Q3 2022 Unifi Inc Earnings Call
Yes.
Ladies and gentlemen, thank you for standing by and welcome to unify third quarter fiscal 2022 earnings conference call. At this time, all participants lines are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
A question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your speaker today aging acres Vice President of finance. Thank you. Please go ahead.
Thank you Andre and good morning, everyone on the call today is al Carey Executive Chairman at Ingalls, Chief Executive Officer, and Craig <unk>, Chief Financial Officer. During this call management will be referencing a webcast presentation that can be found in the investor Relations section of our website at unify Dot Com management advises you that certain statements included in today's call.
There will be forward looking statements within the meaning of the federal Securities laws management cautions that these statements are based on current expectations estimates <unk> projections about the markets in which Unifi operates these statements are not guarantees of future performance and involve certain risks that are difficult to predict actual outcomes and results may differ materially from what is expressed forecasted or implied.
These statements you are directed to the disclosures filed with the SEC on unifies forms 10-Q, and 10-K regarding various factors that may impact. These results also please be advised that certain non-GAAP financial measures such as adjusted EBITDA adjusted EPS adjusted working capital and net debt may be discussed on this call I will now turn it over to Al Carey.
Thanks, a J good morning, everybody and thanks for joining unifies third quarter conference call.
After a few comments about the state of the business I will then turn it over to Eddie Ingle and Craig <unk>, who will fill you in on the Q3 performance for the company and then we'll move to our usual Q&A session.
I would say most of US on this call are operating in some of the most turbulent times that I can remember and.
<unk> some of these macro headwinds such as pandemic inflation and labor shortages and now Theres a whole new round of challenges such as the war in Ukraine, and the Covid Lockdown in China.
But I would say despite all of this our team at unifies remained agile and trying to work around these challenges Thats why im happy to see that our Q3 revenue is right on our forecast of $201 million and our adjusted EBITDA of $12 $2 million is also a little better than forecasted and we had to offset.
Some new costs that came in over the course of the quarter.
The $201 million on Q3 revenues are going to allow us to deliver the full year of 800 million plus on revenues.
And that's a significant milestone for us at unified.
Youll recall back in Q3 that we were working on two pretty significant challenges that was in North America, one was getting pricing to offset the raw material cost and then the second challenge was the labor shortage that we had in North America, while both I would say still are a challenge.
We've seen improvement in Q3 and going forward into Q4, we will see more improvement as well.
These lockdowns in China began to be a headwind at the end of third quarter, they're going to continue to impact us in the fourth quarter, but the underlying mid and long term demand trends are very strong for our Asia business.
So we feel positive about that when it finally, when the Lockdowns finally end.
In Brazil, while were seeing some margin normalization that we spoke to you about last quarter.
Happy with the current performance in the region, and we expect strong demand and market growth opportunities and reprise begins to become more of a factor in.
In Brazil, which it hasnt been in the past.
On Repreve.
This growth.
We were at 36% of our mix in the quarter were at 38% year to date.
And I think this is driven by the increased attention to sustainability and recycled products from our customers. Many of our customers now are looking at us as a very good partner to help them deliver their sustainability targets most of them have significant targets that come due in 2025. So this trend is not only going to.
Continue, but I think it probably accelerates in the upcoming quarters.
So as I look out over the next quarter.
Yes, we do have our work cut out for us with the China, Covid Lockdowns, but we have a lot to look forward to.
Unify our labor situation in North America is getting better we have been able to pass along pricing.
Our repreve momentum is good.
And despite Asia Lockdowns and that market has very strong demand and we think thats going to come back fairly quick.
And all of this makes us feel confident about our future and as we take a look at our our goals that we laid out during investor day, we continue to be very optimistic about that so I would say we are beginning to see some positive momentum building.
So with all of that let me turn this over to Eddy who will now take you through some of the details of our quarterly performance.
Sure.
And good morning, everyone. Our third quarter results were in line with our expectations.
We are pleased with bank of Ireland. Despite some of the persisting challenges we're facing in today's operating environment and I'm proud of and encouraged by the way that everyone on a unified team continues to show resilience and I want to thank all of our employees for their ongoing hard work and commitment.
During the quarter, we produced strong sales and profitability figures and saw a sequential margin recovery into several pockets of the business.
The underlying demand paired with our continuous improvement on the U S linked crumbs gift.
<unk> gives us confidence going forward and I'm excited for what lies ahead.
Moving to the slide presentation, we will begin on slide three with an early view of the quarter.
For the second consecutive quarter, we achieved sales of over $200 million.
An increase of 12, 3% on a year over year basis, resulting from strong demand and proactive pricing initiatives.
This figure it could have been another 1% to 2% higher but we're not still somewhat labor constrained in the U S and without mentioned, we are making solid progress on these fronts.
While some production inefficiencies remain because our improving labor metrics have not yet been reached historical norms. Our recent actions have generated noticeable improvement in our yields which is evident in our sequential margin profile.
And we will continue to strive towards improving the situation and achieving optimal thresholds in order to continue to satisfy the needs of the market and of course our customers.
Remain optimistic in our ability to do so going forward.
As we communicated in our last earnings call deflationary environment impacted domestic margin performance and pricing levels once again.
Raw material costs and inflation continues to be headwinds and unanticipated cost increases continued during the third quarter.
But we remain confident in our ability to adjust prices responsibly and maintain a margin profile that keeps us on a trajectory towards our short term term and long term targets.
We have further price increases schedules in the fourth fiscal quarter in response to the cost pressures that we experienced in the third quarter.
While the impact from COVID-19 subsided domestically.
Fortunately, we cannot say the same for Asia.
As we're all aware Chinese zero code policy has impacted the economy and supply chain in the Shanghai region.
And our thoughts go out to the health and well being of everyone impacted.
