XPEL (XPEL) Q2 2026 Earnings Call Transcript

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DATE

Wednesday, Aug. 5, 2026 at 8:30 a.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer - Ryan Pape
• Senior Vice President and Chief Financial Officer - Barry Wood

TAKEAWAYS

• Revenue -- $143.1 million, reflecting 14.7% growth and record performance for the company.
• U.S. Revenue -- $78.6 million, increasing 11.7% due to strength in the independent channel.
• China Revenue -- $15.9 million, growing 106.7% year over year following a distributor acquisition in September 2025.
• Window Film Revenue -- $32.5 million, up 16.1% and representing 22.7% of total revenue.
• Gross Margin -- 44.1%, compared to 42.9% last year, driven by product mix and improved performance in the China segment.
• Non-GAAP EPS -- $0.68, excluding $0.03 per share in manufacturing start-up and transaction costs.
• Operating Cash Flow -- $30.8 million, a record for the company reflecting improved cash conversion and inventory management.
• Q3 Revenue Guidance -- $137 million to $139 million, accounting for seasonality and approximately $2 million in pull-ahead sales.
• Operating Margin Target -- Mid-20% range on a run rate basis by the end of 2028 as the company scales manufacturing.
• Total Capital Investment -- $110 million, allocated for manufacturing sites and equipment in San Antonio and China.
• Installation Revenue -- Rose 10.8% in the quarter, led by strong performance in corporate-owned stores.
• Europe Revenue -- $17.0 million, a 2.3% decrease due to distribution timing and lower vehicle production volumes.
• Middle East and India Revenue -- $6.4 million, down 5% because of regional conflict and vehicle shortages.
• India Revenue Growth -- Exceeded 60% year over year, though on a relatively small base compared to established regions.
• SG&A Expenses -- $39.9 million, representing 27.9% of total revenue and including $1.5 million from the China distributor acquisition.
• Real Estate Financing -- $44.8 million through a 10-year term loan used to acquire the company's San Antonio operations site.
• Manufacturing Start-up Costs -- $0.03 to $0.04 per share expected in the third quarter as manufacturing initiatives ramp up.
• SKU Reduction Target -- Goal of approximately 10% reduction to improve inventory turns and supply chain efficiency.
• Pull-ahead Sales -- Approximately $2 million in the second quarter, driven by anticipated price increases in the third quarter.
• Quarterly Capital Expenditures -- $65.1 million, largely reflecting the purchase of the San Antonio manufacturing and supply chain site.
• Canada Revenue -- $15.8 million, up 10.8% primarily due to the ordering cadence of a large distributor.

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RISKS

• Pape warned that "challenges from dealerships due to FTC concerns" remain a headwind for the dealership channel in the U.S.
• Pape noted that the Iran conflict contributed to a 5% revenue decline in the Middle East, which he attributed to a "shortage of vehicle availability in the region."

SUMMARY

XPEL, Inc. (NASDAQ:XPEL) reported record quarterly revenue and the commencement of a multiyear manufacturing investment strategy. Management stated that it purchased its headquarters and operations site in San Antonio while acquiring a majority stake in a Chinese facility to vertically integrate its supply chain. Executives noted that while U.S. revenue reached record levels, regulatory pressures in the dealership channel impacted segment performance. The company indicated that its financial outlook for the third quarter includes seasonal factors in Europe and the effect of earlier pull-ahead sales.

• CEO Pape stated the manufacturing investments are "transformational moves" intended to increase the rate of innovation and improve product quality.
• The company expects to reach a mid-20% operating margin range on a run rate basis as it exits 2028, assuming manufacturing projects remain on schedule.
• Management identified a "flight to quality" opportunity as dealerships seek partners to help them remain compliant with evolving regulatory requirements.
• The manufacturing expansion in China is expected to provide a "quicker turnaround" in financial benefits compared to the San Antonio facility, with incremental margin benefits projected for mid-2027.
• Pape noted that the company is transitioning from using third-party assets to its own, stating the technical team of "some 40-something people" is already responsible for product R&D and quality control.
• Inventory management initiatives include a goal to "reduce SKUs and consolidate what we're offering" to drive working capital efficiency.
• The company plans to utilize cash flow for "small tuck-in acquisitions" in service and OEM-adjacent areas while maintaining its focus on share repurchases.

