XPEL - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 revenue was $125.4M, up 11.1% YoY and above both company Q3 guidance ($117–$119M) and Wall Street consensus ($119.3M); EPS was $0.47, down YoY and below consensus ($0.52), as gross margin faced ~170 bps pressure from out-of-market supplier price increases and temporary margin dynamics from the China distributor acquisition.*
• Management announced a $75–$150M investment plan in manufacturing/supply chain to lift gross margin to 52–54% and operating margin to mid–high-20% by end-2028—an explicit margin expansion path and potential medium-term re-rating catalyst.
• Record operating cash flow ($33.2M) and strong US/EU performance offset weakness in Canada; window film revenue grew 22.2% YoY and installation revenue grew 21.3% YoY.
• Q4 2025 revenue guidance is $123–$125M; management expects gross margin to recover beginning in Q4 and reach record levels in Q1–Q2 2026 as China inventory turns and mitigations fully take hold.

What Went Well and What Went Wrong

What Went Well

• Record revenue with broad-based strength: US up 11.1% to $71.7M; EU/UK/Africa up 28.8% to $16.5M; Asia Pacific up 21.0%.
• Window film and installations drove growth: window film +22.2% YoY; installation revenue +21.3% YoY; services +15.7% YoY.
• Strong cash generation: operating cash flow $33.2M—highest quarter in company history.
• Quote: “We have mitigated [supplier price increases] and expect gross margin to return to its normal trajectory beginning in the fourth quarter… We believe we are well positioned to drive leverage in our cost structure in the coming quarters” — Barry Wood, CFO.
• Quote: “We have a goal of increasing gross margin… to around 52%–54% by the end of 2028… and operating margins in the mid to high twenties” — Ryan Pape, CEO.

What Went Wrong

• Margin compression: gross margin fell to 41.8% (–70 bps YoY) as supplier price increases (non-tariff) reduced GM by ~170 bps and the China distributor acquisition created temporary margin recognition constraints until inventory turns.
• Profitability down YoY: EBITDA $19.9M (–8.1% YoY), net income $13.1M (–11.8% YoY), diluted EPS $0.47 vs $0.54 last year.
• SG&A elevated: +20.8% YoY to $35.7M (28.4% of revenue), including ~$1.3M acquisition-related SG&A and ~$0.8M bad debt/other costs; Canada continued to be soft; Latin America flat due to Brazil model transition.

Transcript

Operator (participant)

Greetings and welcome to the XPEL third quarter 2025 earnings call. At this time, all participants are in a listen-only mode and a question and answer session will follow the presentation. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. John Nesbett of IMS Investor Relations. Sir, you may begin.

John Nesbett (Head of Investor Relations)

Good morning and welcome to our conference call to discuss XPEL's third quarter 2025 financial results. On the call today, Ryan Pape, XPEL's President and Chief Executive Officer, and Barry Wood, XPEL Senior Vice President, Chief Financial Officer, will provide an overview of the business operations and review the Company's financial results. Immediately after the prepared comments, we'll take questions from our call participants. A transcript of this call will be available on the Company's website. Please take a moment to read the safe harbor statement. During the course of this call, we'll make certain forward-looking statements regarding XPEL and its business, which may include, but not be 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 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 takes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise. Okay with that, I'll now turn the call over to Ryan. Go ahead Ryan.

Ryan Pape (President and CEO)

Thank you John and good morning. Also, welcome to our third quarter call. Q3 was a record quarter for us for revenue which grew 11.1% to $125.4 million. Performance was led by the US region which grew also 11.1% to a record $71.7 million. We saw double digit revenue growth in both our independent and dealership channels in the quarter, so that's encouraging. That's good momentum. Our EU region had a good quarter, revenue growing 28.8% to $16.5 million, which was a record there as well. As you recall, we saw headwinds in Q3 last year, so it was also an easier comp but good performance. As you likely know, we completed our long contemplated acquisition of our Chinese distributor in early September.

