Greetings, and welcome to the XPEL Inc. second quarter 2018 earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Nesbett, with IMS. Thank you, Mr. Nesbett. You may begin.
Good morning and welcome to our conference call to discuss XPEL's financial results for 2018 second quarter. On the call today, Ryan Pape, XPEL's President and Chief Executive Officer, and Barry Wood, XPEL's Chief Financial Officer, who will provide an overview of the business operations and review the company's financial results. Immediately after the prepared remarks, we will take questions from our call participants. 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 not be limited to, anticipated use of proceeds from capital transactions, expansion into new markets, and execution of the company's growth strategy.
Often, but not always, forward-looking statements can be identified by the use of words such as plans, is expected, expects, scheduled, intends, contemplates, anticipates, believes, proposes, or variations, including negative variations of such words or phrases or state that certain actions, events, or results may, could, would, might or will be taken, occur, or be achieved. Such statements are based on the current expectations of the management of XPEL. The forward-looking events and circumstances discussed in this call may not occur by certain specified dates or at all and could differ materially as a result of known and unknown risk factors and uncertainties affecting the company, performance and acceptance of the company's products, economic factors, competition, the equity markets generally, and many other factors beyond the control of XPEL.
Although XPEL has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. No forward-looking statement can be guaranteed. Except as required by applicable securities laws, forward-looking statements speak only as of the date on which they are made, and XPEL undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Okay. With that, I will now turn the call over Ryan. Go ahead, Ryan.
Thanks, John, good morning everyone. Again, welcome to our second quarter 2018 call. As you probably know by now, Q2 was another record quarter for us. Revenue is finishing at about $28.9 million, which represented a little over 69% increase compared to Q2 of last year. We're continuing to see strong demand in all of our regions. In particular, our European business more than doubled versus the prior year quarter. We continue to gain there. That's been a pretty consistent trend and one we're very pleased with. Our Canadian business grew almost 40% for the quarter, which considering the size of the country and the relative penetration level already, we're very pleased with our execution there. I expect we'll continue to see relatively strong revenue growth for the balance of the year.
Really like our momentum right now. Our growth rate moderated from Q1, a bit. We expect the growth rate to continue to moderate a bit over the course of the rest of the year. I know some of you are wondering about the impact of trade policy, particularly on our business in China. We continue to see strong sales in Q2 from China, which again represented around 30% of our Q2 revenue, similar to first quarter. As you know, there have been tariffs and retaliatory tariffs. The majority of the retaliatory tariffs were to take place starting in July after the quarter ended. At this point, there's been no negative impact on our demand from China through August. We certainly watch the developments and have a variety of plans for mitigating the impact of tariffs.
There can be no guarantee those are successful at the end of the day. It's still a very fluid situation, demand's been consistent through August. Since we don't import products into China ourselves, and this is done through a distributor, we're a few steps removed from sort of the tactical day-to-day implementation of the tariffs. Obviously we continue to watch that closely, the business has been very strong. On a gross margin front, we finished the quarter with 29.8% gross margin, we're able to hold steady from the improvements we made in Q1. While we're pleased with that, with the gross margin performance, this continues to be a top priority for us in terms of enhancing gross margin over the longer term.
I expect we'll continue to make improvements in this area as we move forward. We're still seeing high SG&A growth versus prior-year quarter, our SG&A expenses were 17.9% of total revenue for the quarter versus 19.7% in the prior year. We're seeing some leverage there, which is good, and this is good progress towards our goal of 18% SG&A. While we're under that for this quarter, we expect it to bounce around a bit for the rest of the year. We were slightly higher than that in July, for example. Strong revenue and good gross margin performance with SG&A leverage, a healthy $3.8 million of EBITDA or 13.3% of revenue and net income of around $2.5 million or $0.09 a share.