Given the lockdowns across China, including some of the ports sales and profitability for the Asia segment will be negatively impacted in the fourth quarter. However.
However, I want to be clear.
<unk> has not faded and is waiting to be filled as many industries are similarly impacted.
Our team in Asia is very resilient and I'm encouraged by their optimism that the business environment will open up quickly once the restrictions are lifted.
I'd also like to state that while the Russia, and Ukraine conflict is creating volatility in major markets.
Other than the impact on crude oil pricing and the resulting increase in petrochemicals. We have had no direct impact on our operations as a result of this geopolitical events.
In Brazil, we have maintained a strong market position, but we are starting to see some of the expected margin normalization begin to take effect from the exceptionally strong environment in the prior year period.
The business remains strong and we are looking forward to seeing volumes grow as we move through the next few quarters.
Our new texturing technology, both in place and forthcoming will serve as the volume growth driver.
Now I'd like to move on to slide four to discuss reprieve.
Revenues from our pre products represented 36% of net sales during the quarter compared to 34% a year ago.
On the marketing front, we kicked off a busy quarter with a stronger pre presence at the Wm Phoenix Open golf tournament again.
The activation was accompanied by a national television AD, featuring <unk>, 32nd commercials, which showcased the repeat process.
Solutions loosened COVID-19 restrictions allowed us to increase Repreve mobile tour stops.
Delights included Activations at the Los Angeles Marathon in partnership with Asics and at the Pact trial men's basketball tournament in Las Vegas.
The latter is part of our founding sustainability partner, a pact trial teen Greens pumps shipped.
Beyond events, we have focused on increasing brand partnerships across our digital and social media channels.
<unk> was recently featured on the Instagram feeds of Speedo, My Duca and beyond yoga among others.
Levi's brand beyond Yoga is made in the USA and committed to sustainability and our relationship has mutually beneficial synergies.
We'll of course continue to see cap brand partners that enable us to amplify the Repreve story.
Our <unk> momentum continues beyond apparel with a number of new co branded initiatives such as in the home space. We have secured a new throw program with Jcpenney private label industries.
And <unk> recently mentioned there were pre collection of soft cooler bags and a press release announcing their intent to recycled 30 million post consumer plastic bottles by 2025.
And Dickies has added Repreve automotive seat cover and steering wheel cover should their range of automotive accessories, which are available at Walmart locations nationwide.
Overall I have to say it was a very busy quarter for our marketing team and they continue to do an outstanding job in helping us increase the repreve brand across the globe.
And it's especially exciting to see the way our customers use the repreve brand to differentiate their product a very physical way on the packaging.
We will continue to co branding and customer engagement can be confidence just like our recent indicators of business momentum now.
Now I'll pass the call over to Craig <unk>, our CFO Greg.
Thank you Eddie and good morning, everyone to Echo the sentiments from Al <unk> I'm pleased with our sales and profitability performance consistent with our expectations, especially in an environment with several moving pieces all around the globe.
Demand for our products continues to grow and our management team is keenly focused on achieving a healthy balance of both short term and long term goals.
As we look at the quarter from a high level, we can see that we accomplished our short term sales and profitability goals for the third quarter and maintain the underlying business momentum as we implemented responsive selling price adjustments in may positive step changes against our recent U S labor challenges.
Beyond our operating income and specific to Brazil, you may recall that in the fourth quarter of fiscal 2021, we recognized an estimated benefit from the expected recovery of non income taxes in Brazil, and the gross amount of $9 $7 million.
During the just completed quarter, we reduced the estimate in connection with additional clarity and review of the recovery process. During the months following the associated Brazil Supreme Court decision Accordingly.
Accordingly, $815000 of recovery of non income taxes net reflects the impact of slightly lowering the estimated benefit of recovery.
This amount has been included in our reconciliations of adjusted EBITDA and adjusted EPS within the earnings release consistent with our treatment of the same matter in the fourth quarter of fiscal 2021.
As we look below the pretax income line the headwinds that Andy outlined for our Q3 and Q4 have impacted our effective tax rate due to a decrease in overall U S based earnings and we have not been able to fully benefit from certain U S tax attributes.
This brought our effective tax rate slightly above the expected range for Q3 and will extend into Q4.
Let's turn to slide five of the webcast presentation.
Consolidated net sales increased 12, 3% from $178 9 million to $200 8 million and.
The increase was primarily driven by response and selling price adjustments, partially offset by volume shortfalls.
For the polyester segment performance was muted by the U S labor pool challenges Eddie mentioned earlier.
The price and mix change demonstrates the selling price adjustments that had been made over the last several months in response to rising input costs. Although we are still working to fully normalize the portfolio for todays cost levels.
In Asia sales volume was challenged during the month of March 2022 by the beginning of the current pandemic Lockdowns in China in proximity to our Asian operations for.
For Asia January and February experienced growth over the prior year, but March volume stagnated.
Although inflation in Asia has been calmer than the U S sales prices in Asia are still increasing accordingly.
In Brazil year over year price levels, followed market dynamics and inflation. As this segment continues to exhibit strength driving a price mix benefit of 19, 1%, although lower volumes were the result of a comparatively strong quarter in the prior year.
Nylon exhibited stability with higher sales following the increase in raw material costs.
Turning to slide six of the quarterly gross profit overview. The polyester segment experienced decline in gross profit and weaker gross margin percentage were attributed to the U S labor and input cost headwinds that we mentioned during our last conference call.
When comparing Q3 fiscal 2021 to Q3 fiscal 2020 to input costs and less labor challenges each represent about half of the total gross profit decline of $3 $3 million.
The Asia segment maintained a strong gross margin profile as underlying demand for sustainable products continues.
The volume shortfalls in the month of March 2020 to Asia due to the Covid related Lockdowns had a limited impact on this segment's profitability.
