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Imaflex — Management Reports 2024
Nov 28, 2024
44808_rns_2024-11-28_316ed1d2-fb0f-45c9-863a-1eb097f904c1.pdf
Management Reports
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MANAGEMENT DISCUSSION AND ANALYSIS
PREFACE
This Management Discussion and Analysis (MD&A) comments on Imaflex Inc.'s (the "Parent Company") operations, financial performance, financial condition, future outlook and other matters for the three and nine-month periods ended September 30, 2024 and 2023. Unless otherwise indicated, the terms "Imaflex", "Company", "Corporation", "we", "our", and "us" all refer to Imaflex Inc., together with its divisions Canguard Packaging and Canslit, along with its wholly owned subsidiary, Imaflex USA Inc. All intercompany balances and transactions have been eliminated on consolidation.
This MD&A also provides information to improve the reader's understanding of the accompanying unaudited interim condensed consolidated financial statements and related notes. It should be read together with our unaudited interim condensed consolidated financial statements for the periods ended September 30, 2024 and 2023 as well as our audited consolidated financial statements for the years ended December 31, 2023 and 2022.
Unless otherwise indicated, all financial data in this document was prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB") and all amounts in tables are expressed in thousands of Canadian dollars unless otherwise indicated. Differences may occur due to rounding of amounts. We also use financial measures that are not defined by IFRS. Please refer to the section entitled "Non-IFRS Financial Measures" for a complete description of these measures.
This MD&A was reviewed by Imaflex's Audit Committee and approved by the Board of Directors on November 27, 2024. Disclosure contained within it is current to that date, unless otherwise indicated.
Additional information on Imaflex is available on our website at www.imaflex.com and on SEDAR+ at www.sedarplus.ca.
CRITICAL ACCOUNTING POLICIES
The Company's material accounting policies, including the Company's accounting policies under IFRS, are disclosed in note 2, Summary of material accounting policies of the audited consolidated financial statements for the years ended December 31, 2023 and 2022.
FORWARD LOOKING STATEMENTS
From time to time, we make forward-looking statements within the meaning of Canadian Securities laws, including the "safe harbor" provisions of the Securities Act (Ontario). We may make such statements in this document, in other filings with Canadian regulators, in reports to shareholders or in other communications. These forward-looking statements include, amongst others, statements regarding the business and anticipated financial performance of the Company. The words "may", "could", "should", "would", "outlook", "believe", "plan", "anticipate", "expect", "intend", "objective", the use of the conditional tense and words and expressions of similar nature are intended to identify forward-looking statements.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements, as a number of important factors could cause our actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, statements relating to the potential impacts on our business, financial condition, liquidity and financial results due to COVID, the length and severity of an economic downturn, management of credit, market dynamics, liquidity, funding and operational risks; the strength of the Canadian and U.S. economies in which we conduct business; the impact of the movement of the Canadian dollar relative to other currencies, particularly the U.S. dollar; the effects of changes in interest rates; the effects of competition in the markets in which we operate; our ability to successfully align our organization, resources, and processes; the availability and price of raw materials; failure to achieve planned growth associated with the U.S. operations and future sales; changes in accounting policies and methods we use to report our financial condition, including uncertainties associated with critical accounting assumptions and estimates; operational and infrastructure risks; and other factors that may affect future results including, but not limited to, timely development and introduction of new products and services; changes in tax laws, technological changes, new regulations; the possible impact on our businesses from public-health
IMAFLEX INC.
Third Quarter 2024
MANAGEMENT DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS (continued)
emergencies, international conflicts and other developments; and our success in anticipating and managing the foregoing risks.
We caution our readers that the previous list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Unless otherwise required by the securities authorities, we do not undertake to update any forward-looking statement that may be made from time to time by us or on our behalf. The forward-looking statements contained herein are based on information available as of November 27, 2024.
COMPANY OVERVIEW
Imaflex is focused on the development and manufacturing of innovative solutions for the flexible packaging and agricultural markets. The Company's flexible packaging products are largely used to protect and preserve the integrity of products and consist primarily of polyethylene (plastic) films and bags, and metalized films. Our polyethylene films are mainly sold to printers known as "converters", who process the film into a finished product to meet their end-customer needs. Additionally, our films are sold directly to customers to protect and market their own products or bought by distributors for re-sale.
Our agricultural films are finished products, predominantly sold directly by Imaflex to growers. They are available in a variety of formats and include both metalized and non-metalized films. Our portfolio includes common mulch, compostable and fumigant barrier films, as well as innovative metalized crop protection films that add pest/weed control and/or accelerated growth benefits beyond those provided by our common mulch films.
Imaflex operates three manufacturing facilities. Two are in the province of Quebec, including Montreal (Imaflex Inc.) and Victoriaville (Canguard and Canslit), and one is in Thomasville, North Carolina, USA (Imaflex USA Inc.). The Company also has a warehouse in Thomasville. The four facilities cover a total area of approximately 25,084 square meters or 270,000 square feet. Imaflex and Imaflex USA specialize in the manufacturing and sale of custom-made polyethylene films and bags, along with non-metalized agricultural films. Canguard specializes in the manufacturing and sale of polyethylene garbage bags, while Canslit specializes in the metallization of plastic film. We believe that our manufacturing presence in both Canada and the United States provides a competitive advantage in terms of logistics, currency, manufacturing flexibility and cost leadership.
