iFabric Corp

TSX:IFA

Earnings Call Transcript

[Deborah Honig]

Good morning. Thanks for joining us. We have an update with iFabric, who recently reported their Q4 and year-end 2024 financials, which were both records, great results. So looking forward to diving in a little bit more into those. Also, they announced this morning that they purchased the remaining 25% of the building that they own in Markham. So get an update there. As always, this presentation will contain forward-looking statements. We're not going to actually work off a PowerPoint. So just keep that in mind. If you'd like to know more about those, you can find them on the website on the presentation. And there will be a Q&A section. So feel free to post any comments or any questions in the comments section, and we'll deal with those as we go through. To kick things off, I think we're just going to do a quick review of the financial results and then jump into Q&A. So with me, I have Hylton Karon, CEO; Hilton Price, CFO; and Giancarlo Beevis, COO. Thanks, gentlemen, for joining me today. So who would like to go first, Hylton Karon?

[Hylton Karon, executive]

I'm just going to give a brief opening. Thank you, Deborah, for setting this up. I just really want to compliment our team for a wonderful '24 and a really exciting '25 road map going forward. I think Hylton will dive into the details of '24, and we'll look forward to Q&A afterwards if there's anything specific. I just want to congratulate our team on a wonderful '24 and good things ahead. All right, I'm going to hand over now to Hilton Price to review the financials.

[Hilton Price, executive]

Thanks, Hylton. We did a fairly comprehensive press release on our numbers, the quarter and the 12 months. If anybody wants to review those, they are on our website at www.ifabriccorp.com. And you'll see all the details there, just pretty comprehensive. So I'll be brief and just dive into what I consider the main or salient aspects of the quarter and the year. And I'll start off by -- I just want to remind everybody that we changed our year-end last year from September to December. So our audited numbers are for 12 months, and we're comparing that to 15 months in 2023. So our revenues for the year, the 12 months came to $27.3 million compared to $28.3 million in 2023 for the 15 months. And on a proportionate basis, that was around a 20% increase, a record for the company. For the quarter, we had a significant gain there, $10.5 million in revenues compared to $6.8 million in 2023, and that's quarter-on-quarter that represented a 55% increase, which was very significant for us and bodes very well. Gross profit margins for the year, 41% in '24 compared to 39% in '23, a 2% increase. And for quarter, 40% in '24, 38% last year, again, 2% increase.

Our selling and admin costs $8.6 million compared to $9.8 million last year, about a 9% increase on a proportionate basis, and that's mainly attributable to variable selling expenses. Our baseline overheads were pretty flat. So very nice to be able to maintain or contain our expenses pretty well. Adjusted EBITDA for the year, $2.7 million, $1.2 million last year, a very healthy increase. And for the quarter, $1.9 million compared to $250,000, again, a very healthy increase. Working capital, we had $18.8 million at the end of the year compared to $15.6 million last year, $3.2 million increase, again, very, very healthy, very pleasing. Cash. We had $2.1 million in cash at the end of the year compared to $1.6 million in the previous year, around a $500,000 increase. And I think that's really all I have to say on the numbers.

And now I'd like to deal with a couple of specific issues. First one being the acquisition of our building. As per the press release that went out earlier, we've acquired the 25% of the shares in the building that we didn't own. And we often ask why we don't sell the building and put the cash in the bank. And the answer to that is this is a strategic asset. There's a shortage of warehouse space in the Toronto area. We've got a very low carrying cost in our warehouse even with the financing of the acquisition of the extra 25% and that gives us an extreme advantage in terms of having low warehousing compared to our competitors. If we go to third-party warehousing or utilize third-party warehousing, that's very expensive today. So with our low overhead base and our low carrying cost, we really are at a great advantage in terms of being able to outprice our competitors and stay ahead of the game in terms of revenues. And this obviously applies to Canada. Now in conjunction with that, we increased our credit line from $6. 750 million to $12 million by using the equity in the building. And again, why this is strategic is because we had restrictions placed by minority on how we could use that asset. Now that we've removed those restrictions, we can use the asset freely and we'll be able to leverage it to the full extent possible to provide whatever working capital we need going forward. So with the additional -- at the moment, we're not using our credit line. I expect later in the year, we will. And the $12 million, coupled with our existing working capital, I've calculated will allow us to go beyond $60 million in sales forward, which essentially means doubling our revenues without having to resort to a capital raise. I think that really deals with the building. And then the last thing we've been getting a lot of questions is about tariffs. Yes, I think everybody is emotional about these. First, I have to state that our Canadian business is unaffected by tariffs. So we have a very solid base of Canadian business, which underpins our revenues, and that won't be affected by tariffs.

