XPEL Stock

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.

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.

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.

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 Instructions]

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

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?

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.

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.

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 Instructions]

Our next question is coming from Dillon Heins of B. Riley Securities.

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?

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.

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?

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.

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.

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.

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.

Good morning, everyone, and welcome to the XPEL, Inc. First Quarter 2026 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, John Nesbett of IMS Investor Relations. John, you may begin.

Good morning, and welcome to our conference call to discuss XPEL's First 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 will take questions from our call participants. A transcript of the 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 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 the 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 as a result of new information, future events or otherwise. With that, I'll now turn the call over to Ryan. Please go ahead.

Thank you, John, and good morning, everyone, as well. Welcome to our first quarter '26 call. We're off to a good start this year, solid top and bottom line performance in the quarter. Overall, revenue grew 13.1% to $117.4 million, probably a little bit higher than we were expecting, and that was led by the U.S. and APAC, which both outperformed our estimates in March and set us up for a good launch point for the rest of the year.

Our U.S. region performed quite well in the quarter with revenue growing just under 10% to $63.8 million. And we really, I think, saw a good performance relatively speaking, across all of our channels in the quarter. As we discussed on prior calls, March really dictates how the quarter shakes out. And overall, I would say March exceeded our expectations, especially when you consider the supercharged March of last year in the U.S. where you had the SAAR up substantially and consumers trying to front-run tariffs and risk to vehicle prices that they saw. Our U.S. independent installer channel, which is the largest component of our U.S. revenue grew 12% in the quarter. Good to see the independent aftermarket get off to a nice start.

Our service business also had a good quarter, each of those areas growing mid-teens plus. Overall, and globally, our dealership services install revenue was up 27%. The United States makes up the largest part of that revenue category. So obviously, it performed quite well. In the quarter, we saw some dealer groups in the U.S. receive reminders from the U.S. Federal Trade Commission regarding their pricing disclosure and pricing practices.

Most dealers are compliant and use this as a reminder to review their compliance, but some are less likely to pursue preloaded products due to concerns around interpreting the regulations or that they need the tools to gain compliance. So the net result for us is nominally increased churn and new customer acquisition headwinds there, but we're also really helpful for many of these dealers to gain or maintain compliance with our offerings. So nothing new there, but any time regulation sort of rears its head, that just creates more friction.

So -- but all in all, even with that good results. Canada in Q1 performance somewhat masked by the timing of sales to our large distributor we have there. If we normalize that for timing, which will push that revenue into Q2 of this year, we would have seen growth in Canada of 5.7% versus Q1 of last year versus the decline that we saw. So we saw really good growth in our corporate operations, good growth in the dealership channel, but still some weakness in the aftermarket channel there in Canada. But I think that is encouraging when you normalize for that. And also, our April revenue in Canada was the second highest month we've had in 14 or 15 months. So 1 month doesn't make a trend. I think those are positive signs there.

China revenue came in about where we expected. Obviously, you have a seasonal adjustment there. relative to Chinese New Year that is present more when we're selling direct necessarily than our previous distribution model. We made good headway on our integration efforts there relative to the distribution business that we bought. Our OEM and forest business continues to grow and do nicely. And I think teams really integrated well post acquisition. So we're very pleased with that so far.

So as I said, really all the regions, excluding Canada, saw really good growth for the quarter, and they all had a strong March. Europe continues to post good results. We also saw outsized growth in APAC beyond China, where we're seeing benefits from becoming more direct in that region that we worked on for the past few years. And then we saw one of the better quarters in Latin America, which has been a weak spot for us over the past year as we continue to make progress standing up our direct operation in Brazil and some of our other initiatives that we have in Mexico and beyond. So good opportunity there, and we're really, really happy to see the results.

We did not see a meaningful impact to the Middle East business in Q1 resulting from the Iran conflict. I would tell you, I think a lot of that, the fact that we didn't see negative impact was due to the resourcefulness of our team to navigate what quickly became a much more complicated and expensive logistics operation to get customers their product. The impulse from many of our customers was actually to order more than they needed, anticipating further logistics challenges. But in practice, that didn't happen, just the logistics precluded it.

So really, the quarter came in kind of status quo. We didn't suffer from the disruption nor did we benefit by sort of customers trying to front run that. I think the unfortunate part of that is the sentiment probably post March is more negative now than it has been there. And really, the key driver of that are the vehicle shortages that are showing up. This is becoming quite common throughout the region. And to say the obvious, you can't put our products on cars that don't exist to be sold. So clearly, that's a concern. And we've had reports that some dealership and aftermarket and other operators in the region are starting layoffs and things like that to just reduce their overhead.

So I think that's really probably one of our downside risks for Q2. But overall, a super important region. We've been doing an amazing job and have a really good strategy. And so we're going to keep expanding and investing and continuing our plans uninterrupted and just weather that impact near term. And obviously, as everyone knows, it changes every day. A continued bright spot for us is ongoing interest in development of our OEM programs. These programs now span multiple manufacturers, multiple regions and multiple different program types and configurations.

Some of these programs require upfront investment that negatively impact gross margin and SG&A in the beginning because we were adding fixed costs. But then as the program grows and scales, as costs are leveraged and margins expanded, we're beginning to see signs of that leverage in the OEM business, which is really encouraging. The Q1 OEM revenue was just under 7% of our total revenue. That was the largest in history. So we believe this channel will continue to be a good growth opportunity for us and our dealers. And I think we could see a shift from an environment there where we're more demand limited to more capacity limited in terms of our ability to onboard many things simultaneously.

