Industria de Diseño Textil, S.A. (OTCPK:IDEXY) Q3 2024 Results Conference Call December 11, 2024 3:00 AM ET Company Participants Marcos López - Capital Markets Director Oscar Garcia Maceiras - CEO Ignacio Fernández - CFO James O’Shaughnessy - Senior IR Manager Conference Call Participants Georgina Johanan - JPMorgan Richard Chamberlain - RBC Warwick Okines - BNP Exane Monique Pollard - Citi James Grzinic - Jefferies Marcos López Good morning to everybody. A warm welcome to all of those attending the present ...

Financial Data and Key Metrics - Net sales for Q3 2024 were $324.3 million, down 4.8% YoY from $340.6 million in Q3 2023 [22] - Same-store sales decreased 5.7% YoY, marking the second consecutive quarter of improved trends with a 320 basis points improvement versus the prior quarter [22] - Gross margin for Q3 was 31.8%, up from 30.3% in the prior year, but below expectations due to category and product mix shifts, particularly higher-than-expected penetration of firearms and ammo, which carry lower gross margins [24] - SG&A expense as a percentage of net sales was 30.8% ($100 million), compared to 29.4% ($100.1 million) in Q3 2023, reflecting the first quarter of cost reduction initiatives [25] - Net loss for Q3 was $0.4 million ($0.01 per diluted share), compared to a net loss of $1.3 million ($0.4 per diluted share) in Q3 2023 [26] - Adjusted EBITDA for Q3 was $16.4 million, slightly up from $16.2 million in the prior year [27] Business Line Performance - Fishing and camping departments, along with the gift bar category (optics, electronics, and cutlery), were comp positive for the quarter, with fishing up 13% YoY [9] - Firearms outperformed the adjusted mix in Q3, solidifying the company's position as a leader in this category [9] - Apparel and footwear underperformed, impacting gross margins due to lower sales and penetration in these high-margin categories [24] Market Performance - The company faced tough YoY comparisons due to unique events in the prior year, including footwear and apparel clearance events and a spike in firearms and ammo demand driven by geopolitical events [23] - The company is focusing on geographic micro-seasons and leveraging data and analytics to align inventory with regional demand [11] Strategic Direction and Industry Competition - The company is refining its merchandising and inventory strategy, including SKU rationalization and targeted promotions to align with seasonal demand [8] - Investments in IT systems and tools are expected to improve in-stock levels, gross margins, and inventory productivity [13] - The company is enhancing its omnichannel strategy, with e-commerce-driven sales showing positive results in Q3 [15] - A new omnichannel marketing campaign was introduced for the holiday season, focusing on gifting and value-driven shopping [16] Management Commentary on Operating Environment and Future Outlook - The company remains optimistic about growth potential and is focused on disciplined expense management and reducing inventory levels to generate positive free cash flow [19] - Gross margin pressure is expected to persist in Q4 due to promotional activities and a shift in product mix, but the company aims to improve margins in the following year [12][32] - The company is confident in achieving its full-year 2024 guidance, with net sales expected to be in the range of $1.18 billion to $1.2 billion and adjusted EBITDA between $23 million and $29 million [33] Other Important Information - Ending inventory for Q3 was $438.1 million, up from $446.3 million in Q3 2023, with a 2.5% decrease on a per-store basis [28] - The company expects to end fiscal 2024 with inventory below $350 million as it executes its holiday strategy and cleans up unproductive localized inventory [29] - Total debt at the end of Q3 was $154 million, with total liquidity of $151 million and $148 million available under credit facilities [30] Q&A Session Summary Question: Monthly comp trends and promotional response in Q3 [36] - Comps improved sequentially month-over-month in Q3, with more aggressive promotions to offset tough YoY comparisons [37] - Q4 comps are expected to be down 5-6% YoY, with adjustments for the 53rd week in the prior year impacting comparisons [38][39] Question: New promotional approach and marketing strategy [41] - Promotions in October focused on firearms and ammo, while November and December shifted to gifting and value-driven campaigns [42] - The company is leveraging digital marketing and data-driven insights to improve customer acquisition and brand awareness [44] Question: SG&A cost-cutting and future savings [45] - The company is investing back into store labor while continuing to explore cost savings in back-office functions [46] - SG&A is expected to remain steady in Q4 and into 2025 [47] Question: Gross margin trends and inventory management [51] - Gross margins were impacted by outperformance in firearms and ammo, as well as freight costs for holiday inventory [52] - The company is confident in achieving its year-end inventory and sales targets, with minimal discounting expected [54] Question: Tariff exposure and private label sales [55] - Direct exposure to tariffs is under 3% of sales, primarily affecting private label products [55] - The company is monitoring potential impacts on branded products and pricing strategies for 2025 [56] Question: Q4 gross margin and EBITDA guidance [59] - Q4 gross margins are expected to improve YoY due to reduced clearance activity, with EBITDA guidance implying sub-30% gross margins [59] Question: Omnichannel marketing campaign focus [61] - The campaign is primarily focused on bottom-of-funnel