Given the acquisition closed late in the quarter, we did not see much material financial impact, but you will see elevated SG&A from acquisition related professional fees in the quarter and then of course added SG&A expense for the month of September. Under our ownership, we have hit the ground running. The integration is underway. It was with our team two weeks ago. I can tell you that we have added amazing people to the team. Both our team and our customers are very excited about this and what it means for our business in the country. The customers were very receptive and it was incredibly encouraging. We have a lot of work to do from the integration perspective, but obviously see a huge opportunity and really we will continue our focus to pursue the OEM and 4S business in China.

With this acquisition, along with our acquisitions of Japan, Thailand, and then India prior to that, we really rounded out our footprint that we see in APAC. Beyond that, we continue to see similar trends affect all the regions at different times. Similar to the slowness we saw in the U.S. to start 2024, Canada revenue declined from the prior year, continuing a trend of a slow market. In Canada for this year, we saw a really slow Q1. Q2 was better. Q3 was not as good as Q2. I would not call out anything in particular except just a broad-based slowness across the whole portfolio of customers. As I mentioned, the U.S. was up meaningfully. India and Middle East grew modestly, but this market is more tied to distributor sales, so there is a little bit of sell-in, sell-out noise there, but we are really bullish on what is happening there.

It's a priority market for us and there's a lot more to come. Latin America was flat due to weakness in Mexico, but really from a switch to a direct model in Brazil, from a distribution model. Our expectation for Q4 revenue being the $123 million-$125 million range, you know, with sort of the normal cyclicality we see in U.S. and North America, assuming we hit those numbers, that would take us to year-over-year annual growth for 2025 in the 13%-14% range. On the gross margin front, we did see a little pressure to gross margin in the quarter relative to our overall trend. We had unfavorable price increases that were out of line with the market, which cost us about 170 basis points of gross margin in Q3. Absent this specific impact, we have actually seen gross margin grow from the prior year.

These aren't tariff related and we've mitigated that going forward and we expect to see that reverse starting in Q4 and into Q1. The other item that has an impact on gross margin in the near term is the nature of our China distributor transaction. We're selling through inventory acquired in the acquisition. As we do that, we're only recognizing roughly the former distributor's portion of the margin as the inventory is now on our books at an amount that approximates the distributor's former cost. Obviously a key rationale to buy your distribution is to increase gross margins, which it will do for us in a meaningful way, but only as we sell through existing inventory. Barry will discuss a little bit more the unique structure of the transaction relative to inventory.

We did add on the order of $22 million plus or minus in inventory as part of the purchase. You will see inventory increase on our balance sheet. That is really a function of this transaction and it is structured in a way that is very favorable for us. Our underlying inventory trend and our improving inventory turns remain solid. I would not interpret the balance sheet on face value to say anything else relative to inventory. With that said, you know, we will have great cash flow as we sell through that inventory because the turn times to replace it and the total inventory needed to supply the customers both on our side and the former distributor side will reduce. We will start to see relief from that in Q1 when we have both halves of the margin as both the supplier and distributor for the first time.

As we get into Q1 and Q2 of next year, we'll see record gross margins for the business at the consolidated level based on these investments and changes. The SG&A continues to run hot as we invest in the channel to support these new countries. We've got some optimization to do in our corporate cost structure. Most of the cost added in the past 18 months is in the channel and in the distribution business. Now that we've really completed the build out of those, save a little bit more investment in Brazil, we'll start to see leverage on that. You know, China as an example with this acquisition will add $5 million plus or minus in annual SG&A including intangible amortization. Once we see the full gross margin, we'll pick up approximately $10 million in operating income from China on an annual run rate basis.

You know, I just remind everyone that you have to consider the SG&A and the gross margin interface together when looking at the trajectory of the business, especially as we start to realize that gross margin into next year. I think from our perspective, you know, there is no better time in history to make these really final investments in these countries where we want to operate the most. This is a very tough environment for many people, for many of our competitors. You see a lot of folks pulling back where we are investing. I think that is what you want for the long term. You know, the investments in SG&A in these countries is very much front end loaded.

These are the best markets in the world and they're ones that are impossible to develop in any meaningful way without our direct participation. Investing now sets up perfectly for going forward. Certainly as you see demand in the environment recover and, you know, we see different performance in different places. Obviously we've spent the better part of 18 months on our capital allocation strategy, which we've discussed pretty freely on these calls. This has included evaluation of a number of approaches, including expansion via M&A into adjacent products and services, really in the broader industry in which we participate. This is looking at things that aren't directly related to what we do, but could ultimately bring more demand by bringing other customers into the fold.