To the extent that happens, I consider that a good problem, and we'll have plans in place to continue to scale and evolve and grow what we're doing there. So I think really, really encouraging there. Our expectation for Q3 revenue in the $135 million to $137 million range. This assumes sort of normal Q1 to Q2 ramps. I would say Q1 is slowest quarter of the year, a consistent U.S. trend, modest improvement in Canada, -- and then I think the downside risks are and that have impacted our estimates here would be Middle East.

We certainly expect that to be weaker than we would have expected and probably a little bit delayed new deal flow in some of the dealership services just with that extra friction. So those are probably the downsides. But all in all, I think we're pretty optimistic. We're really happy with how the year started, and we see a lot of that continuing based on what we know today. Our gross margin in the quarter finished 43.7%. We continue to make good progress on working through higher cost China inventory that we acquired, and we continue to see benefits from our other margin initiatives. We are seeing upward pricing pressure from the rise in oil and then all of the disruptions of the supply chain and the petrochemical industry.

So our expectation was to continue to build on this gross margin that we posted this quarter and subsequent quarters this year. I still think that, that's likely. However, it's not guaranteed and it may not be at the magnitude we previously expected. But we'll be looking at our pricing as well. So overall, we've taken a bit of a wait and see with respect to the current dynamics, but we'll begin to firm that this quarter.

There's a combination of real cost inflation and pricing pressure that we see, but also I think there's some opportunistic pricing that we're seeing people try to take as well. So we want to navigate that and make the best decisions. But absent any future impact from that, I mean you're seeing the impact to gross margin that we've talked about from all of these initiatives and as we get [indiscernible] more integrated, and that will continue, excluding those other factors.

We did see leverage in the quarter. EBITDA growing 17.8% quarter-over-quarter. And then just to update on our previously announced initiatives regarding manufacturing and supply chain investments. We made substantial progress this year and have largely settled on our course of action after evaluating numerous alternatives. And we've begun -- we will begin to execute on that strategy, have begun to execute on that strategy. So we'll have more to share in the coming months and quarters and remain very confident in pursuing our goals previously discussed.

But I think I would not expect play-by-play commentary from us on this. This is a multiyear initiative to improve the business and improve the performance of the business and allow us to grow into new markets. So that continues to move. We're quite excited about it. And then also, I'd just mention Mark Thornton, who we added to the Board.

Mark is Procter & Gamble executive and really tremendous China and APAC business experience, along with manufacturing and material science. So we've been very deliberate about how we expand our Board, and it was important to initially add one. We've discussed also possibly adding one more Board member. But I think we have a very high functioning Board that is able to really contribute to the business in a productive way. And the addition of Mark helps us do that. So we've taken our time, but we found a great addition. So very excited about that.

So with that, really good job by everyone on our team. I can't stress it enough. And just the operational discipline this quarter relative to what's happened in the Middle East and to be able to get the revenue out and get the product out and get it in where it needed to go, it took a huge effort just to sort of maintain that status quo operation. So did a tremendous job sort of on unsung heroes that don't get a lot of praise every day. So I want to call that out. But good job by everybody on the team. With that, I'll turn it over to Barry. Barry, go ahead.

Thanks, Ryan, and good morning, everybody. Ryan mentioned our normal Q1 to Q2 revenue ramp. And just as a reminder, Q1 is typically our lowest quarter of the year, as Ryan said. Q2 and Q3 are our highest quarters, and Q4 is usually lower than Q2 and Q3, but higher than Q1. From a product line perspective, our window film product line grew 24.8% to $23.3 million, which represented approximately 19.8% of total revenue.

And we had good performance in most of our regions. But of note, China and APAC saw really strong growth in this product line, which really is just a byproduct of us now being direct in this region. And it's also indicative of the progress we're making in the OEM and 4S space in the region, particularly in China. Our total installation revenue increased a little over 24% in the quarter and represented just under 24% of total revenue with solid performance in each of our channels. Our total SG&A expenses grew 16.6% in the quarter to $38.2 million, representing 32.6% of total revenue. And our Q1 SG&A includes about $1.2 million related to our annual dealer conference that we held in January.

It also includes approximately $0.5 million for NADA, which a lot of you know is a car dealer trade show where we intentionally boosted our presence this year and plan to do so on a go-forward basis. And our SG&A also included approximately $2 million in new SG&A resulting from our China acquisition. And as we've been discussing, we do expect SG&A growth rates to continue to moderate as we progress throughout the year.

Our EBITDA margin in the quarter was 14.5%. Operating income increased 17% and our net income attributable to stockholders grew 20.5% to $10.3 million, and our net income attributable to stockholders margin was 8.8%. During the quarter, we did see another increase in our DSO. And like last quarter, we do have some noise in our AR totaling about $3.1 million and worth about 2 days of DSO resulting from our transition services agreement in China, where the seller is collecting for us as part of the transition agreement.

Outside of that, over 60% of our Q1 AR build was in the OEM channel, which does require extended terms and does impact DSO. And just to call this out, we've also been reorganizing our customer-facing operations to provide more targeted support to our different channels, namely the aftermarket and the dealership channels. And while we're convinced this was absolutely the right thing to do, we were a little slow to evolve our collection practices to fully align with the reorganization. And consequently, we lost some traction there.