activities, driving e-commerce transactions and leveraging digital channels [62] Question: Hunting category performance and strategy [68] - Hunting faced headwinds from tough YoY comparisons, but firearms outperformed NICS on a unit basis [70] - The company is focusing on inventory cleanup and reinvestment in ammo to drive store traffic [72] Question: Consumer behavior and higher-end customer trends [80] - The company is targeting consumers more precisely through digital channels but has not seen a significant uptick in higher-end spending [80] Question: Firearms and ammo performance in Q4 [81] - The company is confident in outperforming NICS on a unit basis in Q4, with strong attachment rates offsetting margin pressure [82] Question: Holiday season progress and inventory management [85] - The company is tracking ahead of its 2019 model for holiday sales but remains cautious about the final two weeks of the quarter [86] - Inventory levels are expected to be managed effectively, with minimal clearance activity in January [88] Question: New store openings and format [91] - A new store is planned for late Q2 or early Q3 2025 in Arizona, with a standard 30,000 square foot format and focus on personal protection [91][93]

Financial Data and Key Metrics - Revenue for the six months ended October 31, 2024, was $30.9 million, up from $26 million in the same period of the prior fiscal year [11] - Gross margin increased due to a large space program completing a major milestone, with older lower-margin programs nearing completion [14] - Operating income for the six months ended October 31, 2024, was $5 million, compared to $3 million in the prior year [20] - R&D expenses increased to $3.1 million, or 10% of revenue, up from $1.3 million, or 5% of revenue, in the prior year [17] - Consolidated net income for the six months ended October 31, 2024, was $5.1 million, or $0.53 per share, compared to $2.8 million, or $0.30 per share, in the previous fiscal year [23] - Backlog reached an all-time high of $81 million, up from $70 million at the end of the first quarter and $78 million at the end of the last fiscal year [4] Business Line Data and Key Metrics - Revenue from commercial and U.S. government satellite programs was $17.7 million, or 57% of total revenue, compared to $9.5 million, or 37%, in the prior year [11] - Revenue from non-space U.S. government and DOD customers was $12.1 million, or 39% of total revenue, down from $15.1 million, or 58%, in the prior year [12] - Other commercial and industrial revenue was $1.1 million, down from $1.4 million in the prior year [13] Market Data and Key Metrics - The U.S. government space business accounted for more than half of the revenue and operating income for the first half of the fiscal year [5] - Less than 10% of the backlog is associated with proliferated small satellites, but this is expected to grow significantly over the next decade [6] Company Strategy and Industry Competition - The company is focusing on developing smaller, lower-cost products for the proliferated small satellite market, leveraging existing technologies [7] - R&D spending is expected to remain at approximately 10% of revenue to support product modernization and new business opportunities [8] - The company is pursuing Cooperative Research and Development Agreements (CRADAs) with NIST and other government laboratories to advance quantum sensor technology [10] Management Commentary on Operating Environment and Future Outlook - Management is cautiously optimistic about the government fiscal year 2025 budget being passed expeditiously, which would accelerate funding availability [10] - The company is well-positioned to participate in the rapidly developing quantum sensor market, with potential government funding expected in the next two quarters [9] - The backlog strength and strong working capital position of $23 million provide confidence in meeting operating and investing needs for the next 12 months [23] Other Important Information - The company hosted the Quantum Sensor Summit in October 2024, which was well-attended and received positive feedback [9] - SG&A expenses increased to 20% of revenue, driven by payroll-related expenses and costs associated with the Quantum Sensor Summit [15] Q&A Session Summary Question: Competitive Advantage in Small Satellite Products - The company's advantage lies in its history of designing high-quality products and its ability to adapt existing technologies for smaller, lower-cost satellite applications [28][32] - The company is targeting a "sweet spot" in the market, offering smaller, lower-power, and lower-cost products with good performance, though not as high as its premium offerings [29][30] Question: Risk of Small Satellites Cannibalizing Existing Business - While there is potential for small satellites to impact the traditional satellite business, the company believes there will still be demand for high-precision timing and frequency hardware in certain applications [33][34] Question: Revenue Growth and Backlog Correlation - Revenue growth is expected to track qualitatively with backlog growth, though not instantaneously [40] Question: Technical Challenges in Developing Small Satellite Products - The primary challenge is adapting terrestrial products to survive in the space environment, particularly dealing with radiation effects in low Earth orbit [43][46] Question: Government Budgetary Environment - The company is optimistic about the new administration and expects the government fiscal year 2025 budget to be passed expeditiously, which would benefit space-related funding [51] Question: Gross Margins and R&D Spending - Gross margins reached 48%, and R&D spending is expected to remain at approximately 10% of revenue for the foreseeable future [56][57] Question: Quantum Sensor Revenue - Quantum sensor revenue is not significant in the current quarter but is a focus area for future growth [58] Question: Non-Space Government Business Recovery - The company anticipates variability in non-space government business but expects significant growth, though timing is uncertain [75] Question: GEO Contract Prospects - The company expects significant work in GEO contracts over the next six to nine months, with proposals out to multiple primes [80] Question: Zyfer Unit Performance and R&D Priorities - The Zyfer unit is performing well, with R&D focused on smaller, cheaper products and integrating navigation capabilities in the absence of GPS [86][87]

