XPEL (XPEL) Q2 2026 Earnings Call Transcript

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. 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. 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. 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. 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. Story Continues 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