That's all been rectified, and we're seeing good improvement in our metrics, and we do expect a downward trend in our DSO going forward. So that, along with our increased inventory levels did increase our cash conversion cycle. And the increase in inventory was planned as we were ramping up for a busy season and still nominally elevated with inventory from the China acquisition.

Similar to Q4, we did execute on a share buyback early in Q1 amounting to approximately $3 million. Our cash flow provided by ops was $7.4 million in the quarter. And we did also incur approximately $9.7 million in CapEx in the quarter, driven primarily by some deposits we made to maintain our optionality on our supply chain initiatives. So all in all, a really good quarter for the company, and we're off to a great start for the year. And with that, operator, we'll now open the call up for questions.

[Operator Instructions] Our first question is coming from Jeff Van Sinderen of B. Riley Securities.

Just a question on the Middle East. I know you mentioned some concerns there, I guess, about how that will progress. Is the downside risk in your guidance for Q2? Or would that be kind of incremental downside risk to the guidance?

I think it's a little bit of both, Jeff. I mean our guidance is updated to probably a little bit lower end with respect to trends we see coming from the Middle East and what we expect. So I think that's embedded in there. But I think we would call it out also is we're still trying to extrapolate what that means. So I think if that's -- if we looked at that wrong, there is probably further downside risk, but I think it's -- we've done our best to include that there.

Okay. That's helpful. And then I know you touched on gross margin, and it sounds like you -- I think you said you do expect gross margin to improve throughout the year, but maybe not to the magnitude previously. So any thoughts on where gross margin might be for Q2 or how we should trend there?

Yes. I mean I think -- yes. So if you look at it really coming into the year, we expected to see Q1 gross margin improvement, Q2 gross margin improvement and then likely beyond that for all the factors that we've discussed. And that's still likely to be the case in Q2. I think as we start to look beyond Q2, the question is, will we be able to continue to drive gross margin improvement? Are we going to see some of that upside reduced by pricing pressures coming in now. So I think it's more likely, we still see some net improvement in Q2. We haven't quantified it exactly. But just beyond that, I think the picture is a little bit more uncertain for the year.

And given the pricing pressure, are there initiatives that you're planning around pricing to help offset some of that?

Yes. Obviously, that's something that we're looking at. I mean we've been relatively conservative in our pricing to the market recently. I think just looking at some of the weakness that you've seen over the past 2 years in the aftermarket, you're trying to balance what's actually productive to the business versus counter to what's productive.

But I think we've been really conservative in our pricing. And so really independent of this pricing pressure that you see, there's an initiative for us to evaluate that this year. And I think now that's just being done with this in mind. So yes, I mean, that's to be determined what that means, but it's certainly likely that we'll make adjustments at least in line with what we're seeing come to us.

Okay. And then just kind of following the line of thought on gross margin. Any more you can give us on progress moving toward verticalization or some form of that? And I guess, any thoughts on time frame around that?

No. I mean I think we've given our goals where we'd like to be in 2028. That is unchanged. We've been pursuing multiple paths simultaneously, I think, as we discussed and really spent the first part of this year evaluating those and deciding what makes the most sense for us. And for the most part, I think now recently, we've settled on that and certainly included some things and eliminated some things, and it's time now to execute that. But this is going to be a multiyear project, and there'll be different sort of milestones and things along the way as we execute on that. So really nothing more changed from our initial goals and nothing more to share, except as we move through that over the next 2 years, we'll -- at any meaningful milestone, we'll certainly be keeping everybody informed of that.

Okay. And then the OEM business, you pointed out the strength there. Just curious, are there other OEMs that you think you might add over the next year or so? -- touch a little bit on...

Yes. I mean I think it's all the above in terms of we're working with more OEMs -- we are expanding with the existing, and we are expanding with the existing in different programs and different configurations than maybe where we started. So I mean, it's pretty broad-based. It's -- and it extends sort of globally now where we have initiatives in multiple different countries. So I think it is a bright spot for us and something that we continue to get better at and smarter at as we move forward.

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

This is Matthew Raab on for Steve. Just want to ask on the $10 million CapEx number in the quarter, understanding that you're not going to give a play-by-play on the in-house manufacturing developments. But can you provide any color on the cadence of CapEx going forward, whether it's quarterly, annual total dollar amount, just as we think about free cash flow in '26 and '27?

Not yet. I think what we've done in the quarter is make some decisions that preserved our optionality and help shorten time lines on things while we made final decisions on what we want to pursue. Now we're in the process of doing that. And I think as that comes to fruition, we'll be able to provide more guidance on that as we go forward. But I don't think I can probably characterize it better than that today.

Fair enough. And then, Ryan, I want to ask a bigger picture question. Obviously, you are outperforming the U.S. market. SAAR is down 5%, 6%. You grew in the U.S. by 10%. And so I'm trying to figure out where you're seeing most of those gains come from. And I would assume it's 3 buckets that we've long talked about, which are take rate, content per car and then market share gains over your peers. I guess the question is within those buckets, where are you seeing the most success? And then how has that shifted over time, maybe even more recently in the last few quarters?

Yes. I mean I think the biggest driver for us is still attachment rate growth. in the sense of more cars with some amount of product from them -- some amount of product from us on them. And the different reasons for that in different parts of the channel. If it's dealership or OEM, it tends to be cars that just didn't have a product on it before in many cases. If it's aftermarket, you see a lot of just net new customers, but you also probably see a little bit more share shift there, share gain there. So it may be new attachment for us, but not net new attachment to the business. So I think that's the #1 driver.