The common shares of the Parent Company, Imaflex Inc., are listed on the TSX Venture Exchange under the symbol "IFX". The Company's head office is located in Montréal (Québec).
GROWTH STRATEGY
Imaflex's history attests to its management's ability to successfully adapt to prevailing and continuously changing market conditions. Management deems that success will also lie in the ability to properly manage future growth whether it comes from new markets and products, acquisitions, mergers, or a combination of any or all three. This success will depend on the Company's ability to seek out new opportunities and to position itself such that it will be able to take advantage of them when they present themselves. Past decisions have been made bearing this in mind and the Company is now in a better position to make this happen.
Management believes the following initiatives will contribute to Imaflex's long-term growth:
Strengthen and Grow the Core
We will continue to strengthen the core flexible packaging business. This includes revenue growth and margin expansion through higher production volumes geared towards the most profitable markets and products, along with a focus on lean operations (minimizing scrap, reducing production set-up times, etc.). In addition to growing organically, we will also consider strategic acquisitions that make sense in terms of complementary fit, cost and ease of integration.
IMAFLEX Inc.
Third Quarter 2024
MANAGEMENT DISCUSSION AND ANALYSIS
GROWTH STRATEGY (continued)
Grow the Agriculture Business
We will continue to build-out our agriculture business, driving awareness and exposure for our advanced crop protection films. These include, our metalized agriculture films, surface coated with aluminum, and used to protect plants from disease transmitting insects, limit the growth of soil borne pests and weeds and/or to accelerate the growth and yield of plants. Going forward, assuming Environmental Protection Agency ("EPA") approval is obtained, we will also bring our patented active ingredient release film, ADVASEAL HG® (ADVASEAL®) to market.
ADVASEAL HG® (ADVASEAL®)
Today, agricultural films are used in the growing of fresh fruits and vegetables worldwide to cover soil treated with fumigants – volatile and toxic pesticides essential for reducing pests, weeds and fungi in the soil, thus supporting good growth of new crop seedlings. Currently, fumigants offer the greatest efficacy for pre-plant soil disinfection, but they also have the highest health and environmental risk due to their volatility, toxicity and required application rates that can run into the hundreds of pounds per acre. To address this, Imaflex developed ADVASEAL®, a preplant soil disinfection alternative to fumigants in minor use crop production.
Originally, the EPA approved ADVASEAL® HSM, which contained only an herbicide for weed control. The new enhanced ADVASEAL HG® (ADVASEAL®), also includes three fungicides and a nematicide to control soil borne pathogens. With ADVASEAL®, modern non-volatile crop protection products can be applied more effectively and safely than with fumigants. The crop protection products are incorporated into a coating, which is then applied to a mulch film. Once the coated film is applied to the ground, the active ingredients are released into the soil under controlled conditions, preventing the over/under-dosing found with current soil disinfection practices. This new technology dramatically reduces the amount of crop protection products required. The catalyst to trigger the release of the active ingredients is soil moisture. When the film is applied to the soil, the active ingredients are efficiently and safely discharged into the ground, resulting in heightened productivity, lower costs and notable environmental benefits.
ADVASEAL® is safe to transport, store and handle and its application is emission-free, eliminating the risk of inhalation and environmental damage present with the drift of fumigants under current agricultural practices. In addition to being environmentally friendly, management estimates that ADVASEAL® will provide significant savings to growers depending on the crop and fumigants currently being used. ADVASEAL® permits the precise application of a low dose of crop protection products. Management estimates that ADVASEAL® will reduce the chemicals required by over 95% and eliminate many of the costly work-steps currently being used. Collectively, this puts Imaflex in a good position to capture market share worldwide as it is commercialized.
Maintain focus on Research and Development
We will maintain our focus on enhancing the customer value proposition, while developing new capabilities and leading-edge products for highly profitable niche markets. This will help support the build-out of our core flexible packaging product portfolio. The Company's research team uses the fields in which they have core competencies in order to identify innovative improvements and solutions where chemicals and polymers can offer added value.
Continue Upgrading Equipment
Finally, we will focus on the efficiency of our equipment, making the required capital investments to maintain, upgrade and expand into new areas. Our commitment to make the required investments, and our ability to deliver customized solutions, on-time and at competitive prices should help to drive revenue and margin expansion, while allowing us to remain competitive in the marketplace.
In 2022, Imaflex announced important investments to support and increase its production capacity and capabilities. This included the purchase of three co-extruders, and other ancillary flexible packaging equipment, namely a metallizer. The new extruders double Imaflex's multi-layer extrusion capacity and generate an additional 12 to 15 million pounds of film per year, depending on product mix. Collectively, these investments should bring a more meaningful impact to revenues and profitability, while also heightening operational efficiencies. The first extruder and metallizer were installed and fully operational in 2023 and the financial and operational benefits are being seen. The remaining two extruders are now operational and being commissioned. Following an initial ramp-up period, it takes approximately 18 months for a new
IMAFLEX INC.