Great quarter all in all. As we announced earlier this week, we've been active on the acquisition front. We acquired three Protex franchisees in Quebec City, Montreal, and in Calgary, in Alberta. Three important markets for us in Canada. As most of you will remember, we acquired the franchisor, Protex Canada, last year. These are three of the franchisees of that franchise group. Acquisitions won't have a material impact on our results, but they're consistent with our desire to get close to the end customer and facilitate the growth of the market overall, which is a model that's worked well for us in the U.S., and we've indicated we continue to want to expand.
Consistent with that and with our strategy there, everyone involved in these businesses remains with the company, and it's consistent with our approach of looking for customers and successful operators who are sort of looking for the next stage of their career, next stage for their businesses. Really happy to bring all those folks on board and expand that strategy further into Canada. We also announced the acquisition of eShields assets from eShields Health LLC, which is a supplier of antimicrobial film. Product's currently sold in small quantities for surface protection, for a variety of surfaces and electronic screens. It's a B2B business, so it's not a retail-facing product, so it's very consistent with our current business and the channels where we do well. Don't have a lot else to say about this at this point.
Still in early stages of development of a go-to-market strategy around this. Ultimately, it gets integrated into our architectural films business and, more on that as we get into 2019. Finally, I just want to call attention to a fun event we did, in late July to help one of our new customers, Sun Stoppers Window Tinting, based in Charlotte, N.C., to set a Guinness World Record for window tinting. This was something that they really wanted to do. They actually approached us, when they won a customer at our dealer conference last year. It's a great way for us to help them, raise awareness for their business and their local market and also raise awareness to the window film business in general.
We helped them set that Guinness World Record in Charlotte in July. We have a great video on our website about it, and I think it's a really good example of how we support our customers to just sort of do what they need to help grow their businesses and generate awareness overall. I encourage you all to look at that. Overall, it was a busy quarter. We're pleased with the results. We've got a lot of work to do. Everybody's very busy around here, as you can imagine. We look forward to continue to deliver results. With that, we'll turn it over to Barry, and let him go over the financials. Barry?
Thanks, Ryan, and good morning, everyone. Clearly we're pleased with our top and bottom line performance in Q2. You know, as Ryan mentioned, revenues grew 69.3% versus Q2 2017 to $28.9 million, which was just a little over 14% higher than our Q1 revenue, which was right around $25.2 million. On a year-to-date basis, revenues grew 82.2%. We saw strong growth across all product categories in the quarter, led by paint protection film, which grew 78%. Window film was 8.3% of total Q2 revenue and grew 57.5% quarter-over-quarter. If you look at it from our operating segment perspective, revenues in Canada grew 39% in the quarter, while revenues in our European segment more than doubled.
Our U.S. and rest of world revenues grew approximately 69% for the quarter. We continue to be pleased with our performance, increasing penetration in Canada, which is a relatively mature market for us, as Ryan mentioned. In Europe, we're excited to see that our investment in that region is paying off, and we have a great team on the ground there that's executing well for us. All in all, we're continued to be encouraged with our top line performance and expect that momentum to carry through for the rest of the year. Gross margin for the quarter grew 86% to $8.6 million, and our gross margin percentage increased to 29.8% versus prior year quarter of 27.1%, and sequentially improved slightly versus Q1 2018.
As we've talked to you about in previous calls, our COGS is made up not only of product costs but also includes other COGS-related costs, such as warranty, warehouse and production costs, credit card fees and things like that. These are areas we continually target to drive efficiency in our gross margin, and we are continuing to make an impact in these areas. Furthermore, as you're aware, we sell primarily through a master distributor into China, which, with lower margins in that channel, it puts a little bit of downward pressure on our overall gross margin. Given this, we're pleased that we've been able to continue to improve our margin performance and establish some consistency despite this China dynamic. Gross margin enhancement continues to be a top priority for us, and we expect to continue to show improvement in this area as we move forward.
SG&A expenses for the quarter increased 53.4% versus prior year quarter and declined as a percent of revenue to 17.9% versus 19.8% in the prior year quarter. On a year-to-date basis, SG&A expenses grew 50.7% versus the prior year to date. We'll continue to see relatively high period-over-period growth rates as we continue to invest in the business scale. We also expect to continue to see leverage gains going forward, which clearly helps drive bottom-line results. EBITDA margin for the quarter was 13.3% and increased $2.2 million-$3.8 million versus the prior year quarter. Sequentially, our EBITDA was approximately 22% higher than Q1. On a year-to-date basis, EBITDA increased $6.9 million, which was more than triple the comparative 2017 period.