Over a longer period of time, the content per vehicle was increasing and was probably a larger driver of growth. We still see by the many metrics the content -- total content per vehicle growth is a component of that revenue growth, but not quite to the magnitude that it was several years ago. And the main reason for that is if you look at products like the paint protection film, I mean, you saw a big shift from smaller coverage to larger coverage and then full car coverage. And that continues, but the magnitude of that is less than maybe it was 4 years ago.

So it's really an attachment rate story. And I think that we'll take the share gain where we can get it, and that's obviously a focus. And we'll love to have more content per vehicle and more products per vehicle. But I think if you want sort of the North Star that we're pursuing, it's really about attachment.

Understood. And then I just want to go back to gross margin quickly. I get the puts and takes on the product side. I mean service margin was maybe a touch weaker in the quarter. Is there anything to call out there as maybe a onetime item or anything else?

No. And I think you're going to see typically compression in service margin in the slower parts of the year as well just because your sort of utilization rate of what's in cost of goods is lower. But overall, no, I wouldn't attribute that to anything meaningful.

Well, we appear to have reached the end of our question-and-answer session. So I will now hand back over to the management team for any closing remarks.

I'd like to thank our team for a really great work this quarter, and thanks to everybody for joining us and look forward to speaking with you next time.

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

Good morning, everyone, and welcome to the XPEL Inc. Fourth Quarter and Year-End 2025 Earnings Call. [Operator Instructions]. Please note, this conference is being recorded.

I will now turn the conference over to your host, Jen Belodeau of IMS Investor Relations. Jen, the floor is yours.

Thank you. Good morning, and welcome to our conference call to discuss XPEL's fourth quarter and year-end 2025 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 will 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 now to read the safe harbor statement.

During the course of this call, we will 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 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 as a result of new information, future events or otherwise.

With that out of the way, I'll turn the call over to Ryan. Please go ahead, Ryan.

Thank you, Jen, and good morning, everyone, and welcome from me also to the fourth quarter 2025 and year-end conference call. '25 was a significant year for us. We accomplished a lot, including our long-planned China distribution acquisition, significant completion of our plans to have a direct position in the largest car markets of the world and then also positioning ourselves for significant change going forward with planned investments in manufacturing and supply chain.

We closed out the year with good momentum Q4 revenue growing 13.7% and Q4 EBITDA growing 37.6%. Our U.S. region, which is the largest revenue growth of 11% in the quarter, which is a good result in light of sort of all the ongoing dynamics which sort of largely unchanged. The corporate stores, dealership service business and aftermarket all saw growth in their various piece parts.

I think our results are probably consistent with the macro car sales trends, Q4 being sequentially down in terms of units, reflecting normalization of earlier strength in the year and attempts to front-run tariffs and then get ahead of the EV credit expiration.

In our case, we likely saw a greater-than-expected negative impact in Q4 for the U.S. as a result of that EV pull forward due to the expiring credits? compared to what we are expecting this probably cost us $1 million to $2 million of end product demand from our referral program channel alone, not including the rest of the market. And that referral program has really been a bright spot this year.

So we saw that manifest with just outstanding revenue performance in September and October, which would have correlated with the end of the EV credits and then the following month, which is really replenishment cycle for our dealers. And then the demand in the referral program was down sharply for the rest of the year. but we're seeing signs of that recovering this year.

The correlation between our buyer and the EV buyer large remains a little bit elusive for us. So obviously, the credit expiration is known and many have prognosticated on what that would be, but extrapolating exactly how that impacts the sales through our channels has proven a little bit harder. But we see significant rebound in the EV sales through the referral channel, obviously, in the slower part of the year. So we're pretty optimistic for that going forward. But we definitely felt that in the U.S. in the fourth quarter.

Q4 was our first full quarter of post-acquisition China revenue came in at $14 million, probably a little bit higher than we expected, well underway in our integration efforts in the region and as I mentioned previously, our team is doing a great job. Our acquisition here sets the stage really for growth in 3 segments of the business, the aftermarket, which for the longest time, had been the entirety of our business in China 4S or dealership and then further OEM partnerships, which we've been engaged in for the past 18 months.

As has been the case all year long, continue to see headwinds in Canada, revenue declining slightly compared to the prior year Canada has been tough all year. You saw car sales in Canada down sequentially 13% Q4 from Q3. So it's obviously not helpful. Europe was a bright spot in Q4 revenue growing 26.8% in the quarter. really strong performance in our different multiple channels there. Indian, Middle East was good, although timing of distributor orders was a bit of a drag in the quarter, but very bullish about what we're doing there, and we're seeing the beginnings of activation in India in all of our channel types not just the aftermarket. So that's really encouraging.

Latin America was flat. Weakness there we saw in Q3 continued into Q4. A big part of that is conversion of Brazil into a direct market, which is really our last or close to last market where we want a direct presence. Our expectation for Q1 revenue is in $112 million, $114 million range. This assumes ongoing U.S. trend, continuous softness in Canada and then obviously, consideration for the impact of Chinese New Year, which is historically always impacts Q1.

We'll see that a little bit differently now, where we're selling directly versus the sell-in, so get through that quarter. And then really, our China sales will really start matching sort of the end market demand. So we're happy to see that. Our gross margin in the quarter finished at 41.9%, relatively flat to Q3 as we discussed in last quarter's call, we're managing through some price increases, which have largely been mitigated as well as selling through acquired inventory that we acquired in the China distributor purchase. So that's obviously at a stepped-up cost basis, so lower margin as we sell through that.