However, the impact from Lockdowns will be evident in our business and will become the biggest headwind we will face in the fourth quarter of fiscal 2022, and accordingly. This has been factored into our updated guidance for fiscal year 2022.
In Brazil, the gross margin rate include some of the expected normalization of.
Brazil remains the segment with the highest gross margin as a percentage of sales and is an important contributor to the success of units by both currently and in the future.
Beyond the year over year gross profit challenge changes it is important to observe the sequential quarter change is presented on slide seven.
We are proud of the progress we have made sequentially in the polyester and nylon segments from the December quarter.
Polyester segment, showing an improvement of over $3 billion in gross profit.
As Andy highlighted our focused efforts are starting to pay off and we are expecting continued gross margin improvement during the remainder of fiscal year 2022 and into fiscal year 2023.
Moving on to slide eight which provides a brief update on our balance sheet and capital allocation priorities.
We ended the third quarter with $18 $5 million borrowed against our ABL revolver, which had an availability of $65 million as of March 27 2022.
Our balanced approach to capital allocation, we expect to continue to invest in the business to drive innovation and organic growth.
Maintained a strong balance sheet and remain opportunistic with share repurchases and or M&A opportunities.
As noted on this slide and as we described in our press release, we spent $1 million to repurchased 50000 shares under the previously announced share repurchase program during the third quarter.
For a total of $2 $2 million and 101500 shares in fiscal 2022 year to date.
Following that activity $45 $8 million remains available for repurchases under the current program.
I will now pass the call back to Eddie to take us through the last slides of the presentation and make some final comments.
Thank you Craig.
Before we conclude today's call I'd like to finish with slide nine of the presentation and discuss our outlook and expectations for the remainder of the fiscal year.
As we have highlighted in this call.
Any numbers have exceeded our expectations and leading us to increase our previous topline outlook for the fiscal year 2022.
Still we must continue to work through all of the global uncertainties, including ongoing labor pool constraints in our U S operations.
Inflation in raw material costs at all locations.
COVID-19, lockdown impact in Asia.
For the full year fiscal 2022, we expect sales reached $810 million or more representing an increase of 21% or more from fiscal 2021 revenues.
We are lowering our outlook on adjusted EBITDA to range between 54 and $57 million.
Due to the recent and ongoing Covid related Lockdowns in Asia on renewed global volatility.
Our capex outlook should fall in the range of 40 million to $42 million.
Lastly, we issued longer term targets during our Investor day in February I want to highlight that we remain on track to achieve our previously stated $1 $1 billion or more revenue target by 2025 comprised a 50% we're pleased fiber sales.
We remain confident about the momentum and growth outlook for the Repreve brand, enhancing our margins and profitability and helping us achieve $110 million or more in adjusted EBITDA by fiscal 2025.
Sustainability is what separates us from our competitors and is the driver of our growth.
Our segments are growing the recycled competition and demand continues to be robust for recycled products with this growing market and our current initiatives taken to increase our margins and operations unify is set to close 2022 on a positive note while setting up the company for long term success.
We'll now open the line for questions. Thank you.
As a reminder to ask a question. Please press star followed by the number one on your telephone keypad again that is star then the number one to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of Chris Mcginnis from Sidoti <unk> Company. Your line is open.
Hi, good morning, Thanks for taking my question.
Just in relation to the impact of Asia, I guess, just how much in revenue is there a way to think about how much that impact is going to be.
Just given the stronger trends there and then also is there.
Any conversations about shifting maybe supply chains.
That could benefit you if it goes to Central America or another region. Thanks.
Yes, thanks, Chris for joining us today there is.
There is uncertainty around how much it's going to impact us.
And part.
A lot of our business and our Asia segment actually is not in Asia not in China.
So out of China.
So we are expecting.
A significant shortfall in revenues.
In April .
We do exceed this we do see this improving the shortfall reducing as we move through May and June of this fiscal quarter, it's hard to determine exactly how much.
The longer term Youre question is interesting around shifting supply chains, we are.
Having conversations with several big brands around.
What is the possibility of moving some of this volume to two Central America, which will help us long term in this region of course I'd like to remind you that the volumes of polyester in China are so large.
Is that any small movements towards Central America would make a big difference to our central American operations. So.
I think the world is probably pausing a little bit to see how quickly the zero copay policy will impact.
By change.
Note that with all of the geopolitical.
Noise, that's going on everybody is rethinking.
Moving products potentially out of concentrations our business in China into some other regions, but it will take time.
Sure.
I appreciate that and then I guess just thinking about that.
Do you need more investment in Central America, or just how is that.
How are your assets their position.
Or what could be some some stronger growth.
Yes, So we announced we were more clear in our Investor day in February .
Where we announced we are investing in all regions the Americas, including Central America. So we are well placed with the investments that are undergoing to capture greater market share and greater volumes in that region.
Great I appreciate it thanks for taking my questions and good luck in Q4.
Thank you thanks, Chris.
Your next question comes from the line of Dan Moore from CJS Securities. Your line is open.
Hi, This is stefanos crist, calling in for Dan how are you.
Okay.
So first what are the gross margin levels implied in both Asia, and Brazil, and your revised Q4 guidance and then when do you expect those will start to improve particularly in Asia.
Yes, I would say this is Craig I would say that the gross margin levels implied for Q4 for Brazil are very close to where we're at for the just completed Q3 for Brazil and that business has had its peak gross margins in Q3 of last year.
And the quarter. We just completed we think thats a pretty representative amount of gross margin that we should see from that business in Q4, and Asia definitely our expectations for the gross margin percentages pretty close but lower than what we just completed this year or excuse me this quarter. So as we finish out the fiscal year.
<unk>.
At much lower sales level should generate.
I have a little bit lower gross margin profile still profitable for sure and we're fortunate that our our business there where were not owning manufacturing assets and resources is definitely kept us.