Third Quarter 2024
MANAGEMENT DISCUSSION AND ANALYSIS
Continue Upgrading Equipment (continued)
extruder to be completely utilized. The strong performance achieved in recent years was driven by our prior capital initiatives and we are confident this proven process can be repeated with these new purchases
MARKET OVERVIEW
The North American flexible packaging market is valued at more than US $30 billion. Although this market is highly fragmented and commoditized in terms of pricing, there are niches within the space that offer the opportunity for increased profitability. In 2023, Imaflex was once again ranked in the top 100 North American film and sheet manufacturers by sales.
The total addressable global mulch film market, excluding silage and greenhouse films, is valued at approximately US $3.7 billion. The Company has and continues to develop innovative and proprietary solutions for this important market. Going forward, Imaflex hopes to capture a much larger share of the agriculture film market due to its advanced films, such as ADVASEAL®. Management believes the value of the global addressable market for an active ingredient release film like ADVASEAL® will be much larger than that for traditional mulch films. In the U.S. alone, the Company estimates that approximately 130 million pounds of mulch film is being used, resulting in an estimated total addressable market for ADVASEAL® of approximately US $750 million.
With growing concerns over the scarcity of resources, the environment, lower crop yields due to disease, and a rising global population, the Company believes that the macro-environment is also working in its favour. Sustainability and intelligent farming are becoming increasingly important and growers are progressively turning to other industries to help them do more with less.
ADVASEAL® COMMERCIALIZATION PROCESS
As part of the ADVASEAL® commercialization process, Imaflex conducted two independent field trials – an Efficacy Trial and a Release Study.
The Efficacy Trial was designed to evaluate ADVASEAL's® ability to release its crop protection products into the soil and achieve soil disinfestation, prior to planting tomato seedlings – one of the most widely grown crops in the world. Concurrently, it monitored plant growth, yield and quality, compared to a crop produced using the best Florida grower standard for fresh tomato production using fumigants. On September 10, 2020 the Corporation announced final independent results of the trial showing that ADVASEAL® was a viable soil fumigation alternative.
Based on these positive findings, in October 2020 the Corporation commenced a Release Study, the last and most comprehensive trial required for the EPA registration package. The Study was required to determine the exact timing each active ingredient coated on ADVASEAL® was released into the soil. This was needed to show compliance with pre-harvest intervals established by the EPA, which is essentially the wait period required between the last application (release) of an active ingredient and when a crop can be harvested for safe human consumption. On January 25, 2021, the Company subsequently announced positive independent final results. The release times of all five crop protection products coated on ADVASEAL® complied with the pre-harvest intervals established by the EPA.
On November 7, 2022, Imaflex announced that it had submitted the ADVASEAL® registration package to the U.S. Environmental Protection Agency (EPA) for approval as a new physical pesticide formulation. In conjunction with this, the Corporation announced that it had submitted the required active ingredient registrations for approval as generic pesticides for use in the manufacturing of ADVASEAL®. These generic active ingredients are effectively used by growers today.
Securing EPA approval is the final major regulatory hurdle before ADVASEAL® can be brought to market. As is typical with the EPA's review process, no specific timeline for a decision has been given. Although it is taking longer than originally expected, Imaflex is confident ADVASEAL® will be approved.
IMAFLEX.ORG
Third Quarter 2024
IMAFLEX INC.
Third Quarter 2024
5
MANAGEMENT DISCUSSION AND ANALYSIS
USPTO GRANTS PATENT TO IMAFLEX FOR ADVASEAL®
In June 2024, Imaflex announced the issuance of U.S. Patent No. 11,992,009 by the United States Patent and Trademark Office ("USPTO") for ADVASEAL®, which is valid until 2041. The patent further recognizes our revolutionary soil treatment that eliminates the need for harmful fumigants, thereby offering a more sustainable approach to agricultural practices. It ensures strong intellectual property protection for many years to come.
COMPETITIVE ENVIRONMENT
Although competition is high in all our markets, Imaflex operates in a multi-billion-dollar industry with a multitude of product opportunities. Flexible packaging alone is used in almost every consumer market to protect and preserve the integrity of a product. Many customers also deal in food related goods, which are somewhat recession resistant.
Imaflex believes the Company's ability to develop innovative solutions, while offering high quality products and services gives it a competitive edge. This combined with our ability to take on smaller orders with short lead times and at competitive prices helps create customer loyalty.
Some competitors, experiencing idle operations or producing at below average capacity levels, may attempt to gain market share through reduced pricing, particularly during difficult economic times. Imaflex still believes that maintaining its focus on the quality of its products and the excellence of its customer service remains its best long-term strategy, as these two characteristics define our position and reputation in the market, and this regardless of the fluctuations in the economic cycle. This strategy has been the backbone of our growth and it has served us well.
