Unifi Q4 2024 Earnings Call Transcript

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August 22, 2024

There are 5 speakers on the call.

Operator

Good morning, and thank you for attending Unifi's 4th Quarter Fiscal 20 24 Earnings Conference Call. Today's conference is being recorded. And all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Speakers for today's call include Al Carey, Executive Chairman Eddie Engel, Chief Executive Officer A.

Operator

J. Eker, Chief Financial Officer. And during this call, management will be referencing a webcast presentation that can be found in the Investor Relations section of unifi.com. Please familiarize yourself with Page 2 of that slide deck for cautionary statements and non GAAP measures. And now I will turn the call over to Al Carey.

Operator

Al, the floor is yours.

Speaker 1

Thank you, Kathleen. Good morning, everybody, and thank you very much for joining us on the call today. I'm going to start with a brief but broad overview of our performance for Q4, see a couple of insights that come out for us. And then I'm going to turn it over immediately to Eddie and A. J.

Speaker 1

Who will provide you with the real details of the quarter. So the first insight was this broader textile and apparel industry sales are coming back a lot slower than we expected, but they are improving. And while the inventory to sales ratios at the retail level and for these brands are now close to the norms and at pre COVID levels, the customers are still very cautious about building back inventories and they're watching their cash and they're keeping an eye on what I'd call a sluggish consumer trend. But retail sales for apparel and furnishings for the first half of the year were growing at about low single digits. And if you factor in inflation, they're probably flat to slightly down versus a year ago.

Speaker 1

Our sales for the quarter for this Q4 are better than the previous quarters of 2024 and they're better than last year's Q4. Our EBITDA was $5,900,000 and it's substantially better than the last three quarters and better performance is attributed mostly to the quarter 2 and quarter 3 cost reductions that we told you about last time. So most of those cost reductions are now fully in place. Now the second insight to the quarter was we are seeing improved market share in North America despite the sluggish sales come back. And we're very close to booking sales in the new categories that we've told you about before, which are the beyond apparel categories.

Speaker 1

And those categories include home, military, automotive and industrial applications. And these sales will start to offset the low performance of apparel and also they'll give us improved mix as the margins on these products are a good bit better than the base apparel sales that we have. And the 3rd insight is that we've been working on innovation all through this period and we now have introduced to the marketplace, just this week, our textile take back introduction, our new revolutionary insulation products and additional layering of our REPREVE platform. And these products have been under development for several quarters and they're going to generate sales in calendar 2025. We won't see any of that in the next couple of months, but they will begin in 2025 and in 2026.

Speaker 1

And 2 of these products are very interesting, in particular, the ones that address the customer demand around circularity and also around reducing carbon footprint. So if I had to say how we feel about the first half of twenty twenty five, it will show improvement versus prior year, but it will be a gradual slower comeback, then the second half should show a more dramatic comeback. And I'd say we're feeling cautiously optimistic as we look out over the new fiscal year and we really believe that soon enough these customers that we have are going to have to start replenishing their inventories and they're also going to have to start preparing for the spring selling season. And I believe those inventories right now are quite low and they're below pre COVID levels. So we're going to continue to manage costs very tightly during this period.

Speaker 1

We're going to preserve cash until all this opens back up. And I think when it's all over, we'll be a better company than we were before all this. So let me turn it over right now to Eddie Engel, our CEO, and he'll take you through more the important details of the quarter. Eddie?

Speaker 2

Thanks, Al. And as Al just highlighted, we do believe that in most aspects of our business, Unify has finally begun to turn a corner and the operating environment is beginning to get closer to returning to more normal levels. And over the past year plus, we've been working hard to reposition our business so as to be able to respond quickly to an uptick in customer demand and that the results of those efforts have already become apparent in our financials this quarter as we saw solid year over year revenue and volume growth and a significant improvement in our margins. And we are also continuing see strong momentum across our segments and we recently announced some exciting new product innovations, which I will touch on in greater detail shortly. Turning now to Slide 4 for an overview of the quarter.