Away from a significant pull down in gross margins. So we do think that the product will get out we'll have a good margin profile.
But not quite as good as if we had been at a full level of sales without the cobot market.
Got it. Thanks, and then can you just give us an update on the labor shortages, which is impacting margins in the polyester segment in the back half of last year.
Just what steps you've taken to alleviate that.
I guess, the expected cadence for margins and poly going forward.
Yes.
On the call earlier.
We are still experiencing labor challenges.
But not to the same extent that we had in Q2.
There's been a lot of things.
Hi, more training trainers, we have changed our onboarding process, we have moved to a team approach too.
Change.
Hi.
We really focus on more of the group work and the efficiency of the machines rather than the individual contributors.
We have done some.
Labor.
When it comes to things around labor to really understand what are their needs and we're getting some loud and clear Sir.
We did see an impact.
And productivity in Q3, but we didn't see the impact that we had in Q2 around our efficiencies and yield losses. So we definitely saw improvements as we move through Q3, we are seeing improvements in.
In April better than March so, it's a long journey for us we see it as something we're going to have to continue to invest time and money in but certainly not in the situation. We were back in Q2, our fiscal Q2. Thank you.
I think we lost 10 points of volume growth in North America in Q2, it looks like about 5% in <unk>.
In Q3, so it improved yes.
I appreciate the color. Thank you.
Youre Welcome. Your next question comes from the line of Marco Rodriguez from Stonegate capital markets. Your line is open.
Yes, hi, good morning, everybody. Thank you for taking my questions.
I was wondering if I could follow up on a couple of those questions that were just previously asked here mainly on Asia.
If you can maybe kind of help us understand a little bit more perhaps amy from a percentage standpoint.
How much of that business over there is China.
And if you can help us understand if the revenue or the volume.
Are being impacted in China.
Are they completely shut down is there some shipments that are going out and any sort of additional color. There. So we can kind of think through the revenue impact in Q4.
Yes, I'll take this call. Thank you Margaret.
The whole country of China has not shut down although there are.
Any restrictions beyond Shanghai, Shanghai is where the real problem is the challenge for us in China, Shanghai is actually getting some some of our export patterns apps, but most of the textile production facilities.
Or in other regions, such as Suzhou where are <unk>.
Commercial operations are so.
No.
The challenge we've had is that.
<unk> as when Shanghai late March and early April really started locking down some of the other provinces around Shanghai started.
Creating more restrictions so they didn't get into the same situation in Shanghai.
At this time, it's very hard for us to determine exactly how much that quarter is going to be impacted so that's why we're reticent to give you the exact number.
But it will be significant and as Craig said, we're not expecting the margin to change, but we are expecting volumes to be.
Much lower than what we had forecasted <unk> been growing the China revenues by 15% a year for the last several years.
This is a pause in growth so we're not going to see growth and we're going to see some decline Q4 is expected to be a really fantastic quarter for us.
Not going to be but the exact margin.
<unk> volume reduction.
Determined right now.
And Marco this is Craig I'll just add on.
In a typical or normal Q4, we would see for Asia, we would see a nice growth because that Q3 is impacted by the Chinese new year. So just to put it in perspective, usually we would see Q4 increase over Q3 somewhere between 10% to 15% somewhere in that range.
But now as Eddie's, saying, we're definitely expecting a a reduction and again I think we can say, it's going to be 20% to 30% or maybe more we don't really know and that's why we did have to range out not only the revenue guidance was not as specific as we otherwise would have been able to give.
It's also one of the reasons, we had the range out the EBIT guidance, a little bit more than we normally would.
Understood very helpful and is there any sort of.
Thinking through perhaps trying to shift.
The supply that you do have access to it sounds like at least in China to different ports that may not be.
Impacted such as Shanghai.
Yes, we arent dingo has a port that's it's not fully locked down.
We're doing some.
Our things like putting containers on.
The river to float DANZ in Ningbo.
To get our products out the door.
You're right.
If they're lifting our team in China are doing an amazing job.
Working around all these restrictions whether it be local very very localized restrictions.
Our customers.
<unk>.
They are screaming for yarn.
And we are doing everything we can to get it out there. So we don't have we don't have a supply issue right now in Germany and China.
We do have an issue around starting to getting some of the products to the customers.
That helps.
Very helpful.
In terms of the labor issues that you've seen some pretty nice improvements sequentially and I understand the admissions on longer process a longer focus for you guys can see those improvements there, but can you maybe talk a little bit about your expectations as far as what sort of sequential improvement you might be thinking.
About next quarter, and then how you sort of see that playing out into fiscal 'twenty three.
Yeah.
I don't have a crystal ball, obviously, but the work that we're doing.
Around onboarding around engaging with our employees.
Rams, putting in different types of training programs around our focus on machine efficiency and not the individual contribution.
All of that is helping and we're seeing that actually.
Bear fruits.
What we also are doing as you know is putting in our new Evo technology, which is improving our.
Our productivity because it's less labor intensive.
So we're expecting.
Another two quarters probably.
Improvements.
Our productivity.
We're hoping by the end of second Q2.
Fiscal 'twenty three by the end of December to see really meaningful impact on our productivity and our retention rates with our employees.
Our expectation.
We'll have to wait and see.
Okay, great. Thank you guys for your time really appreciate it.
Thank you thanks Mark.
And there are no further questions at this time I would now like to turn the call back to our speakers for closing remarks.
Thanks, RJ and thank you everyone for participating today, our next earnings release for the fourth fiscal quarter ending July three 2022 is tentatively scheduled for Wednesday August 10th after the close of the market with a conference call to follow the next morning Thursday August 11 at 830, a M. Eastern time, Thanks again for <unk>.
Joining the call.
Ladies and gentlemen, this concludes today's conference call. We thank you all for participating you may now disconnect.