INDUSTRY GLOSSARY

• DAP (Design Access Program): XPEL’s proprietary software and database containing automotive patterns used to precisely cut protective film.
• OEM (Original Equipment Manufacturer): Companies that manufacture the original parts or vehicles that are sold under another brand or used in final assembly.
• Paint Protection Film (PPF): A clear or colored polyurethane film applied to the painted surfaces of a vehicle to protect it from damage.
• SKU (Stock Keeping Unit): A unique identifier assigned to each distinct product or service to track inventory and sales.
• VLT (Visible Light Transmission): The percentage of visible light that passes through a window film.

Full Conference Call Transcript

Operator: Good morning, everyone, and welcome to the XPEL, Inc. Second Quarter 2026 Earnings Call. [Operator Instructions] It's now my pleasure to turn the floor over to your host, John Nesbett of IMS Investor Relations. John, the floor is yours.

John Nesbett: Good morning, and welcome to our conference call to discuss XPEL's second quarter 2026 financial results. 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 call participants. A transcript of this call will be available on the company's website after the call. 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 our current expectations and assumptions, which are subject to known and unknown risk factors and uncertainties that could cause our actual results to be materially different from those expressed in these statements. Some of these factors are discussed in detail in our most recent Form 10-K, including under Item 1A Risk Factors filed with the SEC.

XPEL undertakes no obligation to publicly update or revise any forward-looking statement, whether a result of new information, future events or otherwise. With that, we will now turn -- I will now turn the call over to Ryan. Please go ahead.

Ryan Pape: Thank you, John, and good morning, everyone. Welcome to our second quarter 2026 call. Q2 was a good quarter for us. We had good financial performance and executed on some very important key strategic initiatives. Overall, revenue grew 14.7% to $143.1 million, which was a record for the company. I think it's fair to say this exceeded our expectations going into the quarter. We probably had about $2 million of pull-ahead sales based on our trend analysis ahead of either actual or perceived coming price increases that would go into effect in Q3. So all said, I still think that's really good performance.

Our U.S. region turned in another solid quarter with revenue growing 11.7% to $78.6 million, which was a record high for the region. Our independent channel had another strong quarter. In contrast to the broader trend we've seen over previous quarters, we actually saw better performance in the independent channel versus the dealership channel on a relative basis this quarter. We're also still seeing some challenges from dealerships due to FTC concerns that we discussed on our last call, and this headwind remains. We're engaged with our dealership customers and are actually helping many of them to be compliant with FTC requirements. And I think we've been a good partner in terms of helping them ensure that compliance.

With these challenges, though, there is opportunity as a flight to quality helps us in many of these scenarios. Our Canada region [Technical Difficulty] grew 10.8% in the quarter. If you recall from last quarter's call, we have a large distributor in Canada, and there's [Technical Difficulty] always some timing impact in terms of their ordering cadence. So last quarter, that was a bit of a drag. Obviously, it helped us this quarter. If we exclude that timing, revenue grew around 4%. So certainly a good for Canada, which has really sort of struggled in the past year. Our China region had a good quarter, revenue coming in at $15.9 million.

In September, we'll cross the 1-year anniversary of our acquisition of the distributor there. The team is doing a really great job. I'm very happy in our progress in integrating the acquisition. And these are good results despite a very challenging Q2 for domestic car sales in China. Many focus on the headline sales, which includes exports. But if you subtract those out, which is really what we're focused on in the China market, the domestic sales, they're down something on the order of 20% year-over-year. So super challenging quarter in China for domestic sales. The rest of the APAC region also saw solid growth in the quarter. Our investments in the various countries are paying off.