We exited the quarter in an upward trend in terms of gross margin and expect gross margins to improve as the year progresses, consistent with our comments on the previous call. And as I alluded to you earlier, we saw good operating leverage in the quarter. EBIT growing 37.6%. As we've been discussing, we continue to expect to gain leverage on our added channel costs as we grow all of these operations.

Reflecting on the year, I'm happy with our overall performance. Top line growth of 30.3% was solid relative to the environment. And we've done a nice job managing through some of these headwinds in gross margin and being able to largely complete our strategy of being direct in these top car markets, I think that's going to be a significant accomplishment and represents significant expense that we've added that now the team is going to grow through that for us.

We continue to advance our DAP platform. This has become more integrated and continues to become more integrated into the business of our customers. We're getting great feedback really on the accelerated rate of development here. And that's, I think, due to a couple of factors being bulk of our sort of legacy tech debt being eliminated for having been in this business a long time.

And also, we're certainly seeing productivity gains from AI, like many you're talking about specifically in that field. We've sharpened our product strategy to focus really on our core products and just the immediate adjacencies and improvements to the core products that comprise most of our sales and where we have the technical competence I would say, overall, we've probably focused on too many incremental product ads rather than a full focus on selling more of our core.

And I don't think these are things we talk about on this call. The products we've talked about here that we've launched like the colored films, windshield films. These are really straight to the core. But sort of behind the curtain, there's been a desire to sort of be all things to our customers and supplying them everything they might need to run their business. And reflecting on that, we really pulled back on that because we're not adding a lot of value there and the effort really needs to be on selling more of the core product. So I think we've successfully made -- we successfully made that pivot this year, and I think that's actually quite important.

We started the year with an incredible dealer conference, despite terrible weather at the time really across the country and in Texas where we host the conference, we had 720, I believe, registered attendees, all-time record, pretty amazing in my mind, given the fact that we've added international conferences since we started, which obviously takes some of the demand for the main conference and in spite of the weakness in the aftermarket.

So either way, it was really great and good validation. And it's a fire host to our team of customer input that really helps us sharpen what we're doing.

In terms of our previously discussed investments in manufacturing and supply chain, our work there continues, expect to have more to discuss over the next several months. But as compared to our previous call, there's really no further update for today, except to say the plan and strategy remains on track. We are excited and optimistic about '26. I think this is a sentiment shared by our team and many of our customers, certainly as we hear their feedback in person at our conference. And we'll see how that plays out.

I think it's an open question exactly what drives that relative optimism that we see, but I think it's encouraging, nevertheless. We've got strong prospects for growth in every part of our channel, in every customer type and every geography. And -- as you know, we've got retail customers. We've got aftermarket installers, we've got car dealers, we've got car manufacturers. And we're seeing opportunities in really all of those customer types around the world. So I think it's really a validation of the strategy of why we need the presence that we've built.

And to that end, our regional leaders and P&L owners, they're all budgeted to grow their operating leverage this year. And combined with the gross margin growth that we expect, we'll see benefits at the operating line of the business. And obviously, that's net of any incremental costs we might add pursuing our manufacturing and supply chain, should we add costs prior to manifesting in any COGS savings. But if and when that happens, we'll certainly talk about that.

So overall, our team is doing an amazing job I really couldn't be happier, and we've really seen incredible focus on what's going to be important for us going forward, and I want to thank all of them.

So with that, I'll turn it over to Barry. Barry, go ahead.

Thanks, Ryan, and good morning, everyone. As Ryan said before, it was really a solid revenue quarter for us. And just to note a couple of the components, our total window film product line grew 10%, which is a good result given the seasonality of the product. And for the year, total window film grew 21.7%, which was primarily driven by market share gains in auto along with a nice lift from windshield protection film, our new product.

Our total installation revenue increased a little over 17% in the quarter and 17.2% for the year with again, solid performance in each of our core channels within that line item. Our gross margin in the quarter grew 17.1% and for the year, grew 13.3%, which I think are really good results in light of some of the headwinds we faced in the quarter and during the year.

Our total SG&A expenses grew 13.9% in the quarter to $35.7 million, representing 29.2% of total revenue. And this was relatively flat to Q3, which I think is a good result as we have elevated SG&A in Q4 due to our largest trade show of the year that occurs each November -- and we saw, as we expected, our SG&A growth rates moderate during the second half of the year.

And as Ryan mentioned, we still have some leverageable costs in our cost structure, which will realize -- we realize as we continue to grow. And for the year, our SG&A grew 17.1% and represented 29.1% of revenue. Our EBITDA grew 37.6% versus prior quarter to $19.6 million, which was essentially flat versus Q3 despite lower Q4 sequential revenue.

Our EBITDA margin finished at 16%. And for the year, our EBITDA grew 11.4% to $77.4 million and our 2025 EBITDA margin finished at 16.3%. Our effective tax rate in the quarter was a little under 14% as we took advantage of some provisions in the new legislation and other onetime items that were booked in Q4. So for future planning purposes, you can assume 21% effective rate going forward. But this, along with some FX effects drove some of our net income attributable to stockholders growth in the quarter, which increased to $13.4 million, reflecting 11% net income margin.

Our operating income, which doesn't have that noise increased 25.4% in the quarter. EPS for the quarter was $0.48 per share. And for the year, net income attributable to stockholders grew 12.6% and to $51.2 million, reflecting a 10.8% net income margin and our 2025 EPS closed out at $1.85 per share.