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Ladies and gentlemen, thank you for standing by and welcome to unify third quarter fiscal 2022 earnings conference call. At this time, all participants lines are in a listen only mode.
After the speaker's presentation, there will be a question and answer session. So I asked a question. During this session you will need to press star one on your telephone.
Today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today.
<unk> group Vice President of Finance. Thank you. Please go ahead.
Thank you Andre and good morning, everyone on the call today is al Carey Executive Chairman at Ingalls, Chief Executive Officer, and Craig <unk>, Chief Financial Officer. During this call management will be referencing a webcast presentation that can be found in the investor Relations section of our website at unify Dot Com management advises you that certain statements included in today's call.
We will be forward looking statements within the meaning of the federal Securities laws management cautions that these statements are based on current expectations estimates <unk> projections about the markets in which Unifi operates these statements are not guarantees of future performance and involve certain risks that are difficult to predict actual outcomes and results may differ materially from what is expressed forecasted or <unk>.
These statements you are directed to the disclosures filed with the SEC on unifies forms 10-Q, and 10-K regarding various factors that may impact. These results also please be advised that certain non-GAAP financial measures such as adjusted EBITDA adjusted EPS adjusted working capital and net debt may be discussed on this call I will now turn it over to Al Carey.
Sure.
Thanks, Hey, Jay Good morning, everybody and thanks for joining unifies third quarter conference call.
After a few comments about the state of the business I'll, then turn it over to Eddie Ingle and Craig <unk>, who will fill you in on the Q3 performance for the company and then we'll move to our usual Q&A session.
I'd say most of US on this call are operating in some of the most turbulent times that I can remember and experiencing some of these macro headwinds such as pandemic inflation and labor shortages and now theres a whole new round of challenges such as the war in the Ukraine and the Covid Lockdown in China.
But I would say despite all of this our team at unify has remained agile and trying to work around these challenges that's why I'm happy to see that our Q3 revenue is right on our forecast of $201 million and our adjusted EBITDA of $12 $2 million is also a little better than forecasted and we had to offset some.
New costs that came in over the course of the quarter.
The $201 million on Q3 revenues are going to allow us to deliver the full year of 800 million plus on revenues.
And that's a significant milestone for us at unified.
Youll recall back in Q3 that we were working on two pretty significant challenges that was in North America, one was getting pricing to offset the raw material cost and then the second challenge was the labor shortage that we had in North America, while both I would say still are a challenge.
We've seen improvement in Q3 and going forward into Q4, we'll see more improvement as well.
These lockdowns in China began to be a headwind at the end of third quarter, they're going to continue to impact us in the fourth quarter, but the underlying mid and long term demand trends are very strong for our Asia business.
So we feel positive about that when it finally, when the Lockdowns finally end.
In Brazil, while were seeing some margin normalization that we spoke to you about last quarter, we're really happy with the current performance in the region and we expect strong demand and market growth opportunities and reprise begins to become more of a factor.
In Brazil, which it hasnt been in the past.
On Repreve it continues its growth.
We were at 36% of our mix in the quarter were at 38% year to date.
And I think this is driven by the increased attention to sustainability and recycled products from our customers. Many of our customers now are looking at us as a very good partner to help them deliver their sustainability targets most of them have significant targets that come due in 2025. So this trend is not only going to.
Continue, but I think it probably accelerates in the upcoming quarters.
So as I look out over the next quarter.
Yes, we do have our work cut out for us with the China Covid Lockdowns, but we have a lot to look forward to unify our labor situation in North America is getting better we have been able to pass along pricing.
Our repreve momentum is good.
And despite Asia Lockdowns and that market has very strong demand and we think thats going to come back fairly quick.
And all of this makes us feel confident about our future and as we take a look at our our goals that we laid out during investor day, we continue to be very optimistic about that so I would say we are beginning to see some positive momentum building.
So with all that let me turn this over to Eddy who will now take you through some of the details of our quarterly performance.
Okay.
Sal and good morning, everyone. Our third quarter results were in line with our expectations and we are pleased with bank of Ireland. Despite some of the persisting challenges we're facing in today's operating environment and I am proud of and encouraged by the way that everyone on a unified team continues to show.
Zillions and I want to thank all of our employees for their ongoing hard work and commitment.
During the quarter, we produced strong sales and profitability figures and saw a sequential margin recovery in several pockets of the business.
The underlying demand paired with our continuous improvement on the U S. Labor fronts gives us confidence going forward and I'm excited for what lies ahead.
Moving to the slide presentation, we will begin on slide three with an early view of the quarter.
For the second consecutive quarter, we achieved sales of over $200 million.
An increase of 12, 3% on a year over year basis, resulting from strong demand and proactive pricing initiatives.
This figure could have been another 1% to 2% higher so we're not still somewhat labor constrained in the U S. Though as al mentioned, we are making solid progress on these fronts.
Some production inefficiencies remain because our improving labor metrics have not yet been reached historical norms. Our recent actions have generated noticeable improvement in our yields which is evident in our sequential margin profile.
And we will continue to strive towards improving the situation and achieving optimal thresholds in order to continue to satisfy the needs of the market and of course our customers.
We remain optimistic in our ability to do so going forward.
And as we communicated in our last earnings call deflationary environment impacted domestic margin performance and pricing levels once again.
Raw material costs and inflation continues to be headwinds and unanticipated cost increases continued during the third quarter.
But we remain confident in our ability to adjust prices responsibly and maintain a margin profile that keeps us on a trajectory towards our short term term and long term targets.
We have further price increases schedules in the fourth fiscal quarter in response to the cost pressures that we experienced in the third quarter.
While impacts from COVID-19, and subsided domestically.
Unfortunately, we cannot say the same for Asia.
As we're all aware China Zero code policy has impacted the economy and supply chain in the Shanghai region, and our thoughts go out to the health and well being of everyone impacted.