We would not be seeing the growth and development opportunities we have in Japan today and elsewhere if we didn't have the presence that we've built over the past few years. So absolutely convicted in that strategy and how that's going to pay off for us. We did begin to see some impacts from the Iran conflict in our India and Middle East region, where revenue declined 5% in the quarter. Overall, this impact was not as great as we feared. And in large part, it seems to be driven due to a shortage of vehicle availability in the region rather than a broader sort of collapse in consumer demand and confidence.

I think when we looked at the quarter going in, we would have expected a larger impact. So we're pleased with that. And I also think given the vehicle availability issue, we'll see whether that means we can actually recapture some of that business in the second half if sales that we would have had are really deferred and not lost because the cars upon which we detach products just simply weren't available to be sold. So all in all, I think not quite as bad as feared in terms of the impact for our business.

Certainly, a bright spot within that for us is the ongoing growth and development of the business in India, where we saw 60-plus percent growth in the quarter, obviously, on a much smaller base. We have a great team in India. It's the third largest market for car sales in the world. Many don't realize that and obviously still developing. So we're well positioned to continue to grow significantly in India and in the Middle East, very excited about it. We have great leadership driving our direction there. Our Europe region saw revenue decline 2.3% in the quarter.

This was driven by multiple factors, including timing of distribution orders and lower year-over-year volumes in some of our OEM operations, which is really just driven from vehicle production cadence more than anything that we control. As compared to the prior year, we saw exceptional strength in vehicle volumes. And also, although we report our revenue by destination shipping address, there's products sold in Europe ultimately destined for the Middle East. So we likely saw impact from that as well. Finally, our LatAm region had another solid quarter. Our Brazil operation is getting up and running.

And just as a reminder, that was really a new build distribution opportunity for us and one of the last countries where we're pursuing such a strategy now that we've built out most of the global distribution base that we think we need. So a lot of activity there. It feels like we're really on the right direction. When you put it together, we're expecting Q3 revenue to be in the $137 million to $139 million range, assumes consistent U.S. and Asia Pacific trending. Obviously, there's always a little bit of seasonality to Europe business as you hit holidays in August. So we expect to see that.

And then also modest improvement in the Middle East, but we're not expecting really any of that recapture I mentioned. If that were to occur, that's certainly upside for us. And then we probably pulled $1 million or $2 million forward out of this number into the current quarter. So all in all, I think pretty good. Moving on, in May, we announced 2 key investments that will chart the course to accomplish our manufacturing strategy. First, we purchased a 4-building site that included our existing San Antonio facility. This site will serve as a centerpiece of our North American manufacturing and supply chain footprint.

We will initially occupy a little over half the footprint of the building for our operations, while the remainder is leased to third parties. We believe this approach creates maximum optionality as we scale up these manufacturing operations. And then secondly, as we mentioned, we acquired a 75% interest in an existing manufacturing facility in China, which will round out our footprint there. And this facility will serve customers in China and some export markets. We don't expect much, if any, of that product to end up in the North American market, although it certainly will be capable of doing so should we need it.

Overall, these investments will total approximately $110 million, and that includes what we've acquired and then further build-out and equipment in San Antonio and beyond. So we expect to begin seeing incremental margin benefit starting in mid-2027 and with the operating margin goal of ours reaching mid-20% range on a run rate basis as we exit 2028. Of course, assumes the fundamentals of the rest of the business stays as they are and assumes these projects remain on schedule, which as of today, they are. So really excited about that. It's taken a long time to get to this point, and our team is doing a really great job. Our gross margin in the quarter finished at 44.1%.