In the U.S., we've measured the impact of tariffs based on what's on the table at the moment by the U.S. administration. Who knows where that will go and how that will change. And I expect there will be changes going forward. But we've measured the impact of around 10% of our U.S. margins negative. And we're going to try and mitigate that in a number of ways. First one is, we're negotiating with our suppliers to reduce prices. And given the fact that there may be a slowdown in the manufacturing, especially in Asia, I think they're well disposed to probably kicking in some portion of that effect by reducing prices appropriately. And the other one is, we are discussing with our customers the potential to increase prices. And I think our customers realize that ultimately, increases are coming. They will have to come. And at the end of the day, the consumer will be paying for those tariff increases. So between those 2, we are hopeful that the bulk of the negative effect of tariffs will be mitigated. And I think that in a nutshell is what I have to say.

[Deborah Honig]

We see a couple of audience questions on tariffs that I don't think we're fully covered off. So I'm just going to [indiscernible] those if you don't mind Hilton. So what percentage of your product gets shipped directly to the U.S. from China?

[Hilton Price, executive]

All of it.

[Hylton Karon, executive]

No, no, no. [indiscernible] business.

[Hilton Price, executive]

No. But for the U.S. market, all of it gets shipped from China. Everything for Canada and the U.S. comes from Asia, well, 90% or 95%. So at the moment, the U.S. market constitutes about 45% of our business.

[Unknown Analyst]

So you have 55% of the Canadian business that's unaffected by the tariff.

[Hilton Price, executive]

That's correct.

[Deborah Honig]

Got it. And what feedback, if any, have you received from your U.S. retail clients about how much of the tariffs they're willing to absorb versus the portion that they'll pass on to consumers?

[Giancarlo Beevis, executive]

Yes. I think the question is in the early stages because everyone is still trying to figure out where the lay of the land will be and how long it will possibly stay in effect, but there is conversations. Retailers know it's coming. Increases are inevitable if the current tariffs are still kept in place at the numbers that they are. Obviously, over the weekend, there's been news of multiple countries reaching out to the U.S. administration to negotiate and try to mitigate some of these tariffs. So it's fluid, but they are telling us that they know price increases are coming. It's just how much that they are willing to absorb, how much we can absorb and how much we can get the suppliers to absorb. But there is a notion of cooperation on the tariffs, at least with our major customers.

[Deborah Honig]

And have your retailers requested any price considerations from IFA?

[Giancarlo Beevis, executive]

Not at this time. No.

[Deborah Honig]

Okay. And then I think that's all the questions dealing with tariffs. I don't know if you wanted to provide any more color or feedback on the financials or just move to the rest of the questions.

[Hilton Price, executive]

No. I think I've dealt with the salient aspects, the important parts of it. I don't really have much more to say in that regard.

[Deborah Honig]

Okay. Could you provide an update on the leaching protocol peer review?

[Giancarlo Beevis, executive]

Yes, certainly. I can handle that portion, if you'd like. So I mean, the leaching protocol is still underway. We've had to adapt new protocols to complete the testing, just given the nature of the chemistry that's being used. That's all gone smoothly. We've transitioned into a new lab in Manchester that seems fully capable of completing the trial. And everything seems to be going well over the last 3, 4 weeks of how that trial is going to be completed. We expect some results in the near term. I would say we're probably about 4 weeks, 5 weeks out from seeing those results. That's where we are at on the leaching peer review, the documents in with the journal. The journal has come back to us with a handful of questions, which we have dealt with, which is a good thing. It means that they're very interested in what we have to say and the results are obviously peaking their interest for publication. We've handled all of that. And now we're just waiting for any further commentary or a publishing date, which we hope to receive shortly.

[Deborah Honig]

Okay. Great. I'm sorry, I had an audience that were asking Hilton to repeat the possible impact on margins that you referenced?

[Hilton Price, executive]

10% adverse at the moment without the mitigation factors kicking in. And I think we will get price reductions on the one side from our vendors. And I think maybe not immediately, but within a reasonably short time, we'll start to see price increases on the other side and probably most of the impact will be dissipated.