Speaker 2

During the Q4 of fiscal 2024, we reported $157,500,000 in consolidated net sales, which was up 4% year over year and 6% sequentially compared to the 3rd quarter. This improvement in net sales was largely driven by our Brazil segment, which has been performing very well recently. In addition, our operations in China have also been continuing to build momentum and contributed to our strong performance during the quarter. We are continuing to see the benefits of our Americas cost reset efforts, which is evident by the significant improvement in our gross margin and subdued operating expenses. We expect to see these efforts continue through the next few quarters as well, although it's worth noting that some of these savings will be slightly offset by inflation.

Speaker 2

With that said, we still believe we have driven sustainable efficiencies and cost discipline over the last year that our organization will continue to leverage into the future. Our sales transformation has also been progressing well and we have continued to see the benefits of our transformation efforts with gross profit during the quarter experiencing a $6,000,000 improvement on a sequential basis. This gives us confidence that our operating profit can continue to improve during fiscal 2025. I'll now provide a brief update on each of our business segments. In the Americas segment, while we are continuing to take market share, we did experience a bit of a slowdown due to some competitive shuffling and some customers pushing out orders for a few months.

Speaker 2

But we remain well positioned to take advantage of further improvement in the region as our continued efforts on beyond apparel initiatives are helping to offset the weakness in apparel programs. Our Brazil segment, as mentioned earlier, was our strongest performing segment during the Q4. The strong performance was driven by our ability to take price in the region, operate at full utilization and we have continued to benefit from the capture of additional market share following our main competitor who exited the region. In our Asia segment, we are continuing to see signs of recovery and we believe that we'll see stronger performance in the region during fiscal 2025 despite seasonally slower Q1. Turning now to Slide 5 for an update on REPREVE.

Speaker 2

During the Q4, REPREVE represented 34% of sales, a meaningful increase when compared to the previous quarter. This improvement in sales was largely driven by the positive recovery trends that have been seen in Central America as well as a moderate recovery in Asia. Looking ahead, we continue to believe that we will see additional improvements in our pre fiber business as we progress through fiscal 2025. This part of our business will be aided by the revenues we expect to see in calendar 2025 as we begin to see commercial activity due mainly to our recent innovation efforts from some new REPREVE product launches. On the marketing front for reprieve, we also achieved several exciting co branding placements this quarter, notably with Dolce Vita Footwear, part of the Steve Madden Group, incorporated reprieve into its products.

Speaker 2

Kate Spade featured REPREVE in a pajama line for Costco Canada and Teva launched an iconic version of their original universal sandal in a ReLU version, which contained REPREVE powered by our own textile take back program. Now as many of you are aware, if you've been listening to our calls over the last few quarters, our textile take back program aims to increase circularity in the production of textiles by transforming fabric waste into a recycled resin that in turn is converted into a pre fiber. Through this process, we are not only leading the transition for a more circular supply chain, but we are also helping our customers such as the ones I mentioned earlier meet their sustainability goals. Now staying on the topic of textile take back, I would like to spend some time on reviewing some of the new innovative reprieve products that we just announced earlier this week that are harnessing our textile take back program and already have the ability to be offered at scale. 1st, on Slide 6, you'll see some highlights of our new white reprieve filament yarn powered by our textile take back process that we will be showcasing at the Intertextile Shanghai Apparel Fabrics Convention next week.

Speaker 2

The new form of Repreve filament yarn is made of 50% textile take back waste and 50% recycled bottles, which is the world's 1st 50% textile waste filament yarn with a tracer and uTrust verification. The new offering is white, dyeable and available at scale now. On Slide 7, for our 2nd new product announcements, you can see that we've launched a totally new product offering, but still based on polyester fiber called Thermoloop, which is an installation solution that is designed for home goods, outdoor gear applications, things like sleeping bags and apparel such as winter jackets. What makes Thermolope so unique is that 50% of the fibers used to make it are from textile waste and we are launching this new product offering in black. The Thermoloop products were launched as 100% recycled content.

Speaker 2

What is even more exciting is that the Thermoloop padding product is the first of its kind to have a reprieve recycled polyester low melt fiber, which allows our customers to provide a wider range of sustainable offerings. Both Thermoloop and our new form of REPREVE filament yarn will be sampled by our customers throughout fiscal 2025. We believe we will begin to see some revenues and volume benefits from our new Filament yarn in the second half of fiscal twenty twenty five. And we'll begin to see the growth benefits from the Thermolope throughout fiscal 2026 supporting additional growth moving forward. Before I wrap up, I would also like to note that our Beyond Apparel innovations are continuing to grow and with conversations progressing with a number of customers in key end markets and we are hopeful that we'll be able to further discuss these in the near future.