This is up from 43.7% in Q1. As I said before, we'll be implementing some relatively modest price increases in some regions during Q3 to help offset some of the price-cost pressure we've been seeing, as I mentioned on the previous call. And our expectation remains that gross margin will continue to modestly increase through the rest of the year in spite of that. We'll talk more about that as it happens over the next few quarters. And overall, I think the cadence we're seeing in gross margin is what we expected as we sell through some higher-priced inventory acquired in the China distributor acquisition.

If we hadn't seen some of the cost pressure come in, we'd probably see even a little bit incrementally higher gross margin for Q2. But I think really good progress anyway. And as I mentioned, even with that noise, we see a path to drive that higher even as we work towards bringing some of the manufacturing investments online. We did have costs related to the start-up and ramp-up of our manufacturing investments in San Antonio and China. These are approximately $0.03 per share in Q2. We see that growing to $0.03 to $0.04 per share in Q3 based on our current estimates.

So some of that is more full run rate in Q3 of those costs, whereas the Q2 costs had more upfront and transaction costs and things of that nature. These are really transformational moves for the company. I know many of our investors are very interested in the future financial benefits. But really, as or more importantly, this is going to do amazing things for the business to increase our rate of innovation and improve our agility and product quality. So it's an exciting time. Our team is really bought in, ready to go and working very hard. Overall, a good quarter in a challenging environment.

As we see stability in the dealerships, understanding the rules of the road in which they need to operate and increasing car inventory in the Middle East, really optimistic about the rest of the year. We have a great pipeline of new customers in multiple geographies with car manufacturers around the world. Our personalization platform, referral platform, is putting up record numbers and providing great volume to our aftermarket installers. We see opportunity to expand on this and are looking to launch additional programs this year. And finally, record cash flow from the quarter from operations, as Barry mentioned.

We're very focused on the nuts and bolts of the business, especially as we integrate China, where we acquired inventory from our distributor. We're aggressively looking to reduce SKUs and consolidate what we're offering alongside our manufacturing expansion to drive more efficiency in working capital and to always make sure we're giving our customers better products and not just more products. This laser focus continues into other parts of the balance sheet, accounts receivable days sales outstanding and changes that result from being direct in China and other places versus operating through distribution. All these are -- these details matter a lot.

Overall, I think we're doing a good job, but we can turn the screws tighter to improve our functioning here and get through the integration pieces even faster. Outside of incremental CapEx that's required for the manufacturing initiative and ensuring that's well funded, we'll be looking at a few small tuck-in acquisitions and then keep our focus on share repurchases with the rest of our cash flow. And we expect that to continue -- that approach to continue into -- well into next year. So a very good quarter for the company. And congratulations to the team.

I'd be remiss if I didn't mention the work, we're doing to integrate these acquisitions and organize the back office in preparation of the manufacturing expansion. A lot of unsung heroes here doing really important work. We continue to add substantial complexity to the business. Our team does a great job of sort of digesting that and integrating that, but we need to give them credit, and we also need to give them time to complete that. So a really good job. And with that, I'll turn it over to Barry. Barry, go ahead.

Barry Wood: Thanks, Ryan, and good morning, everyone. I'll start with a few more comments on the product lines. Our window film product line grew 16.1% to a record $32.5 million in the quarter, which represented approximately 22.7% of total revenue. And this growth was solid in all the regions, led by the U.S. and China. Our total installation revenue increased just under 11% in the quarter and represented a little over 21% of total revenue, led by strong performance in our corporate-owned stores. And just to call out a note on the overall revenue picture for the first half of the year, our revenue for the first half of the year grew 14% versus the first half of last year.

So really good performance in the first half. Our total SG&A expenses grew 16.7% in the quarter to $39.9 million, representing 27.9% of total revenue. And this did include approximately $1.5 million of new SG&A resulting from our China distributor acquisition in September of last year. EBITDA grew 17.6% in the quarter, and our EBITDA margin was 19.3%. Our adjusted EBITDA, which factors out costs related to a ramp-up of the manufacturing initiatives that Ryan was referring to in San Antonio and China, that adjusted EBITDA margin in the quarter grew 20.7%. Our year-to-date EBITDA margin grew 17.7% and our year-to-date EBITDA margin was 17.1%. Operating income increased 20.3%, and our operating income margin was 16.2% in the quarter.