Given the lockdowns across China, including some of the parts sales and profitability for the Asia segment will be negatively impacted in the fourth quarter.
However, I want to be clear that the demand has not faded and is waiting to be filled as many industries are similarly impacted.
Our team in Asia is very resilient and I'm encouraged by their optimism that the business environment will open up quickly once the restrictions are lifted.
I'd also like to state that while the Russia, and Ukraine conflict is creating volatility in major markets other than the impact on crude oil pricing and the resulting increase in petrochemicals. We have had no direct impact on our operations as a result of this geopolitical events.
In Brazil, we have maintained a strong market position, but we are starting to see some of the expected margin normalization begin to take effect from the exceptionally strong environment in the prior year period the.
The business remains strong and we are looking forward to seeing volumes grow as we move through the next few quarters.
Our new texturing technology, both in place and forthcoming will serve as the volume growth driver.
Now I'd like to move on to slide four to discuss reprieve.
Revenues from our pre products represented 36% of net sales during the quarter compared to 34% a year ago.
On the marketing front, we kicked off a busy quarter with a stronger pre presence at the Wm and Phoenix Open golf tournament again the.
The activation was accompanied by a national television AD, featuring <unk>, 32nd commercials, which showcased.
<unk> process.
Loosened loosening COVID-19 restrictions allowed us to increase Repreve mobile tour stops.
Highlights included Activations at the Los Angeles Marathon in partnership with Asics and at the Pact trial men's basketball tournament in Las Vegas, the latter as part of our founding sustainability partner, a pact trial teen Greens pumps shipped.
Beyond events, we have focused on increasing brand partnerships across our digital and social media channels. Previous recently featured on the Instagram feeds of Speedo Manuka and beyond yoga among others.
Levi's brand beyond Yoga is made in the USA and committed to sustainability and our relationship has mutually beneficial synergies with.
We will of course continue to seek out brand partners that enable us to amplify the Repreve story.
Our pre momentum continues beyond apparel with a number of new programs and initiatives such as in the home space. We have secured a new throw program with Jcpenney private label industries.
And <unk> recently mentioned there were pre collection of South Dakota bags in a press release announcing their intent to recycled 30 million post consumer plastic bottles by 2025.
And Dickies has added Repreve automotive seat cover and steering wheel cover to their range of automotive accessories, which are available at Walmart locations nationwide.
Overall I have to say it was a very busy quarter for our marketing team and they continue to do an outstanding job in helping us increase the repreve brand across the globe.
And it's especially exciting to see the way our customers use the repreve brand to differentiate their product a very visible way on the packaging.
We will continue to co branding and customer engagement can be confidence just like our recent indicators of business momentum now.
Now I'll pass the call over to Craig <unk>, our CFO Greg.
Thank you Eddie and good morning, everyone to echo the sentiments from our <unk> I am pleased with our sales and profitability performance consistent with our expectations, especially in an environment with several moving pieces all around the globe.
Demand for our products continues to grow and our management team is keenly focused on achieving a healthy balance of both short term and long term goals.
As we look at the quarter from a high level, we can see that we accomplished our short term sales and profitability goals for the third quarter and maintain the underlying business momentum as we implemented responsive selling price adjustments and made positive step changes against our recent U S labor challenges.
Beyond our operating income and specific to Brazil, you may recall that in the fourth quarter of fiscal 2021, we recognized an estimated benefit from the expected recovery of non income taxes in Brazil, and the gross amount of $9 $7 million.
During the just completed quarter, we reduced the estimate in connection with additional clarity and review of the recovery process. During the months following the associated Brazil Supreme Court decision Accordingly.
Accordingly, $815000 of recovery of non income taxes net reflects the impact of slightly lowering the estimated benefit of recovery.
This amount has been included in our reconciliations of adjusted EBITDA and adjusted EPS within the earnings release consistent with our treatment of the same matter in the fourth quarter of fiscal 2021.
As we look below the pretax income line the headwinds that Andy outlined for our Q3 and Q4 have impacted our effective tax rate due to a decrease in overall U S based earnings and we have not been able to fully benefit from certain U S tax attributes.
This brought our effective tax rate slightly above the expected range for Q3 and will extend into Q4.
Let's turn to slide five of the webcast presentation.
Consolidated net sales increased 12, 3% from $178 9 million to $200 8 million and.
The increase was primarily driven by response of selling price adjustments, partially offset by volume shortfalls.
For the polyester segment performance was muted by the U S labor pool challenges Eddie mentioned earlier.
The price and mix change demonstrates the selling price adjustments that have been made over the last several months in response to rising input costs. Although we are still working to fully normalize the portfolio for todays cost levels.
In Asia sales volume was challenged during the month of March 2022 by the beginning of the current pandemic Lockdowns in China in proximity to our Asian operations for.
For Asia January and February experienced growth over the prior year, but March volume stagnated.
Although inflation in Asia has been calmer than the U S sales prices in Asia are still increasing accordingly.
In Brazil year over year price levels, followed market dynamics and inflation. As this segment continues to exhibit strength driving a price mix benefit of 19, 1%, although lower volumes were the result of a comparatively strong quarter in the prior year.
Nylon exhibited stability with higher sales following the increase in raw material costs.
Turning to slide six of the quarterly gross profit overview. The polyester segment experienced decline in gross profit and weaker gross margin percentage were attributed to the U S labor and input cost headwinds that we mentioned during our last conference call.
When comparing Q3 fiscal 2021 to Q3 fiscal 2020 to input costs and U S. Labor challenges each represent about half of the total gross profit decline of $3 $3 million.
The Asia segment maintained a strong gross margin profile as underlying demand for sustainable products continues.
The volume shortfalls in the month of March 2020 to Asia due to the Covid related Lockdowns had a limited impact on this segment's profitability.