You know, after a thorough review, our boards decided that continuing to invest in the core of the business is really the best strategy. There may be other adjacencies in the future. There are plenty of opportunities in our core today and we've yet to hit the full operating potential of the existing business. Once we hit that full potential, we can reevaluate those concentric rings that surround our business. To do so today is premature. At the end of the day, much as we like those other opportunities for growth and our desire to build a bigger business, you know, we do not like them better than our core business and that, that will, you know, guide our near term decisions. To that end we will be investing more in our manufacturing and supply chain via varying approaches, you know, direct CapEx, M&A, or JV relationships.

We have a goal of increasing gross margin by approximately 10 percentage points to around 52%-54% by the end of 2028. Through those activities we, with that extra gross margin running through our various businesses, you know, particularly where we control our own distribution and get full margin, we have a goal of realizing operating margins in the mid to high twenties commensurate with that. Even with the cost of any of those things we'll do, you know, we would consider investment in the range of $75 million-$150 million over this period. Pretty wide range, but we've got a number of options about how we do this, and it's either way, it's a very favorable return without the risk or complexity of adding additional lines of business relative to our overall strategy decision.

Secondly, we will continue to pursue service business acquisitions within our core with the focus on dealership services with our current product set. Those opportunities are comparatively few in number and relatively small in scale for the most part, but as we can identify and acquire them, this will remain a core part of the strategy. Finally, even with the aforementioned investments, we do expect to have excess cash, considering healthy balance sheet and strong cash flow and an appetite for modest leverage. Assuming all that remains true, there'll likely be an opportunity to return cash to shareholders. Share repurchases look particularly attractive at the moment given our view of the valuation of the business. Turning to the business we have a number of exciting things going on.

We've talked in the past year about our product line additions, colored films, windshield films, and we'll spend the next year getting these to their full potential. We have a very robust product line now and our focus will be less on adding additional products and more on selling more of what we already have and iterating to the next generation of the products that we already have. Like entering new channels, new products and the launch of new products and development of new products are expensive and our focus will be getting a return on the investments that we've made.

Our OEM business interest is strong with the global car manufacturers, although our bottom line performance from our existing programs has missed our expectations and it's certainly a drag on results due to disruptions that plague the manufacturers are creating consistent spikes in demand which challenge us on the cost side. We get better at how we manage this environment with each passing month and any subsequent project, and it remains an important focus for us and an important growth driver of the business going forward. Part of that is our referral personalization platform where we're selling installations online to consumers on behalf of our partners, namely some of the OEMs. We've been driving increased volume to our aftermarket network for installations in a model that no one's ever done before.

We continue to have more interest from others in expanding this program and it has become quite valuable to many of our installer partners as a source of volume, while the retail aftermarket remains very sluggish. We expect to continue to expand this going into next year and beyond. Finally, discussion of our investments in DAP, our SaaS platform, have taken a backseat to other initiatives. The work on this continues unabated. We redirected some of our team to our personalization platform as we have launched out in earnest. We continue to advance on DAP in a way that we know will make our customers more efficient and ultimately sell more products, benefiting them and us.

You know, our view is, even in the aftermarket channel, due to the friction and inefficiency of how the channel operates, there is substantial consumer demand that just slips through the fingers of the collective industry. Our goal with this project is to, is to solve for that. I think a really important time for us, a lot of moving pieces and different things going on, but we feel very good about the decisions we've made and about our strategy going forward. We're really pleased to have this acquisition in China complete. It was a tremendous amount of work. Obviously more work to come, but it really helps cement our direct distribution model in the most important global car markets of the world. It is quite an accomplishment and it will pay tremendous dividends for us.

I thank everybody on our team and everybody else who's been involved in getting that done. Very pleased with that. With that, I'll turn it over to Barry.