Our year-to-date operating income increased 19.1% and our year-to-date operating income margin was 13.9%. Our net income attributable to stockholders for the quarter grew 10.7% and our net income attributable to stockholders' margin was 12.6%. Our adjusted net income attributable to stockholders, which again factors out those items I mentioned before, for the quarter grew 15.6%, and our adjusted net income attributable to stockholder margin was 13.2%. Our EPS was $0.65 per share, and our adjusted EPS was $0.68 per share. And on a year-to-date basis, our net income attributable to stockholders grew 14.1% -- as Ryan alluded to, our cash flow from operations was $30.8 million in the quarter, which was a new record for us.

We saw some nice improvement in our cash conversion cycle, including improved DSO in the quarter. So that was -- that certainly was nice to see. CapEx in the quarter was $65.1 million, which includes the real estate purchase. And as Ryan alluded to, we expect to incur more CapEx in the back half of the year and into Q1 and really weighted more towards the equipment that we still need to get into our San Antonio facility. And as you likely saw in our May announcement, we did finance a portion of the real estate purchase with a $44.8 million 10-year term loan. So you'll see some new debt on our balance sheet in Q2 here.

And while it was critical in our view, to control our site and own it to expand our manufacturing operations. We'll continue to evaluate that as we move forward, whether to own real estate in the long term or we -- maybe we have other options, but we certainly have optionality in deciding what we do there. So a solid quarter for the company, and we look forward to continuing that momentum in the second half of the year. And with that, operator, we'll now open the call up for questions.

Operator: [Operator Instructions] Our first question is coming from Steve Dyer of Craig-Hallum.

Matthew Raab: This is Matthew Raab on for Steve. I just want to start on the manufacturing plans. We've talked in the past about the cadence of that margin expansion. I believe you mentioned there's incremental benefit coming in mid-'27. Can you just talk about the shape of that? Is that a step function change in mid-'27? Or are there several quarters of maybe a more modest change? And then with that, you bought the facility in China. And I would have assumed that there's a quicker benefit there given it's an existing facility. So can you just walk through the gross margin expansion in the context of both the U.S. and China?

Ryan Pape: Yes. I think you're thinking about it correct in that we'll see some points in time with step-up. So it's not a huge jump up to the terminal run rate, and it's also not necessarily just a gradual quarter-on-quarter increase necessarily. So there are going to be some step functions along the way. To your point with China, yes, definitely a quicker turnaround there. That's definitely part of what we'll see by mid-2027. Obviously, if we can speed that timeline up, we're going to do that, too, but that's what it looks like right now.

Matthew Raab: Understood. And then maybe, Ryan, maybe if I put on my devil's advocate hat on, how should we -- how should investors think about the risks associated with this manufacturing build-out this is the largest project that the company has ever undertaken. I mean, how are you managing quality control and the leadership of this build-out? Just walk through that for us.

Ryan Pape: Yes. I think that's a great question. I mean, certainly, for dollars invested, it's the largest project that we've done. I think that what I would stress is that for the majority of what we sell, we're responsible for the quality, supply chain, sourcing and overseeing the production of what we're doing already. We just simply don't own the assets that are used to make most of these products that we sell.

And so in many respects, when you're thinking about quality, managing quality, total cost of quality, yields and efficiency, these are things that we're already responsible for yet we may not be able to control directly, and we may not be able to drive investment in contracted facilities where small amounts of money can make a big impact on the finished product. So I think if you think about it that way as opposed to thinking that we're buying some sort of product turnkey from a vendor and we're replacing it with our own facilities, that's absolutely not what we're doing. We're involved in every part of these products, the development, sourcing, quality, R&D already.

