&A in the dealership space, as they offer tremendous volume and can bring more consumers into our fold. I think we really have two streams of thought: we're looking at larger opportunities while also pursuing a cadence of smaller bolt-on acquisitions. I don't expect our cash position to continue to build. That's not our goal. There are many opportunities, and I think they're becoming more interesting given their circumstances regarding valuations.

Matthew Joseph Raab, Analyst

Okay. And then thoughts on the U.S. market in the second half and as we get into 2026. A wide range of estimates exist on what SAAR could be. I think July was actually pretty good, but the EV tax credit goes away at the end of Q3, which brings a few uncertainties. How do you see the business positioned in that context? And how do you view growth in the U.S. market as we head into the next quarters?

Ryan L. Pape, CEO

We must consider two things. We can't sell products that go on new cars if new cars aren't sold, so we monitor SAAR. However, like interest rates or any other economic indicators, no one really knows what will happen, so we can't plan around it. We have to respond. The second piece is what we can control. We can create awareness to increase attach rates, regardless of SAAR. We can win competitive business and gain market share irrespective of the sales pace. Those are our focuses. If the SAAR declines or negative forecasts come to fruition, we'll deal with it, but we'll prioritize the things we can control, and there are plenty of ways to win business.

Matthew Joseph Raab, Analyst

Yes. Okay. Switching over to China. You've now lapped the sell-in and sell-through adjustments made over the last few quarters. You also have a few quarters now under your belt with an improved product mix. How should we think about growth relative to the $8 million to $9 million a quarter run rate seen in the last few quarters?

Ryan L. Pape, CEO

Our overall current view on the China market with our ongoing efforts is probably low double digits regarding growth potential. There are channels—OEM and PDI and the 4S business—that historically we haven't pursued heavily but are now building teams to support. This represents significant upside for the business over the next several years. The volumes possible through those channels are substantial. The timing for success in that area is uncertain due to the nature of the bid and tender process, making it harder to model than traditional sales. For our core activities, growth could reach low double digits, augmented by our success in the new channels.

Operator, Operator

Thank you very much. We appear to have reached the end of our question-and-answer session. I will now turn the call back over to the management team for their closing remarks.

Ryan L. Pape, CEO

Yes, I want to thank everyone for joining us and thank our team for doing such a great job. Have a great day, everyone.

Operator, Operator

Thank you very much. This does conclude today's conference call. You may disconnect your phone lines at this time. Have a wonderful day. We thank you for your participation.