Barry Wood (Senior VP and CFO)

Thanks Ryan and good morning everyone. Just a couple more bullet points on our top line performance. Our total window film product line grew 22.2% in the quarter. This continues really to be a nice growth driver for us. Our total insulation revenue increased a little over 21% in the quarter. This includes product and service for our dealership services business. Our corporate owned stores and our OEM business all had solid performance in the quarter, notwithstanding the OEM choppiness Ryan mentioned. You know, our corporate store performance, as we've said in the past, is a decent indicator of how the aftermarket is doing. On a year to date basis, our total revenue grew 13.1%. Our total SG&A expenses grew 20.8% in the quarter to $35.7 million. This was 28.4% of total revenue.

We did have approximately $1.3 million in added acquisition related SG&A and approximately $0.8 million in bad debt and some other costs that are not expected to reoccur. On a year to date basis, SG&A grew 18.2% to $102.7 million. Our EBITDA did decline in the quarter 8.1% to $19.9 million. Our EBITDA margin finished at 15.9%. On a year to date basis, our EBITDA grew 4.6% to $57.8 million. Our year to date EBITDA margin was 16.3%. Net income for the quarter decreased 11.8% to $13.1 million reflecting a 10.5% net income margin. EPS for the quarter was $0.47 per share. On a year to date basis, net income grew 3.7% reflecting a 10.7% net income margin. Our year to date EPS was $1.37 per share.

I thought it'd be useful to give a brief overview of the structure of the China transaction given its complexity. First, we formed a new entity in which we have a 76% interest. This new entity then acquired the assets of our Chinese distributor. The purchase consideration for this totaled just under $53 million before discounting for time value of money. There are essentially three components to the consideration. First, obviously there was cash up front. Second, there was deferred consideration or really cash payable over a four year period. Thirdly, there was consideration contingent on future sales of what we considered as excess inventory as of the close date.

This excess inventory was part of the inventory acquired and the contingency is structured such that we pay some consideration if the excess inventory is sold at a profit, but we effectively are not penalized if any of the excess inventory is sold at a loss or is never sold and needs to be written off. As Barry mentioned, in the overall transaction we effectively added approximately $22 million in inventory. If you consider inventory acquired, inventory contributed by minority holders, the first two items, the cash up front and the deferred consideration, are about 75% of the total consideration. For various customary legal reasons unique to the transaction, only a portion of the cash paid up front was actually remitted and the rest of the upfront payment will be paid very soon.

This is important to understand when you look at our balance sheet as we've broken these components out there. The remaining upfront payment still payable and the contingent consideration is reflected in the short term and other short term liabilities on the balance sheet. The deferred consideration, the cash payable over a four year period, is reflected in other long term liabilities. As Ryan mentioned, we're certainly happy to get this deal behind us. It was a somewhat complicated deal and there was a lot of hard work done by several people to make this happen. We have a great team in the region and we are really looking forward to watching them grow that market. Our cash flow provided by Ops was $33.2 million for the quarter compared to $19.6 million in Q3 last year, which was a record for us.

You may notice if you're looking at our balance sheet, a decent sized increase in our AP and accrued liabilities line. There is nothing unusual there. This is related primarily to timing. We've got extended terms with most of our raw material suppliers so timing of payments can create some fluctuation. It is all in the normal course of business. I'll also add that we did see a slight improvement in our cash conversion cycle in the quarter. All in all, solid quarter for us and we look forward to closing out the year. With that, operator, we'll now open the call up for questions.

Operator (participant)

Certainly. Ladies and gentlemen, the floor is now open for questions. If you wish to join the queue to ask a question at this time, please press star one on your telephone keypad. We do ask if listening on speakerphone today that you pick up your handset while asking your question. Once again, please press star one on your keypad at this time if you wish to join the queue to ask a question. Please hold a moment while we poll for questions. Your first question is coming from Jeff Van Sinderen from B. Riley. Jeff, your line is live. Please go ahead.

Jeff Sinderen (Senior Equity Research Analyst)

Hi, good morning everyone. Just curious if we could circle back to one of the things you touched on in the prepared comments. I think you pointed out that there were some out of line price increases you experienced. Maybe you could touch on how those manifest, how you mitigated, and also then if you could kind of dovetail that into leaning into taking more of the manufacturing in house.