It's really just a change of using more of our own assets versus other people's assets to actually laminate and coat and make the finished products. So I think that if you think about it like that, I would have a lot more confidence probably on the outside looking in than some do. Our technical team, which is, QA, R&D, our labs, manufacturing process engineers. This is some 40-something people. So it's a very extensive and experienced team that's already responsible for most of these things. So I have a high degree of confidence in the plan that we have.

Operator: [Operator Instructions] Our next question is coming from Dillon Heins of B. Riley Securities.

Dillon Heins: Dillon on for Jeff. I was wondering just you mentioned aggressively looking to reduce the SKUs. I know that can be a rather long-term project. I was just wondering where you are along that and what you expect to see from that and when?

Ryan Pape: Yes. Great question. I think that the first -- we probably talked about it maybe as long ago as a year ago, where the first objective there was really to reduce the rate of SKUs in which we -- reduce the rate of additions to the SKU base. So I think we really arrested that several months ago or longer to just say that it's not necessary that we supply everything one of our customers' needs in every basically consumable or commodity product. The joke we would use is our customers don't need to buy toilet paper for their business from us.

But I think when you want to serve your customers well, sometimes you can be dragged into that line of thinking. So we really succeeded in that to create sort of laser focus on that. And then now it's really looking at the portfolio of products we have with the film products, be them paint protection film or window film, you can end up with a lot of different SKUs. You've got different widths, different lengths, different thicknesses, maybe different colors or different VLTs or different constructions. And when you look at how these are sold and why they're sold and why they're used, yes, someone will buy them, but that doesn't necessarily make them a viable product.

So really now we're at a point of saying, look, can we reduce that? And maybe it's a total SKU count or something like 10%. But you get in there increased efficiency in terms of inventory turns. And inventory has been something that we've talked about for a long time as there was a period of time where it was really growing excessively and it bounces around seasonally, but it's much more stable now. But we're looking to see how do we improve that efficiency, improve the turns as we go.

And then as we make everything about our supply chain more efficient over the next few years, which includes a lot less WIP and a lot less products sitting on trucks between facilities and different things, do we have the possibility to actually have lower aggregate inventory dollars at work for the company even on compounded revenue multiple years out. I mean I'm not here to say that's going to happen, but I think it's possible that happens, and it's certainly a goal of ours. But I will caveat everything I said with those that understand our customer profile know that we can't run out of products that our customers need for even a day.

They're buying product today in many cases because they need it tomorrow. We know that -- we understand that it's our job to serve them well. So we're not going to cut corners with that. And if there are key products that fit the lineup, obviously, we're going to keep them. But there's plenty of fat that gets added over time, just trying to be everything to everyone, and that's where we have that opportunity.

Dillon Heins: Got you. And then just one additional follow-up. You mentioned some tuck-on acquisitions. Is that still regarding the manufacturing? Or I guess, what does that relate to?

Ryan Pape: No. Great. I appreciate the question to clarify that. No, it would not be related to that. We're very solid in this plan relative to the own manufacturing footprint that we'd like to have. Where we're looking at tuck-in acquisitions, it's really sort of in the service and OEM adjacent areas where are there things we can do to help bring more net new customers in the fold, be they in the dealership channel or in the OEM channel. And I think there are -- those are things we would pursue.

I think we would describe them as tuck-in really just to reinforce our orientation that large acquisitions don't really seem to be readily apparent that we're interested in and transformative acquisitions "are things that we have an outright aversion to". So that's probably where that language comes from.

Operator: Well, there appear to be no further questions in the queue. So I will now turn the call back over to the management for any closing comments.

Ryan Pape: I want to thank our team for doing an amazing job in absorbing all of our added complexity and projects and know that it's very much appreciated from our leadership team. And I want to thank everyone for joining us today and for getting up early to do so. Have a great day.

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

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