Q4 2022 Unifi Inc Earnings Call

Good morning, My name is Brianna and I will be your conference operator today at this time I would like to welcome everyone to unified fourth quarter fiscal 2022 conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session.

If you would like to ask a question. During this time simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question again press the star one.

I will now turn the call over to your host a J Acker Vice President of Finance you may begin your call.

Thank you Brenda and good morning, everyone.

Today is al Carey Executive Chairman, Eddie Ingle, 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 unified Dot Com. Please turn to page two of the slide deck for our cautionary statements 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 unify it's forms 10-Q and 10-K regarding various factors that may impact these results.

So 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 lastly, I direct your attention to slide three I'll remind our audience that we changed our segment reporting to align with recent organizational changes in the fourth quarter of fiscal 'twenty two.

<unk> performed its annual segment evaluation and determined that three geographic segments best represent the composition of the business and the management approach under U S. Generally accepted accounting principles. Accordingly, unifies now reporting the Americas, Brazil, and Asia segments, you may find quarterly and annual history of historical financial information.

Using the updated segment methodology on slides 11, and 12 I'll now turn the call over to Al Carey.

Well, thank you a J and thanks to everybody who is joining the call. This morning, I'm going to take just a couple of minutes to tell you how we're viewing our business at the start of our new fiscal year, and then I'll turn it over to Eddie and Craig were going to take you through the details of our performance for quarter four and how the full fiscal year of 2022 ended.

So I'll start with the quarter quarter four.

We had very good revenue growth for the fourth quarter, we achieved $218 million in revenue, which is a little better than what we expected that's 18% growth above year ago.

But thats, despite Asia being down by 17% due to the Covid Lockdowns that took most of the quarter.

That means the rest of our business was up 30%.

The quarter four performance allowed us to push the total the.

Total fiscal year sales above $800 million.

And Thats the best sales performance. This company has had in many many years and Craig will talk about that a little bit later on.

Quarter four performance had two highlights one as repreve continues to be a success with our customers.

And also our ability to cover cost increases with pricing. So that's that's the topline on the bottom line, we had EBITDA of $12 2 million for Q4, which is right in line with what we were talking about in our forecast we would've liked.

Two have been better, but we were required to cover the downsides that came at us in.

In the quarter, which was the China Covid lockdown.

Which is no small thing and then the spike from raw material pricing that happened in the middle of June which didn't give us much time to react.

So essentially we had a very strong revenue growth top line and a respectable bottom line and if you took those two surprises that we had that were beyond our control and we took those out of the profit picture. We actually would have had a very strong profit performance.

So let me move to quarter, one and.

All of US have heard comments from the retail community by the high levels of inventory that are out there and have built up and so we surveyed some of our customers. We got about 15 of them when we covered mills.

Brands and also retailers in.

There are a couple of common threads that we heard from those people one quote kind of captures it all.

One.

Customer of ours said six weeks ago, I was asking and ship me whatever you could get now.

Now I've got too much inventory and I have to move it and Thats kind of the theme that went through the all of the <unk> 15 that we spoke to they.

<unk> seen some slowdown in apparel sales as their consumers are dealing with inflation on gasoline and food and other what we call necessities.

And this little bit of a downturn started in about memorial day and.

It's unclear how much the decline will be seen in apparel volume or how long it will last.

We have seen a decline in volume in North America as a result of this dilemma that's going on.

It will make it difficult to give a precise forecast on volume for the first quarter of the second quarter, because I think our retailers and customers don't have a good forecast is still a lot of uncertainty, but we definitely see it in the first quarter and probably we'll be updating our guidance more frequently as a result of this marketplace issue.

That's going on.

One other moving development.

Development fast moving development.

As with all of this going on we're seeing very definitely cost reductions on our raw materials that began in August .

Now this could be good news and it could offer an opportunity to recover some lost profits from the slower volume and we have a number of initiatives that we're working on and to capitalize on the opportunity and Eddie will provide you with some perspective on this when we speak about this is later in the presentation and in the Q&A.

Now let me just make one comment on the longer term.

Our team is focused on getting beyond this long tail of COVID-19 that causes.