Ryan Pape (President and CEO)

Yeah, Jeff, sure. We did experience some price increases that really manifest in the quarter. I think in our remarks we called out that was about 170 basis point impact to gross margin. I think that, I guess the best way to characterize that is I think if you look at the industry overall, it's been a challenging time for people and a lot of decisions made on how best to run your own business. You know, where you may want to make up margin for lack of demand. Obviously not impacting this and not impacting us is the overall tariff environment. That's been a challenge for some suppliers and you know, looking for extra margin at other places.

You know, I really can't characterize it more than that except that, you know, we've got a very robust set of suppliers and where there's outsized price increases that don't make sense for the market, you know, we have plenty of options on how we mitigate that. That happened, but it's been mitigated. We'll start to see that reverse in Q4. I think, broadly speaking, to the second point, we have a desire and see incredible opportunity to invest further to be a highest quality and lowest cost provider of the products. If you have the best supply chain and the best distribution and the best brand, I think you're in pretty good shape for the long term. You know, I wouldn't characterize what we're doing there in a very discreet way.

Certainly there's elements of the supply chain we could take in house and do that in a number of ways. We also have a number of really good partners that we could form deeper partnerships with. You know, we have a very broad mandate to do that and we have a lot of ways to win by doing that. You know, this is not an overnight thought either. This is something that's been in the works for some time in terms of our analysis. I wouldn't characterize just one way to do that. What we know is that we can drive substantial gross margin improvement in this business over time by investing in it.

I think the big picture is that until we've done that and we've maximized the business that we have, we need to prioritize those investments versus pursuing other lines of business in which we have less competitive advantage and less experience. That is the direction and the decision that we and the board have made. You know, we have a great team who will now execute on that.

Jeff Sinderen (Senior Equity Research Analyst)

Okay, thanks for that. Curious on the rollout of your colored films. Noticed some marketing around that, seems pretty exciting. Any color you can give us, I guess, on early dealer embracement of that? How impactful do you expect the colored films to be to your business over the next year or two?

Ryan Pape (President and CEO)

Yeah, it's a great question. The rollout has been great. It's been well received. Our team's done an amazing job. Probably the best product rollout that we've ever done in our history. I say that from an external facing standpoint, but also an internal standpoint, which the rest of the world wouldn't appreciate, but I certainly do. I think it's, you know, our view on it has been relatively conservative. I think the question is, you know, what is the growth opportunity within that space given the sort of aftermarket color change business has been around for a long time. Do we see this as something that we can just take share in or do we see this as something where the underlying demand is going to grow?

You know, our initial view was it was certainly a market in which we could take share. I think what we're seeing a little bit of is that I think the market's going to grow. I think as the products now are better and they can be delivered in an even better way and marketed better. There's probably more new interest in that than I would have thought. You see, I think you'll see more engagement too from whether it's the dealership channel and the OEM channel, wanting to offer more options to consumers that maybe you can't do with a limited color palette in a traditional automotive setup. I think if those get traction, you have the opportunity for substantial expansion of that. Early days for us.

I think I'm quite pleased and expect to see more from that going forward.

Jeff Sinderen (Senior Equity Research Analyst)

Okay, great to hear. Thanks for taking my questions. I'll take the rest offline.

Ryan Pape (President and CEO)

Thank you, Jeff.

Operator (participant)

Thank you. As a reminder, if you wish to join the queue to ask a question at this time, you may press star one on your telephone keypad. Once again, that will be star one if you wish to join the queue to ask a question. Your next question is coming from Steve Dyer from Craig-Hallum. Steve, your line is live. Please go ahead.

Matthew Raab (Equity Research Analyst)

Hey, thanks. This is Matthew Raab on for Steve. In the PR, you called out the mid to high 20% operating margin by 2028. Given the investment in manufacturing, you know, that implies 10 percentage points of expansion over the next few years, I guess, whether it be organic or inorganic growth. What are the revenue assumptions underpinning that margin expansion?

Ryan Pape (President and CEO)

I think we've been pretty consistent that we think that a low double digit sort of organic revenue growth, even with all the noise and the weakness that we see, that continuing out for us, you know, certainly throughout, through the midterm. It doesn't, you know, we're not, you know, sort of making any change to our kind of midterm view that that's the sort of revenue growth we think we should be able to generate.