However, the impact from Lockdowns will be evident in our business and will become the biggest headwind we will face in the fourth quarter of fiscal 2022, and accordingly. This has been factored into our updated guidance for fiscal year 2022.
In Brazil, the gross margin rate include some of the expected normalization.
Brazil remains the segment with the highest gross margin as a percentage of sales and is an important contributor to the success of unified both currently and in the future.
Beyond the year over year gross profit challenge changes it is important to observe the sequential quarter change is presented on slide seven.
We are proud of the progress we have made sequentially in the polyester and nylon segments from the December quarter.
Polyester segment, showing an improvement of over $3 billion in gross profit.
As Andy highlighted our focused efforts are starting to pay off and we are expecting continued gross margin improvement during the remainder of fiscal year 2022 and into fiscal year 2023.
Moving on to slide eight which provides a brief update on our balance sheet and capital allocation priorities.
We ended the third quarter with $18 $5 million borrowed against our ABL revolver, which had an availability of $65 million as of March 27 2022.
Our balanced approach to capital allocation, we expect to continue to invest in the business to drive innovation and.
And organic growth.
Maintained a strong balance sheet and remain opportunistic with share repurchases and or M&A opportunities.
As noted on this slide and as we described in our press release, we spent $1 million to repurchase 50000 shares under the previously announced share repurchase program during the third quarter.
For a total of $2 $2 million and 101500 shares in fiscal 2022 year to date.
Following that activity $45 $8 million remains available for repurchases under the current program.
I will now pass the call back to Eddie to take us through the last slides of the presentation and make some final comments.
Thank you Craig.
Before we conclude today's call I'd like to finish with slide nine of the presentation and discuss our outlook and expectations for the remainder of the fiscal year.
As we have highlighted in this call are revenue numbers have exceeded our expectations and leading us to increase our previous topline outlook for the fiscal year 2022.
Still we must continue to work through all of the global uncertainties, including ongoing labor pool constraints in our U S operations.
Inflation in raw material costs at all locations.
COVID-19, lockdown impact in Asia.
For the full year fiscal 2022, we expect sales reached $810 million or more representing an increase of 21% or more from fiscal 2021 revenues.
We are lowering our outlook on adjusted EBITDA to range between 54 and $57 million.
Due to the recent and ongoing Covid related Lockdowns in Asia on renewed global volatility.
Our capex outlook should fall in the range of 40 million to $42 million.
Lastly, we issued longer term targets during our Investor day in February I want to highlight that we remain on track to achieve our previously stated $1 $1 billion or more revenue target by 2025 comprised a 50% we're pleased fiber sales.
We remain confident about the momentum and growth outlook for the Repreve brand, enhancing our margins and profitability and helping us achieve $110 million or more in adjusted EBITDA by fiscal 2025.
Sustainability is what separates us from our competitors and is the driver of our growth.
Our segments are growing their recycled competition and demand continues to be robust for recycled products with this growing market and our current initiatives taken to increase our margins and operations unify is set to close 2022 on a positive note while setting up the company for long term success.
We will now open the line for questions. Thank you.
As a reminder to ask a question. Please press star followed by the number one on your telephone keypad again that is star then the number one to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of Chris Mcginnis from Sidoti <unk> Company. Your line is open.
Hi, good morning, Thanks for taking my question.
Just in relation to the impact of Asia, I guess, just how much in revenue is there a way to think about how much of that impact is going to be.
Just given the stronger trends there and then also.
Are there any conversations about shifting maybe supply chains.
Could benefit you if it goes to Central America or another region. Thanks.
Yes, thanks, Chris for joining us today there is.
There is uncertainty around how much it's going to impact us.
I think in part because a lot of our business and our Asia segment actually is not in Asia not in China.
Outside of China.
We are expecting.
A significant shortfall in revenues.
In April .
We do exceed this we do see this improving the shortfall reducing as we move through May and June of this fiscal quarter, it's hard to determine exactly how much now on the longer term Youre question is interesting around shifting supply chains, we are.
Having conversations with several big brands around.
What is the possibility of moving some of this volume to two Central America, which will help us long term in this region of course I'd like to remind you that the volumes of polyester in China are so large.
That any small movements towards Central America would make a big difference to our central American operations. So I think it's I think the world is probably pausing a little bit to see how quickly the zero copay policy will impact.
Supply chains.
Note that with all of the geopolitical.
Noise, that's going on everybody is rethinking moving products potentially out of concentrations our business in China into some other regions, but it will take time.
Okay.
I appreciate that and then I guess just thinking about that.
Do you need more investment in Central America, or just how is that.
How are your assets their position.
For what could be some some stronger growth.
Yes, So we announced we were more clear in our Investor day in February .
Where we announced we are investing in all regions the Americas, including Central America. So we are well placed with the investments that are undergoing to capture greater market share and greater volumes in that region.
Great I appreciate it thanks for taking my questions and good luck in Q4.
Thank you thanks, Chris.
Your next question comes from the line of Dan Moore from CJS Securities. Your line is open.
Hi, This is stefanos crist, calling in for Dan how are you.
Okay.
Thank you.
So first what are the gross margin levels implied in both Asia, and Brazil, and your revised Q4 guidance and then when do you expect those will start to improve particularly in Asia.
Yes, I would say this is Craig I would say that the gross margin levels implied for Q4 for Brazil are very close to where we're at for the just completed Q3 for Brazil and that business has had its peak gross margins in Q3 of last year.
And the quarter. We just completed we think thats a pretty representative amount of gross margin that we should see from that business in Q4, and Asia definitely our expectations for the gross margin percentage is pretty close but lower than what we just completed this year or excuse me this quarter. So as we finish out the fiscal year.
<unk>.
That much lower sales level should generate.
A little bit lower gross margin profile still profitable for sure and we're fortunate that our our business there where were not owning manufacturing assets and resources is definitely kept us.