A few challenges.

The top focus we've got in this company is to be focusing on the execution of the strategy. We presented at the February Investor Day that is the most important thing in the short term issues I described a minute ago are not going to slowdown our delivery of our goals in 2025 in fact, I think we're making very good progress on some of the key initiatives that make up that strategy.

<unk> first of all Reprieved momentum continues with our customers.

You will see a lower mix because of China and.

In the quarter, but we are in a very good spot with repreve.

Evo cooler technology is now getting some scale and I think youll be able to it's performing better above our expectations and I think in the second half of the year productivity will show up as a result of those that new technology.

And we've made improvements in labor we've spent the money to do it we're not done yet, but I am encouraged with the progress we're making on labor.

Also Brazil and Asia as future outlook remains bright and then we've got this raw material cost decreased that's coming at us. So those are some of the positives were optimistic about the future I don't see the short term challenges, having an effect on the long term view.

This long tail of the pandemic certainly has caused some challenges.

But we're very definitely going to diminish as the year goes on.

So with that let me.

Turn it to Craig and Eddie to take you through more of the details and right now I will turn it over to Eddie.

Thanks, Al and good morning, everyone.

Our fourth quarter performance was consistent.

Our expectations and we are pleased with the results we delivered despite the lapsing presence of a volatile and challenging operating environments.

So looking back on our fiscal year I am very proud of everyone on the unified team for what we've accomplished and the obstacles that we've overcome that I want to thank them publicly for their hard work and perseverance. This year. There has been no shortage of adversity or new challenges to conquer in the last year and I can say with confidence that unifi is a stronger company today.

Because of our people.

So moving it directly to the presentation on slide four let's discuss at a high level. Our overall performance during the period and the quarter, we recorded $218 million in net sales, which was up 18% compared to Q4 of last year. This brings our total net sales for fiscal 2000 $22 million to $816 million.

An increase of 22% from a year ago.

In the quarter the U S inflationary pressures, we experienced throughout the fiscal year, specifically with raw materials, they persisted and they will impact us as we enter into fiscal 2023.

In the U S and Central America, we witnessed unprecedented short term cost increases in Virgin polyester raw materials in the month of June to the tune of roughly 20% above March levels.

And when there are such significant input cost changes there is as we've discussed in the past the normal lag until we catch up with customer pricing and this negatively impacted our results. During the month of June 2022, and will affect us in the first quarter of fiscal year 2023 and.

In addition, we saw our U S sales bottom prices in April and May reached historic levels and as a reminder, the price we pay for Bel bottles and the yields associated with the recycling process are the most important cost inputs to a repeat products.

But we have implemented further price adjustments in July and August to mitigate the impact of these cost pressures on our margin profile and are seeing some relief in raw materials as al mentioned on an opportunity to return to more normal margin levels in the U S. In the December 2022 quarter.

Turning to slide five to discuss reprieve.

We continue to see positive momentum for new products customer adoptions and co branding in fact 24 million Reprieved hang tags were sent out to a customer brands during the fourth quarter alone.

It can be expected revenue from our free products were negatively impacted by the China Lockdowns in the fourth quarter and this was significant given the fact that over 80% of the sales from our Asia segment, our repreve the highest percentage of any of our segments.

For fiscal 2022, Repreve fiber accounted for 36% of our sales.

On the marketing fronts in May we celebrated the fifth annual champions Sustainability Awards, which recognize our brand textile and retail partners that have demonstrated a true commitment to supporting a more sustainable world.

Awards represented to 39 brand and retail partners that have transformed 10 1 million or more recycled plastic bottles and 53 textile partners that have transformed $50 million of more recycled plastic bottles through the use of Repreve performance fibers.

Additionally, Nike and target both reached a major milestone this year, each having transformed more than $2 billion recycled plastic bottles, while total check Walmart and textron textile group have transformed more than 1 billion bottles.

Next our mobile tour efforts focused on key retailers with visits of both Abercrombie and Fitch and Walmart.

Our two day activation at Walmart headquarters in Bentonville, Arkansas took place during their annual open call event in June during which we presented the 1 billion bottle award to Walmart Senior Vice President over general merchandise apparel.