We employ a staff of chemical & polymer engineers and a chemist, which allows us to develop unique solutions. In our markets, we believe it is essential to sell value-added products and avoid producing highly commoditized offerings generating lower margins. The key to this strategy is identifying and building relationships with customers having specific needs and eventually developing products that address them. Our sales force is mandated to seek out such clients and the Company works to ensure its sales team is technically accomplished and equipped to properly communicate the advantages of all products.
EMPLOYEES AND CORPORATE OFFICE
Imaflex currently employs approximately 269 people in North America, including those at its corporate head office located in Montreal, Canada. The Company currently has no unionized employees.
OUTSOURCING
Our industry is capital intensive and labour is only a minor component in the total cost of production. As a result, outsourcing our manufacturing to countries with lower wages would not have a material impact on costs, especially when factoring in expenses related to freight and duty. Furthermore, the risks associated with relinquishing our control over quality and delays in delivery deadlines would far outweigh any minimal benefit that would be generated by lower labour costs.
However, in our effort to eliminate bottlenecks in our production process when our capacity usage is very high, management may consider the use of third-party (toll) manufacturers for certain activities in order to meet all production deadlines and ensure the best service to our customers.
RISK FACTORS
The Company is involved in a competitive industry and marketplace in which there are a number of participants. To accommodate and effectively manage future growth, Imaflex continues to improve its operational, financial and management information systems, as well as its production procedures and controls. Our success is largely the result of the continued contributions of our employees and the Company's ability to attract and retain qualified management, sales and operational personnel.
MANAGEMENT DISCUSSION AND ANALYSIS
RISK FACTORS (continued)
The overall market we compete in has historically shown resiliency and growth, even during difficult economic times. Our customers predominantly operate in the food packaging and agriculture markets, which are somewhat resilient to recessionary and seasonal pressures. This fact, coupled with expanding product lines and the introduction of newer and faster equipment, should help Imaflex weather any potential volatility caused by uncertainty in the North American economic climate.
Factors which can impact the Company include, but are not limited to: the impact of COVID on our current and future business, management of credit, market dynamics, liquidity, funding and operational risks; the strength of the Canadian and U.S. economies in which we conduct business; the impact from movement of the Canadian dollar relative to other currencies, particularly the U.S. dollar; the effects of changes in interest rates; the effects of competition in the markets in which we operate; our ability to successfully align our organization, resources, and processes; the availability and price of raw materials; failure to achieve planned growth associated with the U.S. operations; changes in accounting policies and methods we use to report our financial condition, including uncertainties associated with critical accounting assumptions and estimates; operational and infrastructure risks; other factors may affect future results including, but not limited to, timely development and introduction of new products and services; changes in tax laws, technological changes and new regulations; the possible impact on our businesses from public-health emergencies, international conflicts and other developments; and our success in anticipating and managing the foregoing risks.
GENERAL SITUATION OF THE POLYETHYLENE BLOWN FILM MARKET – RESIN PRICING
Commencing the second half of 2023 resin pricing trended upwards, largely due to production cuts by manufacturers to maintain prices and a strengthening in the resin export market. Recently, pricing eased, although resin producers are expected to resist pricing reductions for the remainder of 2024.
In general, pricing fluctuations largely relate to suppliers curtailing production levels, the state of the export market, weather related events and geopolitical issues. Over the longer term, North American resin production is expected to increase which should have a positive impact on pricing. However, global events and any production issues could put additional pressure on resin supplies and pricing.
Imaflex has no long-term customer contracts and consequently it can adjust product pricing as resin costs change. This said, there is usually a 30-day lag between a resin price increase and when our customer product pricing can be revised. To the contrary, resin price decreases are normally passed along to the customer immediately.
LOSS OF BUSINESS FROM A SIGNIFICANT CUSTOMER
One of our business practices has been to limit the purchases by any particular customer to less than 10% of our revenues. This strategy helps ensure that our profitability and financial well-being are not dependent on any one client.
COMPETITION FROM OTHER COMPANIES
Imaflex operates in the highly competitive multi-billion-dollar flexible packaging and agricultural film markets. This said, we believe the Company has a competitive edge over the competition due to our highly skilled teams that are quick to respond to customer needs, a diversified manufacturing base and the fact that the bulk of our customers deal in food related products which are less subject to recessionary and seasonal pressures. It may not always translate into greater net profit, but it should result in customer loyalty if we decide to match our competitors' prices.
IMAFLEX.ORG
Third Quarter 2024
MANAGEMENT DISCUSSION AND ANALYSIS
SEASONALITY OF OPERATIONS
Certain products made at our Victoriaville and Thomasville facilities are subject to some seasonality due to the plant's partial manufacturing focus on the production of agriculture film for fruit and vegetable growers. Inventory is managed in a way to optimize cash flow, while also remaining capable of seizing market opportunities that may arise. Since these locations also manufacture products destined for other markets, they are not overly affected by seasonal downturns.
EXPOSURE TO PRODUCT LIABILITY
Due to the nature of our operations, which consist primarily of manufacturing polyethylene film for converters, who process film into finished products for their end-customers, Imaflex's exposure to product liability is low. Furthermore, the Corporation is not exposed to liability for personal injury or death arising from negligence in the manufacturing of the films.