Our year-to-date EBITDA margin finished at 12.8%. Net income for the quarter was approximately $2.5 million or 8.6% of revenue, compared with $0.8 million in prior year quarter. On a year-to-date basis, net income finished at $4.5 million or 8.3% of revenue versus about $700,000 in the prior year. Cash flow from operations for the quarter was $1.2 million and $1.8 million on a year-to-date basis compared with cash flow used in operations of $3.7 million in June year-to-date 2017 period. As you may recall, we were in inventory building mode during this time last year. That, coupled with our strong operating performance this year, accounted for significantly improved results there.
We also were able to work our revolving credit facility down to zero as of Q2 and are set to pay off the remainder of our bank note from our 2015 Parasol Canada acquisition in Q3. After that, the remaining debt on our balance sheet is all owner-financed unsecured debt at very favorable rates resulting from our prior acquisitions. Our balance sheet continues to strengthen and we're very well positioned to continue to execute on our strategy as we go forward here. All in all, it was a great quarter for us, and we're working hard to continue to deliver solid results in the coming quarters. With that, operator, we'll now turn the call over for questions.
Thank you. We will now be conducting a question-and-answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please limit yourself to one question and one follow-up question and then re-queue for additional questions. One moment please while we poll for questions. Our first question comes from the line of Adam Goldstein, a private investor. Please proceed with your question.
Hi, guys. I've got a question on the China tariffs. Do you know what the tariff rate is on your sales to China?
Hey, Adam. How you doing? Yeah, absolutely. We know, you know, sort of all the published rates of what they were and then what they were, what they were to go to.
Can you tell us what that is? What is the tariff rate?
You have sort of what is the, what is the theoretical rate, what's the actual applied rate. My understanding on the ground is that things are being not applied consistently. I don't think I can speak sort of firsthand to that. I think, you know, historically there was around a 10% tariff pre any other actions. Depending on what you hear and what you see in practice, you know, that would have increased to 25%.
Okay. That's all for me. Thank you.
Sure.
Our next question comes from the line of Brock Erwin with CleverInvesting LLC. Please proceed with your question.
Good morning, guys. My question is about gross margin. I know you've said in the past, and you said this morning that, you know, the actual margin percentage, you know, depends on the mix of the sales. To the extent that you have lower margin distribution sales, that can sort of be a drag. I'm just wondering, like, going forward, you know, we saw sequentially margins barely go up. I'm just wondering, you know, it's about almost at 30% now. Are you happy with that level, or do you think there's still room for improvement here?
I would say that we're happy with the improvements we made Q1 versus, you know, prior quarters. Overall, no, I would say we're not happy at 29% and change. The number needs to go higher, and that's a top priority for us. Could drive that a variety of ways. I mean mix is part of it. Currency is part of it. There's a lot of things that are part of it. You know, there's a lot of things that can be done to improve that. Not to say that that improvement happens overnight, but, no, we think gross margins should be, should be higher than that, should be into the, into the low 30s, at a minimum, and we're pushing hard for that.
Great. Okay. Then just one other question. You know, you mentioned that the China distribution sales are lower gross margins. Can you quantify how much lower those are?
I can't specifically for China, just relative to sort of the whole mix of business. But in general, you know, it's safe to assume that our distribution sales, sort of where they exist globally, are between, you know, 15% and 25% lower gross margin. you know, it obviously depends on who we're talking about and who we're comparing to because our different regions within region have different gross margins also, where we're selling directly. But 15%-25% sort of round number for you.
As a reminder, ladies and gentlemen, it is star one to ask a question. Our next question comes from the line of Salim Negim, a private investor. Please proceed with your question.