Building on the success of reprise Pact trial partnership we have signed a three year partnership with both season and entity that advocates for the 44 Bowl games that serve as the pro season for college football.

We will be a founding sustainability partner and expect positive brand exposure given their prominent at calendar and universities sporting events.

We kicked off the partnership at their annual conference in April where we hosted a panel around circularity.

And among other things. This comprehensive partnership includes a working group consisting of executive directors from six bowl games to promote sustainability initiatives.

<unk> Mobile tour activation at a bowl game of our choice from their working group to include public service announcements and venue signage and a bowl of bond social media campaign, including broadband Repreve shirts, given to each both and university. So more to come on that initiative. Once we get past our first boat season, which is in the middle of our fiscal year 2023.

We also continue to focus on strengthening brand partnerships across our digital and social media channels.

During the quarter, we executed a social media partnerships with beyond yoga.

Igloo Love Sac men Duca Sonics veto.

<unk> and <unk> Com, we will continue to support our brand partners that enabled us to amplify the Repreve story.

So turning back now to a review of the consolidated business before Craig goes into more details on our financials, our adjusted EBITDA for the fiscal year was $55 million.

This was within the range of our forecast from April but it was obviously impacted by the macroeconomic factors we've discussed earlier.

As inflationary conditions ease and our pricing catches up with raw materials that we do expect to be able to expand our overall margins and until that time, our team will continue to proactively align our pricing with market conditions.

To sum it up you can see our growing brand and customer momentum and our global approach is clearly, helping us drive and sustained business momentum.

We believe we are well positioned to drive long term value with that I will now pass the call over to our CFO Craig.

Thank you Eddie and good morning, everyone. The quarter. We just completed was consistent with our expectations and was a good ending to a fiscal year that had its share of challenges.

Our regional footprint combined with our focus on sustainable products has helped us manage through the external factors that al and Eddie described.

Demand for our products remains strong and our management team remains focused on our long term goals.

Looking at the quarter from a high level, we maintained underlying business momentum as we implemented responsive selling price adjustments and made positive step changes against our recent global challenges.

Before we discuss the segment results I would like to expand on the effective tax rate and EPS.

As Eddie mentioned the pressure on our U S operations distorted our worldwide effective tax rate as the foreign locations, we operate in specifically, Brazil, and China are not low tax jurisdictions.

However, recent developments from the Brazil Supreme Court cleared the path for us to recapture some excess income taxes paid in prior years.

You will recall that we benefited from a Brazil Supreme Court decision regarding certain non income taxes in the year ago period, but the most recent developments related to income taxes paid in Brazil.

Accordingly, the prior period non income tax changes were reflected as an adjustment to EBITDA and EPS. While these income tax benefits from the current quarter are reflected as an adjustment to EPS.

Let's turn to slide six of the webcast presentation here, we will begin a review of our reportable segment performance.

Business developments and our management approach in fiscal 2022 transition unify two a purely geographic segmentation and which we are focused on recycled and synthetic textile products. Following our regional models in the Americas, Brazil and Asia.

In the Americas, we continued to benefit from the legacy businesses that we previously referred to as polyester and nylon and both will continue to be valuable to unify as we service the diverse needs of our customers.

For the Americas segment at 28, 7% increase in revenues demonstrates the robust pricing efforts, we have highlighted throughout the fiscal year and.

In Brazil, the just completed quarter demonstrates a normalized level of strong revenue performance.

The prior year by nearly 50%.

We are proud of what our Brazil team continues to accomplish and note that much of this volume improvement stems from the pandemic lockdowns that occurred in the region during the prior year quarter.

In Asia sales volumes were challenged by the previously communicated an ongoing pandemic lockdowns in China. However.

However, the continued interest in sustainable yarns, and our ability to support the local customer demand allows for robust underlying revenue performance given those circumstances.

Turning to slide seven for the quarterly gross profit overview.

The Americas segment's expected decline in gross profit and weaker gross margin percentage were attributed to the input cost headwinds that we mentioned during our last conference call.

In addition, because the most recent inflationary impact to our input costs occurred late in the just completed quarter, we were not able to make proportionate pricing adjustments to our customers.