Early in the quarter, we did buy back a relatively small amount of shares to the tune of approximately $3 million. As we've discussed on our last call, our capital allocation strategy is centered on investing in the core of the business, including manufacturing and supply chain. We'll continue to evaluate further buybacks relative to our planned investments in M&A -- and M&A, I should say, with an appetite for modest leverage to accelerate our returns.

Our cash flow provided by ops was $2.7 million for the quarter and $66.9 million for the year, which was a little over 86% of our total EBITDA and right at 40% higher than last year. The cyclicality of our operating cash flows is similar to our revenue cycle where our highest cash flow quarters typically occur in the second and third quarter, and this year was certainly no different. And just a reminder on the revenue cyclicality, Q1 is typically our lowest quarter of the year, Q2 and Q3 are our highest quarters and Q4 is usually lower than Q2 and Q3, but not as low as Q1.

So really a good year for the company, and we're excited for what the future holds for us here at XPEL. And with that, operator, we'll now open the call up for questions.

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

This is Matthew Raab on for Steve. Just want to ask what's contemplated in the Q1 revenue guide, which was in line to our estimate, at least we saw auto demand was a little bit weaker in Q4. It feels like that continued into January, and we'll see how Q1 shakes out. We had some weather impacts recently. Ryan called out the EV mix changes, Luxury was a little worse. So quite a few puts and takes there.

Are you able to parse through kind of what all that means for you guys? I'm just trying to get a sense of where you're seeing some headwinds and maybe if there are some more transitory elements in the very near term.

Yes. Well, it's a great question. I mean I think the answer is, to your question, is really half yes and half no. I mean I think if you if you look at our business across all the different customer types, I think, in '25, if I'm saying the number correctly, we have something like 20,000 customers that we've transacted with in some former fashion across all the different customer types. And that's obviously grown through the increase in our referral program. We're actually selling to more individuals with that.

All of these things have just fundamentally different drivers. If you're looking at the OEM business, we're, for the most part, at the mercy of production versus sales. If you look at the dealership business, half of it is driven by sales in terms of F&I half of it's derived from inventory and growth, a reduction in inventory on the ground when products are being preloaded, distributor pieces or subject to timing impacts in the quarter, all that's a much smaller part of our business now.

And then the aftermarket typically more consistent, but ordering on such an infrequent cycle that you could really only extrapolate from recent ordering. So I guess all that to say that we have a process that we use to forecast the business, and it continues to improve over time, but it hasn't largely changed. And so as things change off of their run rate in particular, either that method of doing that is more vulnerable to having a wider outcome.

So I think to your point, I mean, obviously, the weather has been bad, you've seen lost days in some places, days of sales that may be shifted into the rest of the year. So we do our best to capture all that in that guide, but subject to limitations there are.

And then the other part, as Barry mentioned, in terms of seasonality is March is really the month every year that sort of makes the quarter for the first quarter because it's really when you start to see the aftermarket pieces come alive. So a lot of what happens depends on March. But I think we've within the constraints of what we have, we've factored a lot of that in.

That's great. Maybe switching over to the in-house manufacturing. I'm curious how you see that playing out over time. Do you think it's a gradual build out over the next several years where you guys are adding capacity as you go along? Or are there opportunities for adding bigger chunks. I guess I'm trying to get a sense of the cadence of margin expansion as we look out over the next couple of years. Is it a step function change as you add capacity? Or is it maybe more linear with a more gradual build out over time.

Yes. That's a great question. And I think the answer is depending on the final decisions that are taken it could be either of those or both. And we've really -- we talked before that as we get kind of into the March and April time line, we're going to be making decisions around that. If there's more sort of internal new build, there's probably a more incremental change, step change and then more incremental. But as we pursue -- if we were to pursue M&A, and some of the JV opportunities we see, then there's more of an opportunity for more pronounced step change.

So I think it's still a little bit too early to say, and we'll certainly keep everybody updated on that. But there's an opportunity for either or both or some combination of the two.

Our next question is coming from Jeff Van Sinderen of B. Riley.

Just kind of more of a housekeeping question to start with. I think the DSOs were up a little bit. Maybe you can speak to what's going on there. And then also kind of had a 2-part question here, maybe add a bit more color on what underpins your optimism for 2026.

Yes. I mean I'll defer the first question to Barry, if you've got a comment on that. I don't think there's anything significant reflected there.

There's no -- there's nothing significant going on with the DSOs. It is trending up a little bit. And probably if I'm going to attribute that to anything it's going to be some of the OEM business that we've been getting the new OEM business. As the terms on those are a little longer than what you historically see. But that would probably be the main thing that's caused it to tick up. Nothing alarming to see there.

Yes. And I would add to that, I think a question that we would get occasionally is sort of we just when you look at the aftermarket and the health of the aftermarket over time, are we seeing a degradation in sort of the timely pay and things like that, just if there's stress in any of the channel. And the answer there is really no.

I think it's been quite healthy even as you've seen all those customers sort of off their peak.

And then yes, if you could repeat your other question, sorry.

Yes, sure. No problem. Just a bit more color on what underpins your optimism for 2026.

Well, I mean I think that like we talked about with the previous question, I mean you have so many different inputs in the data and then you have all of these other sort of more subjective factors. And I see -- I just see increased optimism from our team and from our customers in general, just in talking with them and visiting them, that isn't a qualitative factor in the data.