Good morning, guys. Fantastic quarter. One follow-up question on the Sun Stoppers account that you won. Can you give us a bit of background? How large is this account? Who was the incumbent window tinting supplier? Why did they decide to move over to XPEL?
Well, in deference to the customer, I won't say how large of an account they are. I will say they're, you know, a very large window film account as an end user for the U.S. market. I also don't like to give any of our competitors press, so I won't say where they came from. I think really what was so special about that deal, and that's why I encourage everyone to watch that video.
You have, you know, an operator who's been in business for, you know, 15 years plus or minus, who says, you know, we've been able to provide him more value in, you know, six or nine months of working together than he's received from the incumbent supplier in years. I think that, you know, that's real. That comes from the fact that we have so many great people on our team, people from the industry, people that have done everything that gentleman does in his business, maybe not at the same scale that he is, but that type of thing. When we have a customer with a great idea, we can act on it immediately.
There's a quote in the video where he came up with this idea for this event that of course wasn't in our marketing plan, wasn't in our marketing budget, but we still agreed we needed to do it and took 10 seconds to think about it. I think all of those things together sort of speak to, you know, why we won that account. We have a great account manager for that region who worked incredibly hard with that customer and incredibly hard to put that event together. It's just really a perfect story.
Are they also in paint protection?
They are, but that's a relatively small part of their business compared to window film business.
Our next question comes from the line of Andy Preikschat with Edgebrook Partners. Please proceed with your question.
Oh, yes. I was wondering if you could share more about the window film as a percent of sales and how that business is growing.
Andy, I think for the quarter we were at 8.3%, and I believe Barry may have called out the growth rate was 57%. I think that's those are strong results. Obviously, we'd hit over 10% plus on window film, but then with some of the acceleration in the paint protection film business, that percent of sale went down slightly in spite of that growth. We're pleased with that. We're making progress on that every day, and that's really entirely automotive at this point. Our architectural, our XPEL VISION, really is not even contributing to that yet. We're pleased with that overall.
Okay, great. Could you share more about the tuck-in acquisition plans? Like, what is currently in the pipeline? What regions are you focused on? I mean, could these deals accelerate over the next 12 months?
Sure. Yeah. I think when you look at where we're focused, I mean, the core sort of driving principle we have with all of our strategy, we wanna get close to the customer. That means two things. Principally, it means acquiring international distributors to expand our footprint, expand where we operate directly, because we know that if we're operating directly, we can outperform. Europe's an example of that. Mexico's now an example of that. Canada was the first example of that.
That's, sort of the one half of the focus and then the other consistent with that strategy and really for some of the same reasons, even though it's slightly different in implementation, is the acquisition of some of our customers, installers in the business, which is designed to, again, get closer to the customer, get closer to that local market, and help increase penetration of all these products in that market. With that, the second part of that strategy, the first with the international, obviously, you know, that's global in scope. It's just, it's mainly dependent on quality of the distributors and operators and, you know, how much risk we wanna take and how much expertise we think or we do or don't have in operating in that market, globally.
On the installation side, you know, that strategy has been principally U.S. to now. Obviously, we've added Canada to that, but we manage the U.S. and Canada sort of as one market. Operationally for us, that doesn't have a huge impact. I think we're open to that elsewhere. We would be open to that in Europe as well, not as a priority, but more opportunistically. For us, there are lots of good candidates for this program. What we're trying to do, I guess, to answer your final point of your question, is we wanna make sure that operationally, you know, we have this down to a science, and that's more of a gating factor than capital constraints or good targets.
It's just operationally a heavy component of the business, and I think we're gaining on that. We're getting better and better, you know, every month. That's ultimately gonna be the gating factor on that strategy. If we can continue to prove we're successful with that, I think we would probably step it up a bit from our sort of historical run rate of these. I wouldn't expect that it comes to sort of dwarf what we're doing or dominate the story. It will continue to be, you know, an important part of what we do, you know, very methodically going forward.
There are no further questions in the queue. I'd like to hand the call back to management for closing comments.
I'd just like to thank everybody for their time and for participating today. We look forward to speaking with you next quarter. Thanks a lot.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.