In spite of these challenges it should be noted that on a sequential quarter basis gross profit and gross margin as a percentage of sales for the Americas segment improved nicely by $2 $9 million and 150 basis points respectively.

In Brazil, the gross profit and margin rate included some expected normalization. In addition to temporarily unfavorable cost and pricing dynamics in the region.

In Q1 fiscal 2023, we expect Brazil's gross margin to surpass the percentage they achieved during the most recent quarter as the short term headwinds start to alleviate.

The Asia segment maintained a strong gross margin profile with a high proportion of repreve products, albeit at a lower sales level due to the pandemic related lockdowns.

Without the Lockdown to the Asia segment would have continued their strong performance of revenue growth.

In spite of the results for the fourth quarter of fiscal year 2022 being lower than expected.

The Asia segment exceeded $200 million in annual revenue for the first time in our history, an increase of 12%.

Moving on to slide eight which provides an update on our balance sheet and capital allocation priorities.

We ended the fourth quarter with $41 $3 million borrowed against our ABL revolver, which had an availability of $51 million as of July three 2022.

Under our balanced approach to capital allocation, we expect to continue to invest in the business to drive innovation and organic growth maintain a strong balance sheet and remain opportunistic with share repurchases and toward M&A prospects.

As noted on this slide and as we have described in recent press releases we saw.

<unk> $9 $2 million during fiscal 2022 to repurchase 616500 shares under the previously announced share repurchase program with over 500000 shares repurchased in the just completed quarter.

Following that activity $38 $9 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.

<unk> and make some final comments thank.

Thank you Craig and before we turn the call over to our Q&A session lets turn to slide nine of the presentation to discuss our outlook and expectations for fiscal 2023.

As we alluded to throughout the call. We are very pleased with our revenue performance in the year and more importantly, this quarter as it shows our resiliency against market downturns and also the recognition repreve has been getting even with repreve volumes and revenues growing globally.

Continued global focus on sustainability, we have some significant inflationary and macro economic headwinds to overcome in fiscal 2023, which we believe we are ready to address.

That being said, we expect fiscal year 2023 to be more of a gradual ramp each quarter compared to our historical norms until we put some of these challenges behind us.

Nevertheless, we remain confident in our ability to achieve our fiscal 2025 goals we laid out.

Our recent Investor day back in February and have issued our guidance for official fiscal 2023.

In fiscal 2023, we expect net sales to reach $855 million to $885 million.

Representing an increase of 5% or more from fiscal 2020 twos revenues.

We also expect to achieve adjusted EBIT of between 48% and $57 million with a second half, reflecting more normal business metrics in terms of gross margins and raw material inputs.

Our capex outlook should fall in the range of $35 million to $40 million.

Our sales and profitability expectations include some softness in Americas demand over the first half of fiscal 2023 with a stronger performance expected. When we entered the next calendar year, which will be our second half of our fiscal 2023.

This forecast is softness is caused by the pullback in demand mentioned earlier by our by the large brands and retailers as a result of publicly declared excess inventories some of which are in their apparel segments.

The demand in Brazil is expected to remain strong throughout the remainder of calendar 2022.

While Asia will continue to grapple with the effects of the headwinds of the Lockdowns during the rest of this calendar 2022.

Slide 10 closures at our presentation and reviews, the Big picture goals, we gave in our Investor day several months ago.

We remain confident in our ability to hit our targets and are well placed on a path to achieve over $1 1 billion in revenue by 2025.

Repreve is expected to comprise half of our sales mix and will ultimately enhance our margins and profitability profile.

We will maintain our strong balance sheet to act opportunistically on growth initiatives as we remain well positioned and focused on being the sustainability partner of choice to brands and retailers across the globe.

We'll now open the line up for questions. Thank you.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.

Our first question comes from Daniel Moore with CJS Securities. Your line is now open.

Thank you good morning, thanks for taking the questions.

Maybe start with the guidance top line just talk about the implied price and volume expectations embedded in the mid single digit revenue growth guide for fiscal 'twenty three.

On the margin front can you give us a sense of your expectations of gross margin by segment embedded in the guidance.