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Financial Data and Key Metrics - Consolidated revenue for Q2 declined by 5% year-over-year, with net sales of $55.7 million [10][33] - The company reported an operating loss of $5.4 million, including $2.8 million in restructuring expenses, compared to a loss of $2.2 million in the prior year period [33] - Adjusted EBITDA for the 12-month period ending with Q2 was negative $1.3 million, compared to negative $240,000 in the prior year [36] - Net loss for Q2 was $5.6 million, or $0.45 per diluted share, compared to a net loss of $2.4 million, or $0.19 per diluted share, in the prior year period [35] Business Segment Performance Mattress Fabrics Segment - Sales for the mattress fabrics segment were $30.1 million, down 4.2% year-over-year but up 7.1% sequentially [38] - Operating loss for the segment was $1 million, a 70.7% sequential improvement from Q1, driven by restructuring progress [11][39] - The segment is expected to return to profitability in the second half of fiscal 2025 [11] Upholstery Fabrics Segment - Sales for the upholstery fabrics segment were $25.6 million, down 6.4% year-over-year and 10% sequentially [41] - Operating income for the segment was $615,000, down from $1.4 million in the prior year, impacted by lower sales and unfavorable foreign exchange rates [42] - Hospitality contract fabric sales remained solid, representing 35% of the segment's total sales [16] Market and Geographic Performance - The company has expanded its North American capacity with strong supply chain operations in Asia, including Vietnam and Turkey [13] - Foreign exchange rates in China negatively impacted Q2 results, but a favorable currency impact is expected in Q3 [18] - The company has fully ceased production in Canada and is transitioning to a sourcing model, improving margins [12][24] Strategic Direction and Industry Competition - The company is focused on restructuring to return to profitability, with the majority of restructuring activities expected to be completed by Q3 [12][19] - The mattress fabrics segment is a critical catalyst for recovery, with expected annualized cost savings of $10 million to $11 million [27] - The company is enhancing its product offerings, including the LiveSmart brand of performance fabrics, to meet customer demand for functionality and sustainability [15] Management Commentary on Operating Environment and Outlook - Management remains optimistic about the company's strategic approach and expects to return to positive adjusted EBITDA in the second half of fiscal 2025 [31][49] - The company anticipates continued pressure on sales in the residential upholstery fabrics segment but expects to achieve positive consolidated adjusted operating income by Q4 [49] - The restructuring process is expected to result in significant operational improvements and cost savings, positioning the company for growth as market conditions improve [32] Other Important Information - The company has $10.5 million in cash and $4.1 million in outstanding debt under its China credit line as of Q2 [45] - Capital expenditures for the first six months of fiscal 2025 were $1.6 million, with full-year projections of $3.5 million to $4 million [44] - The company expects to sell its Canadian facility in Q4, with net proceeds estimated at $6 million to $8 million [29][30] Q&A Session Summary Question: Market Share and Order Growth in Mattress Fabrics - The company is gaining market share in the mattress fabrics segment, driven by product innovation and strategic placements [54] - Positive momentum is expected to continue through Q3 and Q4, with new programs scheduled to launch [55] Question: Upholstery Fabrics Demand and Inventory Adjustments - The decline in upholstery fabrics sales is attributed to customers adjusting inventory levels due to soft industry demand, with some customers over-ordering in Q1 [59] - The company remains optimistic about the segment's potential, with strong customer interest in new products [58] Question: Contract and Hospitality Business Performance - The hospitality contract business is outperforming, driven by strong demand for hotel-related fabrics and window treatments, offsetting declines in office furniture sales [60][62] Question: Mattress Fabrics Restructuring Economics - The company expects annualized cost savings of at least $10 million from the restructuring, with significant operating leverage potential as sales grow [65][66] Question: Tariff Risks and Supply Chain Flexibility - The company is well-positioned to handle potential tariff changes, with a flexible supply chain and a strong U S manufacturing base for mattress fabrics [69][70][71] - The upholstery fabrics segment is largely insulated from tariff risks due to its asset-light model and global supplier relationships [73]