Matthew Raab (Equity Research Analyst)

Okay, that's helpful. Maybe just a couple housekeeping items, you know, maybe Ryan, if you could just give an update on the sentiment across the aftermarket and dealer channel. Q4 guiding to 15% growth in the quarter, obviously. Good. Any other further detail you have there would be great.

Ryan Pape (President and CEO)

Yeah, I mean, I think it's a real challenge. I mean, if you look at sort of our peers in the aftermarket and other places, there's a real mixed sentiment. What we've found interestingly is that the weakness and the sort of trough in sentiment has sort of bounced around globally. Obviously you have the U.S., you've got sort of Canada now, you had Europe maybe at some point last year, and we've kind of seen it more negative and then recover some. I think you look at the retail automotive business in the U.S., you know, they're certainly back in the mode of looking for extra gross profit as things are tougher there and, you know, just compression in margins and challenges with affordability and tariff impacts into new car pricing and all that.

You know, that's negative in the sense that, you know, that's still a headwind for the consumer where you.

Have.

Upward pressure on pricing and affordability. You know, maybe we get some relief from sort of the interest rate situation in terms of the affordability overall, but it is positive for us in the sense that when it is tougher for dealers, you know, there is more push to find other ways to make money and the things that we do provide more value on a percentage basis when it is harder overall. I think from that standpoint that is actually quite positive. I just think it is, you know, we have never been in an environment where you get more differing views on what is happening. You know, I do not think there is this universal consensus that things have substantially improved or that the consumer sentiment is way better. At the same time there has not been any sky falling moment.

You know, our approach has been that, you know, we have to, you know, power through. We've got to be mindful of those dynamics, but we've got to set the company up for the long term success and make investments where we need to make it. We know that consumer in the demand picture, it will all, it will all settle out. I think you've seen some stress Barry mentioned in his remarks, you know, bad debt. There was an aftermarket chain of some sort that filed for bankruptcy that we had some exposure to. You see a little bit of signs of stress like that. Nothing meaningful or material to the business overall. I think that's kind of emblematic of what's going on.

You know, you've also seen, you know, an influx of competitors into this space and, you know, this current environment makes it more challenging for them, especially those trying to get rooted and footed. That is all the more reason why we need to keep the pedal to the metal and maintain and grow our positioning. Long answer to your question, but I think it's a mixed bag overall.

Matthew Raab (Equity Research Analyst)

Understood, thank you. On gross margin, it sounds like there's a little bit of a drag expected in Q4 just given some of that China inventory. Expect a record in Q1 and Q2 2026, you know, level of the impact there across those three quarters would be helpful.

Ryan Pape (President and CEO)

We, you know, yeah, the sort of drag from China with that higher, higher priced inventory and then sort of the tail off of some of that price increase that will remain in Q4. However, on a comparative basis, Q4 of 2024 was quite low in gross margin. The expectation is that, you know, we should see some gross margin improvement from the prior year in Q4 on a percentage basis. Even though we, to your point, will be off of that sort of full potential until we get into the end of Q1 where we are recognizing all of the margin in China and we fully remediated the cost increases that we have seen.

Matthew Raab (Equity Research Analyst)

Any commentary on Q1 and Q2 2026, just the level of improvement expected there?

Ryan Pape (President and CEO)

I think. I'm hesitant to quantify it any more than we have only because we've got to turn the inventory and sell what we've got. Our position is that we will be seeing highest gross margins we've seen as we get into that time frame.

Matthew Raab (Equity Research Analyst)

Understood. Thank you very much.

Ryan Pape (President and CEO)

Thank you.

Operator (participant)

Thank you. This does conclude today's question and answer session. I would now like to turn the floor back to management for closing remarks.

Ryan Pape (President and CEO)

I want to thank everybody for joining us today and thank our team for doing an amazing job. We've got a big contingent at the SEMA show in Las Vegas. Big annual event and we're on great display. Thanks everyone.

Operator (participant)

Thank you. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. Thank you once again for your participation.