And I think you have to weigh that in how you look at the market. and the opportunity mainly because they're a pretty good indicator many times of what you can always measure and forecast. And I think you saw that when you really saw the aftermarket slow in the beginning of 2024, as that happened, you start to hear from people. Wow, I've not been this low. I've not seen my shop this empty and those are all anecdotes, but when you take them together, I think that they're not immaterial.

I think if you want to look at sort of more structural things, I mean, there's probably some optimism to be had in terms of the overall sort of vehicle affordability. I mean there's plans to really trade down content to get pricing right, the tariff thing, who knows. I mean, I guess that's changed even within the past week. So I think that's really an open question, but was maybe some sort of certainty there was previously generating some type of optimism and then rates and things are down from their peak.

So I think all of those are better going into this year than perhaps the year before. So I think it's a combination of all of those. And then the additives that we have is just looking at our pipeline of customers and new customer wins and why are we winning? Who are we winning business from, all of that's been quite positive. And this is really against a backdrop, which I think is hard to appreciate from the outside looking in.

And when we talk to suppliers and component suppliers and different people in the industry, demand for many people and many of our competitors is down. It's not a factor of wishing growth is higher. It's a factor of demand is down. And so I think you've got to weigh that against what we see in our results in our pipeline and that's another tick of the box in terms of being optimistic. And I think for me, obviously, I want good numbers in this quarter, that quarter or this year or that year. But way more important than that, I want to know that we're doing a better job as a company next year than this year.

We're providing more value. We're providing better service. We're doing more things our customers want us to do. That's my top priority.

Okay. That's all really helpful. And if I can squeeze one more in. How do you expect gross margin could trend this year? Maybe any thoughts on Q1 gross margin? And then I know you mentioned getting some leverage through the P&L. Maybe just touch on OpEx, if you have any thoughts there.

Yes, I would go back really to our comments from last quarter in the sense that as we get through Q1, we'll see those gross margin headwinds really abate being some pricing issues that we've talked about and then sell-through of that lower higher-cost acquired China inventory rather.

So our expectation would be as we get into Q2, we're posting gross margins at or above sort of the best that we've been directionally not. I don't know exactly when that phases in, if we see that in March or we see that in May. But there's definitely a [indiscernible] our corporate SG&A has really been wrangled better over the past months, most of the investment has been sort of in the field and the other operations, costs incurred from the M&A costs incurred from these distribution businesses.

There'll be some incremental costs on those. But -- as I mentioned in my remarks, when we look at how we've got our region leaders budgeted, they're all driving increased operating margins budgeted to drive increased operating margins this year into all those regions and all of that expense.

So I think that's good upside for us. And then the only thing that could impact that would be any decisions made in any of these different modalities around the supply chain and manufacturing and what impact that could have in the immediately or over time. But that will all be sort of well described at the appropriate time.

Thank you very much. Well, we appear to have reached the end of our question-and-answer session. So I will now hand back over to Ryan for any closing comments.

I'd just like to thank everybody for your time today and for joining us on the call. Have a great day.

Thank you very much, everyone. 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.

Greetings, and welcome to the XPEL, Inc. Third Quarter 2025 Earnings Call. [Operator Instructions] 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.

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'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 XPEL, Inc. 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 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 closed 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. I was with our team 2 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 -- is incredibly encouraging. We have a lot of work to do from the integration perspective, but obviously see huge opportunity and really we'll continue our focus to pursue the OEM and FS 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.

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 really slow Q1. Q2 was better. Q3 was not as good 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. India and Middle East grew modestly, but this market is more tied to distributor sales, so there's a little bit of sell-in, sell outs there. But we're really bullish on what's 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 be in the $123 million to $125 million range 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, you've 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 distributors 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 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, 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 see -- 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 to 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 will 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 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.

And I think from our perspective, 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. 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 we see different performance in different places, obviously.

We spent the better part of 18 months on our capital allocation strategy, which we've discussed pretty freely on 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 Board 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, 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 approach is, 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. We -- 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.

We would consider investment in the range of $75 million 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 a 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, strong cash flow and 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 business. We have a number of exciting things going on. We've talked in the past year about our product line additions, color [indiscernible] 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 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 a 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 half of of our partners, namely some of the OEMs. We've been driving increased volumes 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, a discussion of our investments in DAP. Our SaaS platform has taken a back seat to other initiatives that 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 in 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 an accomplishment, and it will pay tremendous dividends for us. And I thank everybody on our team and everybody else who's been involved in getting that done. So very pleased with that.

So with that, I'll turn it over to Barry.

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, and this continues really to be a nice growth driver for us. Our total installation revenue increased a little over 21% in the quarter. And 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.

On 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, and this was 28.4% of total revenue. We did have approximately $1.3 million in added acquisition related to 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 to 8.1% to $19.9 million, and our EBITDA margin finished at 15.9%. On a year-to-date basis, our EBITDA grew 4.6% to $57.8 million, and 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 and 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 and our year-to-date EPS was $1.37 per share.

I thought it'd be useful to give a brief overview of the structure the China transaction given its complexity. We -- 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. And there are essentially 3 components to the consideration. First, obviously, there was a cash upfront. Second, there was deferred consideration or really cash payable over a 4-year period. And 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 has never sold and needs to be written off.