The only market segment that exposes the Company to potential product liability claims is the agriculture space. In this market, proof of negligence in our manufacturing process could entail some form of compensation if the expected crop yields do not materialize.
Although the likelihood of a claim in this market is low, we are nonetheless covered by a product liability insurance policy in the amount of $25,000,000.
FLUCTUATIONS IN OPERATING RESULTS
It is important to note that quarterly profitability may vary, irrespective of quarterly sales. This is due to many factors, including and not limited to: competitive conditions in the businesses in which Imaflex participates; general economic environment and normal business uncertainty; product mix; fluctuations in foreign currency exchange rates; the availability and costs of raw materials; changes in Imaflex's relationship with its suppliers; planned plant shutdowns for preventative maintenance affecting production levels; and interest rate fluctuations along with other changes in borrowing costs.
EXPOSURE TO INTEREST RATE FLUCTUATIONS
The Company's borrowings, which bear interest at a variable rate, have some interest rate risk. Management assesses its exposure to interest rate fluctuations and decides whether it may be favourable to enter contracts to hedge this risk based on expected future movements and available economic data. Interest rate hikes may affect the Company's future cost of borrowing. However, management is currently not hedging its interest rate exposure and expects this exposure to lessen as the outstanding balance on its long-term borrowings decreases.
ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL
Imaflex's core operational management team has been historically stable and the Company was able to keep key competencies within the firm. This includes its three founders, who have more than 100 years of combined experience in management and research and development. As Imaflex has grown, it has also strengthened its team, adding individuals having a variety of competencies, such as accounting, operations, or engineering.
Management promotes a work environment that allows for the free exchange of ideas in an effort to ensure that the Company remains at the forefront of its industry. Management is confident that it can retain and, if need be, attract qualified individuals that will contribute to its on-going goal of building shareholder value.
FOREIGN EXCHANGE FLUCTUATIONS
Some of the Company's sales and expenses, as well as accounts receivable and payable, are denominated in US dollars. A portion of the revenue stream in US dollars acts as a natural hedge to cover US denominated expenses. Imaflex can also borrow funds on its line of credit in US dollars. The Company has increased its debt in US dollars in order to obtain additional revenues in US dollars. As this additional U.S. business fully materializes, the Company's exposure to foreign
IMAFLEX.ORG
Third Quarter 2024
MANAGEMENT DISCUSSION AND ANALYSIS
FOREIGN EXCHANGE FLUCTUATIONS (continued)
currency should be managed naturally. Management continuously assesses its exposure to such risk and the Company does not currently use any financial instruments to hedge its foreign currency position.
ENVIRONMENTAL HAZARDS
The Company's raw materials, processes and finished goods do not have any hazardous implications. However, we do buy a few items which are used in our production equipment, such as cooling products, which may be hazardous, but their use and handling are controlled. Though these products pose little risk, they are handled in a manner that fully complies with existing safety regulations.
NON-IFRS FINANCIAL MEASURES
The Company's management uses a non-IFRS financial measure in this MD&A, namely EBITDA, to assess its performance. EBITDA is determined as "Earnings before interest, taxes, depreciation and amortization". The reader may refer to the following table for the reconciliation of the Company's EBITDA to its reported net income.
Reconciliation of EBITDA to net income:
| ($ thousands, except per share data) | Three months ended September 30, | Nine months ended September 30, | ||
|---|---|---|---|---|
| 2024 | 2023 | 2024 | 2023 | |
| Net income | $ 1,468 | $ 155 | $ 6,750 | $ 1,516 |
| Plus: | ||||
| Income taxes | 20 | 77 | 996 | 306 |
| Finance costs | 182 | 138 | 617 | 381 |
| Depreciation and amortization | 1,325 | 1,093 | 3,883 | 3,155 |
| EBITDA¹ | $ 2,995 | $ 1,463 | $ 12,247 | $ 5,358 |
| Basic EBITDA per share | $ 0.06 | $ 0.03 | $ 0.24 | $ 0.10 |
| Diluted EBITDA per share | $ 0.06 | $ 0.03 | $ 0.24 | $ 0.10 |
(1) Basic weighted average number of shares outstanding of 52,088,637 for the quarter and year-to-date ended September 30, 2024, up from 51,988,637 for the quarter and 51,865,560 for the year-to-date ended September 30, 2023. Diluted weighted average number of shares outstanding is 52,119,893 for the current quarter and 52,100,852 for the year-to-date, compared to 52,060,362 for the quarter and 52,052,246 for the year-to-date ended September 30, 2023.
While EBITDA is not a standard IFRS measure, management, analysts, investors and others use it as an indicator of the Company's financial and operating management and performance. EBITDA should not be construed as an alternative to net income determined in accordance with IFRS as an indicator of the Company's performance. The Company's method of calculating EBITDA may be different from those used by other companies and accordingly it should not be considered in isolation.