Away from a significant pull down in gross margins. So we do think that the product will get out we'll have a good margin profile.
But not quite as good as if we had been at a full level of sales without the cobot market.
Got it thanks, and then can you just give us an update.
On the labor shortages, which is impacting margins in the polyester segment in the back half of last year, and just what steps you've taken to alleviate that.
I guess, the expected cadence for margins and poly going forward.
Yes.
On the call earlier.
We are still experiencing labor challenges.
Not to the same extent that we had in Q2.
We spent a lot of things.
Hi, more training trainers, we have changed our onboarding process, we have moved to a team approach to it.
<unk> hi.
<unk>.
We really focus on more of the group work and the efficiency of the machines rather than the individual contributors.
We have.
<unk> done some lag.
Labor.
Recently from some things around labor to really understand what are their needs and we're lifting some loud and clear Sir.
We did see an impact.
And productivity in Q3, but we didn't see the impact that we had in Q2 around our efficiencies and yield losses. So.
We definitely saw improvements as we move through Q3, we are seeing improvements.
In April better than March so, it's a long journey for us we see it as something we're going to have to continue to invest time and money in but certainly.
Not in the situation we were back in Q2, our fiscal Q2.
Sure.
I think we lost 10 points of volume growth in North America in Q2, it looks like about 5% in.
In Q3, so and improved yes.
I appreciate the color. Thank you.
Sure.
Youre Welcome. Your next question comes from the line of Marco Rodriguez from Stonegate capital markets. Your line is open.
Yes, hi, good morning, everybody. Thank you for taking my questions.
I was wondering if I could follow up on a couple of those questions that were just previously asked here mainly on Asia.
Maybe kind of help us understand a little bit more perhaps maybe from a percentage standpoint.
How much of that business over there is China.
And if you can help us understand if the revenue or the volume.
Are being impacted in China are.
Are they completely shut down and there is some shipments that are going out and any sort of additional calling out. So you can kind of think through that the revenue impact in Q4.
Yes, I'll take this call. Thank you Marco.
The whole country of China has not shut down although there are.
Many restrictions beyond Shanghai, Shanghai is where the real problem is the challenge for us in China Heng, Hi is actually getting some some of our export patterns apps, but most of the textile production facilities are in other regions, such as Suzhou where are <unk>.
Commercial operations are so.
No.
The challenge we've had is that.
<unk> as when Shanghai late March and early April really started locking down some of the other provinces around Shanghai started.
Creating more restrictions so they didn't get into the same situation that Shanghai.
We were at this time, it's very hard for us to determine exactly how much that quarter is going to be impacted so that's why we're reticent to give you the exact number.
But it will be significant as kind of as Craig said, we're not expecting the margin to change, but we are expecting volumes to be.
Much lower than what we had forecasted <unk> been growing the China revenues by 15% a year for the last several years.
This is a pause in growth so we're not going to see growth and we're going to see some decline Q4 is expected to be a really fantastic quarter for us.
Not going to be but the exact margin.
In fact project volume reduction.
To determine right now.
And then Marco this is Craig I'll just add on.
In a typical or normal Q4, we would see for Asia, we would see a nice growth because that Q3 is impacted by the Chinese new year. So just to put it in perspective, usually we would see Q4 increase over Q3 somewhere between 10% to 15% somewhere in that range.
But now as Eddie's, saying, we're definitely expecting a reduction and again I think we can say, it's going to be 20% to 30% or maybe more we don't really know and that's why we did have to range out not only the revenue guidance was not as specific as we otherwise would have been able to give.
It's also one of the reasons, we had the range out the EBIT guidance, a little bit more than we normally would.
Understood very helpful and is there any sort of.
Thinking through perhaps trying to shift.
The supply that you do have access to it sounds like at least in China to different ports that may not be.
Impacted such as Shanghai.
Yes, we are.
<unk> is a port that's it's not fully locked down.
We're doing some.
Our things like putting containers on.
The river to float dancing Ingo.
To get our products out the door.
I'll tell you.
If they are lifting our team in China are doing an amazing job.
Working around all these restrictions.
It would be local very very localized restrictions.
Our customers.
Already.
They are screaming for yarn.
And we are doing everything we can to get it out there. So we don't have we don't have a supply issue right now.
In China.
We do have an issue around starting to getting some of the products to the customers.
That helps.
Very helpful.
And then in terms of the labor issues that you've seen some some pretty nice improvements here sequentially and I understand that <unk>.
On a longer process a longer focus for you guys can see those improvements there, but can you maybe talk a little bit about your expectations as far as what sort of sequential improvement you might be thinking about next quarter and then how you sort of see that playing out into fiscal 'twenty three.
Yeah.
I don't have a crystal ball, obviously, but the work that we're doing.
Around onboarding around engaging with our employees.
Rounds, putting in different types of training programs around our focus on machine efficiency and not the individual contribution.
All of that is helping and we're seeing that actually.
Bear fruits.
We also are doing as you know is putting in our new Evo technology, which is improving our.
Our productivity because it's less labor intensive.
So we're expecting.
Another two quarters probably.
Improvements.
Our productivity.
We're hoping by the end of second Q2.
Fiscal 'twenty three by the end of December to see really meaningful impact on our productivity and on our retention rates with our employees.
Our expectation.
We'll have to wait and see.
Great. Thank you guys for your time really appreciate it.
Thanks Mark.
And there are no further questions at this time I would now like to turn the call back to our speakers for closing remarks.
Thanks, RJ and thank you everyone for participating today.
<unk> earnings release for the fourth fiscal quarter ending July three 2020 is tentatively scheduled for Wednesday August 10th after the close of the market with a conference call to follow the next morning Thursday August 11 at 830, a M. Eastern time, Thanks again for joining the call.
Ladies and gentlemen, this concludes today's conference call. We thank you all for participating you may now disconnect.