Speaker 2

With that, I will now like to pass the call over to A. J. To discuss our financial results for the quarter.

Speaker 3

J. Muse:] Thank you, Eddie. As both Al and Eddie noted, we've continued to make great strides towards improving our business and we are well positioned to pivot to growth and stronger profitability as we move forward. Our focus has remained on keeping our variable expenses across both production and administrative functions low, and we've already begun to see a sustainable reduction in those expenses. As we've previously noted, we plan to reinvest these cost savings and increase profits in the key areas of our business that will drive innovation and margin expansion such as the 2 new REPREVE fiber products that Eddie just discussed.

Speaker 3

Turning now to our financial results. On Slide 8, you'll see our consolidated financial highlights for the quarter. Consolidated net sales for the quarter were $157,500,000 up 6% sequentially versus the 3rd quarter or 4% year over year, driven by our beneficial pricing actions, continued market share gains and some demand normalization in conjunction with improvements from our profitability improvement plan continuing to materialize. This greater performance also led to our gross profit seeing an improvement of more than 100% sequentially, marking our 3rd consecutive quarter of gross profit improvement. Turning to slide 9.

Speaker 3

In the Americas segment, net sales were sequentially flat and down 4% year over year, which as Eddie noted was primarily driven by a slowdown in spending and customers pushing out a few orders. However, with that said, the Americas segment did experience a significant gross profit improvement, which was driven by improved productivity in the region following holiday impacts in the Q3 of fiscal 2024. Slide 10 displays our Brazil segment highlights, which experienced net sales growth of 9% during the quarter on a sequential basis and almost 19% year over year. Our Brazil segment has continued to benefit from our ability to take price in the region, operate at full utilization and the capture of additional market share. On slide 11, the Asia segment saw net sales growth of 21% sequentially and over 17% year over year, driven by higher sales volumes in the period and improved market conditions.

Speaker 3

As Asia continues to recover, we remain well positioned in the region and our portfolio expansion will help drive improved performance for the segment in the future. Before passing the call back to Eddie for some closing commentary, I'll now briefly discuss our balance sheet on slide 12. During the quarter, we continued to focus on working capital management and cost controls, allowing for a better free cash flow situation in the quarter year to date periods and positioning us to remain focused on debt repayment. CapEx spend continues to be focused on maintenance levels and remains significantly lower than the prior 2 fiscal years, with fiscal 2024 coming in at $11,000,000 a multi year low attributed to the diligence of our various teams and operations. With our improved financial performance and our focus on managing our balance sheet, we remain confident that our business is well positioned for realizing profitable growth opportunities in fiscal 2025 and beyond.

Speaker 3

I'll now pass the call back to Eddie to take us through the last few slides of the presentation and make some final comments.

Speaker 2

Thank you, A. J. Let's now turn to slide 13 to discuss our forecast for the Q1 of fiscal 2025. As we look forward, we're having more positive conversations with our customers about their needs and destocking is clearly behind us and most of the industry, which will help as we anniversary some of the impacts of this unusual period. And looking specifically at the Q1, we expect to see our positive momentum push forward as we begin our new fiscal year.

Speaker 2

More specifically for the quarter, the Q1, which as a reminder is historically one of our slower quarters from a sales perspective due to seasonality, we are expecting the following: net sales between $147,000,000 $153,000,000 which at the midpoint would be roughly a 10% top line growth year over year We expect adjusted EBITDA to range between $1,000,000 $3,000,000 a significant improvement over last year's EBITDA loss. And we also expect to continue to keep a disciplined eye on capital expenditures and believe CapEx for the quarter will come in between $3,000,000 $4,000,000 Then in terms of our fiscal 2025 outlook, I'd like to provide a little more context on Slide 14. Our underlying momentum is rebuilding. So in fiscal 2025, we believe we'll see a return to more normal conditions, which will support top line growth in excess of 10% year over year. Further, we believe the proactive decisions we have made to control our costs and streamline our business will continue to show up in stronger profitability results next year.