RECLASSIFICATION OF EXPENSES
The Company has reclassified certain expenses for 2023 to better reflect the nature of these costs. These changes have no impact on the company's net income.
IMAFLEX.ORG
Third Quarter 2024
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
During the third quarter of 2024, revenues and profitability continued to come in stronger than 2023, driven by heightened sales volumes and growth in higher margin products.
| ($ thousands) | Three months ended September 30, | Nine months ended September 30, | ||
|---|---|---|---|---|
| 2024 | 2023 | 2024 | 2023 | |
| Sales | $28,418 | $22,858 | $84,655 | $70,588 |
Revenues were $28.4 million for the third quarter of 2024, up 24.3% from $22.9 million in 2023. Growth was driven by heightened volumes, stronger sales of higher margin offerings and favourable movements in foreign exchange.
For the first nine months of 2024, revenues increased 19.9% to $84.7 million, driven by the same factors outlined for the quarter.
| ($ thousands) | Three months ended September 30, | Nine months ended September 30, | ||
|---|---|---|---|---|
| 2024 | 2023 | 2024 | 2023 | |
| Gross Profit ($) before amortization of production equipment | $5,874 | $3,122 | $18,613 | $11,608 |
| Gross Profit before amortization of production equipment (%) | 20.7% | 13.7% | 22.0% | 16.4% |
| Amortization of production equipment | 1,257 | 1,042 | 3,678 | 3,007 |
| Gross profit ($) | $4,617 | $2,080 | $14,935 | $8,601 |
| Gross profit (%) | 16.2% | 9.1% | 17.6% | 12.2% |
Gross profit before the amortization of production equipment was $5.9 million (20.7% of sales) for the current quarter, versus $3.1 million (13.7% of sales) in 2023. Gross profit including amortization of production equipment came in at $4.6 million (16.2% of sales) for the third quarter of 2024, versus $2.1 million (9.1% of sales) in 2023.
For 2024 year-to-date, the gross profit before amortization of production equipment was $18.6 million (22.0% of sales) versus $11.6 million (16.4% of sales) in the corresponding prior-year period. Similarly, the gross profit including amortization of production equipment came in higher, totaling $14.9 million (17.6% of sales), versus $8.6 million (12.2% of sales) in 2023.
Despite a competitive pricing environment, the Corporation's performance in 2024 has been bolstered by higher sales volumes, product mix, operational efficiencies, and ongoing cost controls.
| ($ thousands) | Three months ended September 30, | Nine months ended September 30, | ||
|---|---|---|---|---|
| 2024 | 2023 | 2024 | 2023 | |
| Selling and administrative | $2,607 | $2,070 | $7,029 | $6,367 |
| As a % of sales | 9.2% | 9.1% | 8.3% | 9.0% |
Selling and Administrative expenses were $2.6 million (9.2% of sales) in the current quarter, versus $2.1 million (9.1% of sales) in 2023. The year-over-year increase was largely due to higher administrative expenses, including increased provisions for the Corporation's profit participation plan due to the heightened profitability. For 2024 year-to-date, expenses totalled $7.0 million (8.3% of sales), compared to $6.4 million (9.0% of sales) in 2023. The selling expense ratio for both the current quarter and year-to-date benefited from the larger 2024 sales base.
IMAFLEX
Third Quarter 2024
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (continued)
| ($ thousands) | Three months ended September 30, | Nine months ended September 30, | ||
|---|---|---|---|---|
| 2024 | 2023 | 2024 | 2023 | |
| Finance costs | $182 | $138 | $617 | $381 |
Finance costs came in at $0.2 million for the current quarter and $0.6 million for the year-to-date. This compares to $0.1 million and $0.4 million respectively in the corresponding prior-year periods. The year-over-year increases were largely due to higher interest rates and new finance leases associated with equipment purchases, partially offset by a reduction in long-term debt. Although the rise in interest rates has impacted Imaflex's variable rate loans outstanding, the Company has also been controlling debt levels to minimize the impact on finance costs.
| ($ thousands) | Three months ended September 30, | Nine months ended September 30, | ||
|---|---|---|---|---|
| 2024 | 2023 | 2024 | 2023 | |
| Other (gains)/losses | 340 | ($360) | (457) | $31 |
Imaflex recorded other losses of $0.3 million for the current quarter, versus gains of $0.4 million in the same period last year, resulting in a $0.7 million unfavourable year-over-year variance. For 2024 year-to-date, the Company recorded gains of $0.5 million versus losses of $31 thousand in 2023, yielding a $0.5 million favourable variance. Other gains and losses were primarily driven by foreign exchange movements.