[Hylton Karon, executive]

I just want to jump in. I think we've done an analysis. And I think this is -- we're working on worst-case scenario. So I really think that to Giancarlo and Hilton's point, this is early days, and we've done the analysis based on worst-case scenario. We don't see this playing out for years and many quarters, but we're going to operate on worst-case scenario and hopefully, things improve sooner than later.

[Giancarlo Beevis, executive]

And just to be clear, that's on only the 45% of the total revenue coming from the U.S. side of the market. 55% of the margin remains unchanged.

[Deborah Honig]

And that's gross margin that you're referencing?

[Hilton Price, executive]

Yes.

[Hylton Karon, executive]

Correct.

[Deborah Honig]

Okay. And I guess like just looking at the apparel industry, I would assume that every single one of your competitors is affected in the exact same capacity.

[Giancarlo Beevis, executive]

Some instances worse because they are using some of the countries that have 97% tariffs imposed upon them. So listen, we've been doing this for a long time. And for the last 4 years, we've been planning a strategy of how we can spread our supply base over multiple countries. So we've done -- I'd like to, if I may say so, a decent job of spreading it out and mitigating as much of the impact as we can. But yes, everyone in the world who makes -- not even just apparel, makes anything overseas is facing the same thing that we are.

[Hylton Karon, executive]

Sorry, Deborah. But I'd also like to add, we've got inventory that we -- because we do these replenishment programs, so we've got a warehouse full of goods for the next 3 months plus that landed well in advance. So this is not something that's hitting the business today. This is future looking. It's what we're placing orders on. And we've even got new programs on items that we've never launched before, which give us a clean slate to price from the beginning at a new level. So I mean the -- this impact -- is it going to have an impact on everybody? Absolutely. People are foolish to believe otherwise. So we are working on worst-case scenario. And I think that I'm cautiously optimistic that things will get better. Everybody knows, the suppliers know they have to participate. And the retailers know that we can't absorb this continuously at these levels. So there will have to be some middle ground if they want people to continue shipping them. So I think there might be a little bit of pain always around in the very short term. But remember, our warehouses are full of inventory that was bought in way before this. So please keep in mind that this is not such an alarming situation that affects us day 1.

[Hilton Price, executive]

Good point.

[Deborah Honig]

Got it. [indiscernible] like -- I mean, this is not an industry that's going to be reshored to the U.S., correct? I think we've talked about this in the past, Hylton.

[Hylton Karon, executive]

It's highly unlikely. Labor costs compared to Asia are significantly different that even 25% and 30% is not going to allow them to open up manufacturing. Raw materials have left these shores 20, 30 years ago. So the likelihood of bringing them back is very, very miniscule. And the fact of the matter is if infrastructure has to be invested to bring that kind of numbers and that kind of inventory back to manufacturing in the United States, nobody is going to put that kind of money into and resources into these factories if it's a short-term dip. So I think people are really looking to see what the new world order is going to look like for 5, 10, 15, 20 years from now, and they're going to base it. So they might absorb and might have to absorb some form -- who knows 4 years from now who the next administration is going to be and what their view is going to be. I think we've just learned that the world is a different place. So it really is unnerving. It's sad. And I think that over, as I say, the next couple of months, I think that this will play out and hopefully give the world a little bit of a more solid base to stand on.

[Deborah Honig]

Got it. And I had a clarifying audience question, sorry to be repetitive. I just want to make sure that it's addressed. So just is that gross margin in the U.S. or total company gross margin? My understanding is that you're talking about a 10% impact to U.S. gross margins only.

[Hilton Price, executive]

That's correct. The margins I've given you are total gross margins. So if you took the 10% overall on the 45% in the U.S., you're going to be less than 5% overall gross margins, probably closer to 4%, which is not a train smash -- by the time we get some mitigation, that could be substantially reduced. So 2% or 3% isn't going to be a train smash for us.

[Deborah Honig]

Okay. And then how does the future look as it pertains to revenue and profit? I know you're not providing guidance, but maybe you could give us sort of what you're expecting for 2025 in terms of growth?