Speaker 2

We expect EBITDA to be positive in every quarter of the fiscal year and see a path to a significant increase in gross profit, gross margin and adjusted EBITDA. Lastly, we've budgeted to keep capital expenditures contained and we are projecting that we'll see capital expenditures range from $10,000,000 to $12,000,000 for fiscal 2025. Moving on to Slide 15, you can see that some of the key strategic initiative items we're focused on to maintain our momentum and expand our business. While we're excited about our opportunities in fiscal 2025, I want to be clear that we're focused on pivoting to growth for the foreseeable future. Despite the challenging conditions over the last year and a half, we've never stopped investing in our business.

Speaker 2

We've got new leaders in key areas to invigorate and position the business for sustainable profitable growth. We also invested heavily in innovation as we talked about today as it's the engine that helps us grow our business globally. It's our belief that we have only scratched the surface of our potential as demand for sustainable solutions continues to be desired by our customers' customers. Our reprieve offerings continue to gain traction in terms of name recognition and assortment. And our Beyond apparel initiatives will help us further diversify our product portfolio by offering new avenues for innovation and growth.

Speaker 2

Finally, we have just started to leverage our textile take back process at scale with Thermoloop and our new Reprieve filament yarns powered by textile take back. And we have a pipeline of future textile take back innovation opportunities that we will share with you over the next several quarters years. And before I end our remarks, I want to note, collectively, we've been through a lot over the last few years. And this team the global team has risen to the challenge to not only help streamline our business, but also set it up for long term success. And I want to personally thank the whole team again for all of their hard work.

Speaker 2

With that, we would now like to open the line for questions. Thank you. Operator?

Operator

Thank you. We will now begin the question and answer session. And your first question comes from the line of Anthony Lebiedzinski. Your line is now open.

Speaker 4

Good morning and thank you for taking the questions. So certainly nice to see the improvement in sales and profitability during the quarter. As you pointed out, Brazil showed the most improvement from a top and bottom line perspective. Just wondering, what is your confidence level as far as being able to sustain that type of improvement going forward?

Speaker 2

Specifically in Brazil, we actually feel very confident in the demand signals we're getting. We expect to run full fiscal year. There will be some margin pressure as the raw materials inputs normalize and our catch our margins could catch up with the new higher input costs. But for the most part, we do expect to remain strong and have a much better EBIT performance in Brazil this year versus last year.

Speaker 4

That's great to hear. And just to follow-up as far as the raw material costs, Are you seeing that in all regions? Or is this specifically to Brazil that you referenced to?

Speaker 2

It's specifically in Brazil due to the supply chain that we have. Most of the inputs come from Asia and the freight costs, the international container costs have risen significantly, which has given us a pricing opportunity.

Speaker 4

Understood. Okay. And then as far as in other regions, what are you seeing from a cost perspective for raw materials?

Speaker 2

Raw materials have been predominantly, for the most part, flat. Got it. Okay. I'm concerned about that area.

Speaker 4

Got you. That's good to hear. Okay. And then, so in your conversations with your top customers in the Americas, obviously, your largest region, What are you hearing from them as far as when we could see improved results?

Speaker 2

Yes. When we look across our top customers in all reasons, actually, not just the apparel segment, they are telegraphing to us that our fiscal Q1, the July through September period is going to be a little slower than they had expected. But they are, I think, almost to almost all of them are expecting an uptick in October. We have seen a significant improvement already in Central America, our business down there. And maybe they're leading indicator, but we do expect to see that business improve as you move through the next few months.

Speaker 2

In the U. S. Specifically, there are some markets that we sell into that traditionally they are slower in the summer. As we move into the late September, early October period, things will get back to a more normalized higher run rate. But they're generally speaking positive.

Speaker 2

It's very different from what it was this time last year.

Speaker 4

Got you. Okay. So it sounds just like normal seasonality as far as what's impacting that. Okay. And then in terms of the new product offerings that you announced earlier this week with the white dyeable filament yarn and ThervaLoop.

Speaker 4

Just wondering, how meaningful could these new products be? I know you talked about really calendar 'twenty five as far as seeing a benefit, but just wondering if you could if there's any way you could put a number or just give more details as to like what's the opportunity for those new products?