A majority of the Corporation's foreign exchange gains and losses are non-cash impacting and largely relate to intercompany balances for which Imaflex can control the time of settlement.
| ($ thousands) | Three months ended September 30, | Nine months ended September 30, | ||
|---|---|---|---|---|
| 2024 | 2023 | 2024 | 2023 | |
| Income taxes | $20 | $77 | $996 | $306 |
| As a % of income before taxes | 1.3% | 33.2% | 12.9% | 16.8% |
Income taxes stood at $20 thousand for the current quarter versus $77 thousand in 2023. For the first nine months of 2024, income taxes were $1.0 million (12.9% of sales), up from $0.3 million (16.8% of sales) in 2023 due to the higher profitability. The Corporation's statutory tax rate is currently 26.5%.
| ($ thousands, except per share data) | Three months ended September 30, | Nine months ended September 30, | ||
|---|---|---|---|---|
| 2024 | 2023 | 2024 | 2023 | |
| Net income | $1,468 | $155 | $6,750 | $1,516 |
| Basic earnings per share | $0.03 | $0.00 | $0.13 | $0.03 |
| Diluted earnings per share | $0.03 | $0.00 | $0.13 | $0.03 |
Net income grew to $1.5 million in the current quarter, increasing $1.3 million or 847.1%, over 2023. For the year-to-date, net income grew to $6.8 million, up 345.3% from $1.5 million in 2023. The heightened profitability in 2024 was driven by the higher gross profit.
IMAFLEX
Third Quarter 2024
MANAGEMENT DISCUSSION AND ANALYSIS
SUMMARY OF QUARTERLY RESULTS
Summary financial data derived from the Company's unaudited quarterly financial statements for each of the eight most recently completed quarters are as follows:
For the quarters ending March, June, September and December ($ thousands, except per share data):
| Q3/24 | Q2/24 | Q1/24 | Q4/23 | Q3/23 | Q2/23 | Q1/23 | Q4/22 | |
|---|---|---|---|---|---|---|---|---|
| Revenues | 28,418 | 28,833 | 27,404 | 23,006 | 22,858 | 24,494 | 23,236 | 21,778 |
| Net income | 1,468 | 3,434 | 1,847 | (1,007) | 155 | 438 | 923 | 500 |
| Earnings/(Loss) per share | ||||||||
| Basic | 0.028 | 0.066 | 0.035 | (0.019) | 0.003 | 0.008 | 0.018 | 0.010 |
It is important to note that profitability may vary from quarter to quarter, irrespective of quarterly sales, due to many factors. These include and are not limited to: competitive conditions in the businesses in which the Company participates; general economic conditions and normal business uncertainty; product mix; fluctuations in foreign currency rates; the availability and costs of raw materials; changes in the Company's relationship with its suppliers; planned plant shutdowns for preventative maintenance affecting production levels; along with interest rate fluctuations and other changes in borrowing costs.
FINANCIAL POSITION
September 30, 2024 vs. December 31, 2023
Working capital stood at $21.9 million at quarter end, up from $14.0 million as of December 31, 2023. The improvement was driven by heightened cash levels, higher trade and other receivables, along with a reduction in bank indebtedness and long-term debt, partially offset by higher finance lease obligations (current portion).
LIQUIDITY
Cash Flows from Operating Activities
Net cash flows generated by operating activities, including movements in working capital and taxes, stood at $5.0 million for the current quarter, up from cash inflows of $0.7 million in the same period of 2023. The $4.3 million improvement was driven by the higher profit in 2024, along with movements in trade & other payables, foreign exchange, and income taxes, partially offset by movements in trade & other receivables and inventories.
For the first nine months of 2024, cash flows generated by operating activities, including movements in working capital and income taxes, stood at $9.1 million, up from $2.3 million in the prior year. The $6.8 million increase was primarily driven by the higher profit in 2024, along with movements in income taxes.
Cash Flows from Investing Activities
During the third quarter of 2024, cash used in investing activities totalled $0.8 million, down notably from $2.2 million in 2023. For the first nine months of 2024, cash used in investing activities stood at $2.9 million, down from $8.4 million in the corresponding period of 2023. Imaflex is approaching the end of its multi-year capital asset purchase program. These investments were largely for the major equipment purchases announced in the second quarter of 2022, including new extrusion equipment, a metallizer and other ancillary flexible packaging equipment. They further enhance Imaflex's production capacity and capabilities, in line with our goal of heightening sales and profitability.
Cash Flows from Financing Activities
The Corporation recorded net cash outflows from financing activities of $1.2 million in the third quarter of 2024, versus cash inflows of $0.6 million in 2023. During the third quarter of 2023, bank indebtedness increased by $1.3 million (nil in Q3 2024) and finance leases increased by $0.2 million (nil in Q3 2024), driving the $1.7 million year-over-year variance.
IMAFLEX
Third Quarter 2024
MANAGEMENT DISCUSSION AND ANALYSIS
Cash Flows from Financing Activities (continued)
For 2024 year-to-date, the Company had cash outflows from financing activities of $3.3 million, versus cash inflows of $0.6 million in 2023. The year-over-year variance is primarily due to higher payments in 2024 year-to-date to reduce bank indebtedness and finance leases. Additionally, cash flows generated from finance leases were lower in 2024 compared to 2023. A substantial portion of the Company's previously mentioned equipment purchase program has been financed through lease agreements.