[Hylton Karon, executive]

Well, I think I put in my statement that we're still expecting a double-digit year of growth. And I think that we've always been prudent in our growth that we haven't exceeded what the company is comfortable with. I think that very -- there's many years where we can still continue to grow this company at 15%, 20%, 25%. There will be various years where, yes, the number will fluctuate a bit. But I can see double-digit growth being something that's going to challenge us for many years to come. As I put in my statement and we've put out, we've got new categories that we're going to be launching in '25 that we've never supplied into before. And our core business, our generic growth has been pretty impressive and very well received at retail, and that's growing very nicely. So I think that '25 should be an exciting year. We're already working on '26. So '25 has pretty much been put to bed. So we really do have a very comfortable road map for this year. And I think that once we get this tariff, I hope 3, 6 months from now, we're not even talking about this conversation, and we can get back to -- while this is going on, life carries on. So we're pretty much in the same operational mode that we've always been. And our continued success is a very comfortable one as Hilton put, we are very well poised to double the business from where we are now without looking for any external input. So we really are in -- it's still a very exciting time. We're putting record after record year out. And I think there's no reason why that shouldn't continue.

[Deborah Honig]

Can you talk at all about some of the new categories you're looking at launching?

[Hylton Karon, executive]

It's in the apparel space. So we are still staying true to what we do. They still incorporate technologies. I think that these are areas that the retailers and the people we're working with really wouldn't appreciate us putting their name and what exactly it is out in the marketplace ahead of it being at the retail store level. And I think as soon as we do ship the first lot of goods into them, and it's now public, we will advise accordingly. And I think that every year that we've put out guidance, we've done a pretty good job. And I think that year after year of meeting with the investor community, what we've said we've delivered. So I think that -- and of course, turning the corner where our revenue has quite impressively grown in relation to overhead, we're making money and continue to make money and we will continue to be more profitable into the future. So we've set a very good core road map for the company, and we're going to stay true to it. I don't think you're going to see us getting into businesses that aren't within the confines of what technology and our proprietary technologies are what really separate us from the crowd. So there will always be that situation in anything that we manufacture that keeps us separate and allows us to keep a program for many, many years. I think there's very few cases where we really have one season opportunity.

[Deborah Honig]

Okay. Well, I don't see any more audience questions. I guess the last one for me just relates to Q1, which you would have just closed the books on and obviously can't get into much detail. But all the port strike delays, they were shipped into Q1. Is that correct?

[Hylton Karon, executive]

Yes. We had 0 cancellations. So goods went out. Retailers had the opening on their shelves. So they needed the goods, and we were able to get through all the merchandise.

[Hilton Price, executive]

But you can see from the quarter -- you can see from Q4 that we were able to turn the vast majority of those goods around. So the stuff that went into Q1 weren't -- I don't want to create the impression that was a large amount. It wasn't that large. We did turn around a lot of the stuff. So the delays were there, but the impact actually was quite minimal in there.

[Deborah Honig]

Okay. Well, that's clear. Was there anything that you wanted to discuss today that we didn't get an opportunity to cover?

[Hylton Karon, executive]

No, I just think that we've kind of covered it. We're really looking forward to '25. As I say, 3, 6 months from now, I hope that tariffs are not part of what we have to really be dealing with on a daily basis. I think the retailers don't want to see retail prices going up and down. I think that's a headache for them. And so once this is put to rest, it will be business as usual going forward. And we've got a wonderful order book and conversation going forward into what '26 already is starting to look like. So we've got to just continue to execute the way we have.

[Deborah Honig]

Well, congrats. I mean the results were fantastic, right? $0.05 in earnings, good growth in pretty much every category. It's just unfortunately, the timing is a bit overshadowed by last week's macro announcements. But yes, I mean, in terms of the year, I think 2024 was a really solid growth year and hopefully, you can build on that for '25. So congratulations. You guys should all be very happy with the results.

[Hilton Price, executive]

Thank you.

[Deborah Honig]

with that, and I don't see any other questions. If anyone has any follow-up questions or would like a one-on-one call, just feel free to reach out. And yes, good luck, everyone this week. Hopefully, the markets get a little bit less volatile.

[Hilton Price, executive]

You can always sell short.

[Deborah Honig]

[indiscernible].

[Hilton Price, executive]

Not our favorite. That would be a mistake.

[Hylton Karon, executive]

Thanks, Deborah. Thanks every one.

[Deborah Honig]

Thanks to the management team for your time. Have a good morning.

[Hilton Price, executive]

Thank you.