As Ryan 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 2 items, the cash upfront and the deferred consideration are about 75% of the total consideration. And for various customary legal reasons unique to the transaction, only a portion of the cash paid upfront was actually remitted, and the rest of the upfront payment will be paid very soon. And 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 4-year period is reflected in other long-term liabilities. So as Ryan mentioned, we're certainly happy to get this deal behind us. It was somewhat a 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. And you may notice, if you're looking at our balance sheet, a decent size increase in our AP and accrued liabilities line. There's nothing unusual there as 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, but it's 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. So all in all, a solid quarter for us, and we look forward to closing out the year strong.;

And with that, operator, we'll now open the call up for questions.

[Operator Instructions] And your first question is coming from Jeff Van Sinderen from B. Riley.

Just curious if we could circle back to 1 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.

Yes, Jeff, sure. So 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 and where you may want to make up margin for lack of demand. Obviously, not impacting this -- not impacting us is the overall tariff environment. So that's been a challenge for some suppliers. And looking for extra margin in other places. So I really can't characterize it more than that, except that we've got a very robust set of suppliers. And so where there's outsized price increases, that don't make sense for the market. We have plenty of options on how we mitigate that. And so that was -- that happened, but it's been mitigated. We'll start to see that reverse in Q4.

And 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. And 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. And so I wouldn't characterize what we're doing there in a very discrete way. Certainly, there's elements of the supply chain we could take in-house and do that in a number of ways. But we also have a number of really good partners that we could form deeper partnerships with. And so we have a very broad mandate to do that, and we have a lot of ways to win by doing that. And this is not an overnight thought either. This is something that's been in the works for some time in terms of our analysis. And so I wouldn't characterize just one way to do that. But what we know is that we can drive substantial gross margin improvement in this business over time by investing in it. And 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 a less competitive advantage and less experience. And so that's the direction in the decision that we and the Board have made, and we have a great team who will now execute on that.

Okay. And then curious on the rollout of your colored films. I noticed some marketing around that seems pretty exciting. Any color you can give us, I guess, on early dealer embracement of that? And how impactful do you expect the colored films to be to your business over the next year or 2?

Yes, it's a great question. So the rollout has been great. It's been well received. Our team has done an amazing job, probably the best product rollout that we've ever done in our history when you -- and I say that from external-facing standpoint, but also an internal standpoint, which the rest of the world would appreciate, but I certainly do.

I think it's -- our view on it has been relatively conservative. I think the question is what is the growth opportunity within that space given the sort of aftermarket color change business has been around for a long time. So 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?

Our initial view was there 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 is 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. And you see -- I think you'll see more engagement to 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 pallet in a traditional automotive setup.

And so I think though if those get traction, you have the opportunity for a substantial expansion of that. So early days for us, but I think I'm quite pleased and we expect to see more from that going forward.

[Operator Instructions] And your next question is coming from Steve Dyer from Craig Hallum.

This is Matthew Rob on for Steve. In the PR, you called out the mid- to high 20% operating margin by 2028. Given the investment in manufacturing, that implies 10 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?

Well, 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 certainly through the midterm. So it doesn't -- we're not 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.

Okay. That's helpful. And then maybe just a couple of housekeeping items. Maybe, Ryan, if you could just give an update on the sentiment across the aftermarket in dealer channel. Q4 guiding to 15% growth in the quarter, obviously, good. But any other further detail you have there would be great.

Yes. 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 mix sentiment. What we found interestingly is that the weakness in the sort of trough and sentiment has sort of bounced around globally. Obviously, you had 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 if you look at the retail automotive business in the U.S., they're certainly back in the mode of looking for extra gross profit as things are tougher there and just compression in margins and challenges with affordability and tariff impacts into new car pricing and all that. And so that's negative in the sense that, that's still a headwind for the consumer where you have upward pressure on pricing and affordability. Maybe we get some relief from sort of the interest rate situation in terms of the affordability overall. But it's positive for us in the sense that when it's tougher for dealers, there's more push to find other ways to make money in the things that we do provide more value on a percentage basis when it's harder overall. So I think from that standpoint, that's actually quite positive.

I just think it's -- we've never been in an environment where you get more differing views on what's happening I don't think there's this universal consensus that things have substantially improved or that the consumer sentiment is way better. But at the same time, there hasn't been any sky's-falling moment. So our approach has been that we have to 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. And we know that the consumer and the demand picture will all -- it will all settle out. And I think you've seen some stress. Barry mentioned in his remarks, bad debt, there was an aftermarket chain of some sort that filed for bankruptcy that we had some exposure to. So you see a little bit of signs of stress like that, nothing meaningful or material to the business overall. But I think that's kind of emblematic of what's going on.

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

Understood. And then on gross margin, it sounds like there's a little bit of a drag expected in Q4, just given some of that China inventory and then expect a record in Q1 and Q2 '26 level of the impact there across those 3 quarters would be helpful.

Well, we -- yes. The sort of drag from China with that 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 '24 was quite low in gross margin. So the expectation is that we should see some gross margin improvement from the prior year in Q4 on a percentage basis, even though we -- to your point, we'll be off of that sort of full potential until we get into the end of Q1 where we're recognizing all of the margin in China and we fully remediated the cost increases that we've seen.

And then any commentary on Q1 and Q2 '26, just the level of improvement expected there?

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. But our position is that we will be seeing highest gross margins we've seen as we get into that time frame.

And this does conclude today's question-and-answer session. I would now like to turn the floor back to management for closing remarks.

I want to thank everybody for joining us today and thank our team for doing an amazing job, and we've got a big contingent at the SMA Show in Las Vegas, a big annual event. And we're on great display. So thanks, everyone.

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.