CONTRACTUAL OBLIGATIONS
The contractual obligations as at September 30, 2024 were as follows:
| ($ thousands) | Payments due by period | |||
|---|---|---|---|---|
| Total | Less than 1 year | 1 to 5 years | After 5 years | |
| Long-term debt (includes interest) | $ 186 | $ 186 | $ - | $ - |
| Bank indebtedness | - | - | - | - |
| Leases | 11,486 | 3,123 | 8,116 | 247 |
| Total contractual obligations | $ 11,672 | $ 3,309 | $ 8,116 | $ 247 |
These contractual obligations are sensitive to the fluctuation of interest rates. They are based on interest and foreign exchange rates effective as at September 30, 2024.
CAPITAL RESOURCES
The Company's $12 million operating line of credit, which is secured by trade receivables and inventories, bears interest at the Canadian prime rate. As at September 30, 2024, Imaflex had no outstanding balance on its line of credit (versus $2.9 million as at December 31, 2023) and had cash on hand totalling $3.7 million ($0.8 million as at December 31, 2023). Working capital stood at $21.9 million as at September 30, 2024, up notably from $14.0 million as at December 31, 2023. The Company controls its financial leverage, ensuring that its borrowings reflect the asset base against which funds are borrowed as well as the profitability that is generated through the operations.
PROPOSED TRANSACTION
The Company is not currently contemplating any business acquisition or merger.
RELATED PARTY TRANSACTIONS
In the normal course of operations, the Company had routine transactions with related parties. These transactions are measured at fair value, which is the amount of consideration established and agreed to by the related parties.
The following table reflects the related party transactions recorded in the statements of comprehensive income for services received by related parties for the periods ended September 30, 2024 and 2023. For additional information, please refer to note 23, Related party transactions of the "Notes to the consolidated financial statements" for the years ended December 31, 2023 and 2022.
IMAFLEX
Third Quarter 2024
MANAGEMENT DISCUSSION AND ANALYSIS
RELATED PARTY TRANSACTIONS (continued)
| ($ thousands) | Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|---|
| 2024 | 2023 | 2024 | 2023 | ||
| Professional fees and key management personnel services | (a) | $ 36 | $ 37 | $ 108 | $ 108 |
| Rent | (b) | $ 300 | $ 290 | $ 894 | $ 873 |
| Remuneration | (c) | $ 299 | $ 219 | $ 902 | $ 980 |
(a) Professional fees include transactions with Polytechnomics Inc., of which Gerald R. Phelps, Imaflex's Vice-President Operations, is the controlling shareholder and with Philip Nolan, a director of Imaflex, who is also a self-employed tax lawyer.
(b) Joseph Abbandonato, Executive Chairman of the Board, is the controlling shareholder of Roncon Consultants Inc. ("Roncon"). The Company's production facilities at Imaflex, Canslit, and Imaflex USA are leased from Roncon and parties related to Roncon under long-term lease agreements. The majority of these payments are recorded as a lease obligation on the balance sheet, while the remainder covers the applicable interest and is recorded under finance costs as an expense.
(c) Includes salaries, benefits, non-cash stock-based compensation expenses and fees paid to key management personnel and directors.
FINANCIAL INSTRUMENTS
Please refer to note 21, Financial instruments of the consolidated financial statements for the years ended December 31, 2023 and 2022 for disclosure on the Company's financial instruments as well as note 22, Risk management for a discussion on the risks the Company is exposed to and how they are managed.
As at September 30, 2024, the Company was not using any swap, forward or hedge accounting and there were no warrants outstanding.
As at September 30, 2024, 500,000 options to purchase shares of the Company were outstanding at a weighted average strike price of $1.162, of which 462,500 were exercisable.
As at September 30, 2023, 650,000 options to purchase shares of the Company were outstanding at a weighted average strike price of $1.069 of which 462,500 were exercisable.
MANAGEMENT OUTLOOK
While we are mindful of evolving market conditions, we remain optimistic about our sustained growth prospects. The positive momentum we have seen for the first nine months of 2024 is a testament to our capabilities. Moving forward, we will focus on strengthening our core business, while driving innovation and expansion in key areas. We remain confident that the foundation we have built will support profitable growth, and we are committed to driving sustained performance throughout 2024 and beyond.
IMAFLEX Inc.
Third Quarter 2024
MANAGEMENT DISCUSSION AND ANALYSIS
OUTSTANDING SHARE DATA
As at September 30, 2024, the Company had 52,088,637 common shares outstanding, unchanged from December 31, 2023.
Additional information on Imaflex, including quarterly and Annual Reports, can be found on SEDAR+ at www.sedarplus.ca.
(s) Stephan Yazedjian
Stephan Yazedjian
President and Chief Executive Officer
(s) Robert Therrien
Robert Therrien, CPA, CA
Director of Finance, in my capacity as Chief Financial Officer
November 27, 2024
For investor information, contact
JOHN RIPPLINGER
Vice President Corporate Affairs
[email protected]
T: 514.935.5710 ext. 157 | F: 514.935.0264
IMAFLEX INC.
5710 Notre-Dame West
Montreal, Quebec, Canada H4C 1V2
T: 514.935.5710 | F: 514.935.0264
www.imaflex.com
IMAFLEX INC.
Third Quarter 2024