Speaker 2

Well, I personally, I'm incredibly excited about what we've been able to bring to the markets. We've been asked for several years now how do we make the supply chain more circular. And on top of that, there's pending legislation in the EU that will require inputs to recycled inputs content to be not just from bottles, but also from textiles. So we believe we've hit the right note with a 50% content of textile tape back, but 100% recycles. We believe based on the messaging we've been getting from the brands that we are right on the sweet spots for them to be able to communicate.

Speaker 2

I've actually spent time personally talking to brands in Europe and in the U. S. And from based on their reaction and their reaction is different depending on the brand, but based on the some reactions of all these brands and retailers, we think we've hit on a nice balance of circularity and sustainability because some customers are based on our focus on carbon reduction, some customers are based on fossil fuel consumption depletion and this provides the answers to both. So and I think what's really exciting Anthony is the fact that one of these products is a new product line for us, insulation, and it allows us to call directly on the brands and we can get specked in as a solution for providing a recycling content product.

Speaker 4

Got you. Yes, that sounds very good. So as far as I know it's hard to say for sure probably as far as the timing of this pending legislation, but I mean as far as what you know, like what's the earliest that you think that you could actually see that going through because I think that could be meaningful to you guys?

Speaker 2

I think in the second half of this fiscal year, the January through July period, we'll start to see we'll be sampling now, but we'll start to see meaningful production orders. And really at the beginning of our fiscal 2026, 12 months from now, 10 months from now, it will be in our budget and it will be visible from a revenue perspective and margin perspective. But we are planning for the next 6 months to fulfill the sampling needs of all the customers so they can figure out how and when to put it into their programs.

Speaker 4

Got you. Okay. And then as far as the Beyond Apparel initiative, I know that's something you guys have talked about certainly in the past. As far as thinking about this going forward here, are you actually gaining some new customers? Are you actually seeing more purchase orders to come in?

Speaker 4

And maybe if you could just provide a little bit more detail on the Beyond Apparel initiative, that would be helpful.

Speaker 2

Yes. We have talked about Beyond Apparel a lot in our calls really last 12 to 18 months. We are seeing traction. We are seeing commercial orders. And I believe by the in the next call, we'll be able to outline some of the revenue impacts that we're going to see from these initiatives.

Speaker 2

Right now, I can't give specific details, but I'm very confident that by in the October call, we'll be able to outline the progress we've made and what that means to our business. But we are well on our way to making it part of our business. Thanks.

Speaker 1

Anthony, this is Al. I just wanted to add something to Eddie's comments. I'd say that in fiscal 2026, we'll see an impact and probably a little bit in the end of this fiscal year. But the thing that's exciting is the products that Eddie's talking about, the new ones with textile take back and the insulation, they have stronger significantly stronger margins in our base business. And then if you go to the beyond apparel, I know we've been talking about it for a long time, but one of the new pieces of information is to get qualified for some of these customers, boy, it takes a long time for qualifying the quality of your product, the timing and to get contracts signed, but those are happening.

Speaker 1

And that's another one that has significantly better gross profit margins than the base business that we're into today. So I think going forward, we'll be less dependent. We're still going to sell apparel want to be in the apparel business, but we'll be less dependent on it. And this new textile take back is a real boost in the environmental sustainability story. So I wish these were going to show up this quarter.

Speaker 1

They won't, but they will be probably by the end of the fiscal year.

Speaker 4

Okay. That's great to hear and I appreciate the comprehensive answer. So I guess my last question, just to follow-up as far as the margin differential. Any way you guys could quantify or give some more additional color as far as what the margin difference you think will be for the new products versus the legacy products?

Speaker 3

Sure, Anthony. It's A. J. Thanks for the questions and thanks for joining this morning. In general, we're seeing that as in general double what we see from our base business.

Speaker 3

Certainly, the base business is constrained, especially in the Americas right now with fixed cost absorption and not getting the full volumes in that we've been chasing for several months now. So those margins are naturally suppressed, but you've seen those in the past in the low double digits, somewhere between 8%, 12%, 15% that we've been able to perform in the better years. So with these new products, as they have some innovation underlying those and we're able to really key in on what customers need with the new products. We're able to see double the margin there in many cases.

Speaker 4

All right. Well, that's great to hear and look forward to seeing the progress that you guys will be making this year. So thank you very much and best of luck.

Speaker 1

Thank you.

Speaker 3

Excellent. Thank you, Anthony. Thank you, Anthony.

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