XPEL, Inc.

Greetings, and welcome to the Expel Incorporated 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 Nesbitt of IMS Investor Relations. Sir, you may begin.

Good morning and welcome to our conference call to discuss Expel's third quarter 2025 financial results. On the call today, Ryan Pape, Expel's President and Chief Executive Officer, and Barry Wood, Expel'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 our call participants. A transcript of this call will be available on the company's website after the call. I'll take a moment to read the safe harbor statement. During the course of this call, we'll make certain forward-looking statements regarding ExpoLink 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. Next, the bill undertakes 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.

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 U.S. 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. And as you likely know, we completed our long contemplated acquisition of our Chinese distributor in early September. Given the acquisition close late in the quarter, we didn't 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've hit the ground running. The integration is underway. It was with our team two weeks ago. I can tell you that we've 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 so it was incredibly encouraging. We have a lot of work to do from the integration perspective. but obviously see a huge opportunity and really will continue our focus to pursue the OEM and forest 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, but then beyond that. We continue to see similar trends affect all the regions at different times, similar to the slowness we saw in the US to start 2024. Canada revenue declined from the prior year, continuing a trend of a slow market in Canada for this year. You know, we saw a really slow Q1, Q2 was better. Q3 was, was not as good as, as Q2. I wouldn't call out anything in particular, except just a broad based slowness across the whole portfolio of customers. And then, as I mentioned, Europe was up meaningfully. Uh, India, Middle East grew modestly, but this market's more tied to distributor sales. So it was a little bit of sell in, sell, sell out noise there, but we're really bullish on what's happening there. It's, uh, 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 to 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 25 in the 13 to 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. And 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. So 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 of the unique structure of the transaction relative to inventory, but we did add on the order of 22 million plus or minus in inventory as part of the purchase. So you'll see inventory increase on our balance sheet, but really that's a function of this transaction and it's structured in a way that's very favorable for us. So our underlying inventory trend and our improving inventory turns remain solid and would not interpret the balance sheet on face value to say anything else relative to inventory. With that said, you know, we'll 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. So we'll 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. So 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 and support these new countries. We've got some optimization to do in our corporate cost structure, but most of the costs added in the past 18 months is in the channel and in the distribution business. And 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. China, as an example... with this acquisition, we'll add $5 million plus or minus in annual SG&A, including intangible amortization. But 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. So, you know, I just remind everyone that you have to consider the SG&A and the 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. And I think from our perspective, you know, there's 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're investing, and I think that's what you want for the long term. You know, the investments in SG&A in these countries is very much front-end loaded, but 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. So investing now sets up perfectly for going forward, and 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 in these calls, and 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. And 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. 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. So once we hit that full potential, we can reevaluate those concentric rings that surround our business. But to do so today is premature. And 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 don't like them better than our core business. And that will guide our near-term decisions. So to that end, we will be investing more in our manufacturing and supply chain via varying approaches, direct capex, M&A, or JV relationships. We have a goal of increasing gross margin by approximately 10 percentage points to around 52% to 54% by the end of 2028 through those activities. With that extra gross margin running through our various businesses, particularly where we control our own distribution and get full margin, we have a goal of realizing operating margins in the mid to high 20s. 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 to $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 will 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, color 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 the 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 global car manufacturers, although our bottom line performance from our existing programs has missed our expectations, and there's certainly a drag on results due to disruptions that plague the manufacturers or create inconsistent spikes in demand, which challenge us on the cost side. We get better at how we manage this environment with each passing month and each 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 customers. 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's 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. And finally, Discussion of our investments in BAP, our SaaS platform have taken a backseat to other initiatives. The work on this continues unabated. We received, we redirected some of our team to our personalization platform as we've launched that in earnest, but 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. 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. And our goal with this project is to solve for that. So 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. And so it's quite, it's quite an accomplishment and it will pay tremendous dividends for us. And I think everybody on our team and everybody else who's been involved in getting that done. So very pleased with that.