Not.

To the exact basis point than just at least Directionally, how we should think about each of the three segments in terms of margin performance and cadence.

And then I've got a follow up or two thank you.

Thanks, John I'll take the.

First question around revenue volumes.

As we talked throughout the call we have had challenges in our Asia segments and.

That supply chain is still coming out of the Covid lockdowns that they had in April and May and June .

We're seeing some improvement, but we know thats going to take a while for.

That business to pick up from a volume perspective and revenue perspective.

Particularly in China, we do have.

Fair amount of our business outside of China and that is.

So returning to that normal levels in the U S.

The slowdown that we are experiencing today in both volumes and revenues.

Is around the inventory pullback by the retailers and brands.

We do have.

Good expectations on revenues, because our pricing has as we mentioned gone up.

And in our July month end in our August months that we've just started.

But volumes will be under pressure.

In Brazil volumes and revenues are at expectations.

We don't see right now any issues at all in that space.

I'll turn it over to Craig to talk about that margin question, because I think thats, particularly interesting as it relates to Brazil.

Sure So Dan I'll, just add onto the revenue comments for.

If you look on our segment.

As we have laid out our segments.

Projections for FY 'twenty, three definitely Americas will have.

Its toughest period in the early part of the year, especially this first quarter and as we noted in the call. We saw quite a sudden increase in costs at the very tail end of our June quarter, and we are now seeing the exact opposite of that which is a sudden reversal of a lot of those input costs and so.

We will be taking some hits, writing down inventory doing those types of things during that first first quarter and probably maybe even into the second quarter and that will also parallels with where the demand will be soft this but after that we do feel like we will get back to more normalized levels of profitability for the Americas for Brazil is that.

He said, we do feel like they they had a good conclusion to the end of the fiscal year as far as from a revenue perspective, and that's continuing here as we start this year. So we expect them to be pretty steady and get out of the gate very well here in the beginning of FY 'twenty three and then for Asia. Our current forecast is very consistent with what we.

Noted back in April and that is that the Covid lockdown.

<unk> impact the Asia operations in the first half of our fiscal year 'twenty three so through the end of this calendar year, but after that we expect that to alleviate and continued to grow now one thing to note is the Asia impact is really just impacting the sales impact the margin impact the margin profile of the business has remained very positive very consistent with that.

Historical levels, even in spite of the.

Lower sales that we're seeing because of the Covid lockdown so.

That's very helpful.

And maybe just talk Directionally, it's still early obviously.

The rate of change on input pricing.

As Virgin input costs.

Tied to oil prices should they continue to come back down.

Can you talk about your ability to hold the line on pricing.

We could see potentially a.

Maybe a bigger margin benefit in each two then what's embedded in the guide and just talk about bell bottles that sort of supply dynamic more generally that would be great.

Yes.

On the Virgin side.

What happened in June was.

Quoted some of the Petro chemical injury said was historic.

Levels of pricing for one of the major inputs into polyester parasailing.

And it was foreseen and it's it was a very.

Very rapid spike just in that one month of June we are seeing a reduction in the pricing.

And we have raised.

The cost of those inputs and we have raised our pricing in July and August just to catch up with what we saw in June .

We do.

We do see the ability to expand the margins get back to normal margins.

In our.

And our Q2 and beyond.

Craig had mentioned we have this inventory that would have to work through but we are currently very focused on managing our price points as we move through this on the sale of auto side again in April and.

May.

<unk> reached very high levels they have since returned.

Yes.

Back to more normal levels and we are.

On being opportunistic in buying some bottles at at the lower price, but again, we do have the inventories that we have to work through.

So when we get to Q2.

Our margins should be.

Improved significantly over over Q1.

The higher price inventory to flush through and again any repreve products, we sell and we are currently managing our price points very carefully in the U S. Specifically.

In Brazil.

What you saw in Q4.

So what we're seeing here in the U S from a margin perspective, we are back to.

Sort of more normal margins in Brazil, as the lower priced raw materials for them is being used in the system.

Makes sense.

No. It does and then you've touched on the tax rate.

But the guide implied is different level than what we've seen so just kind of maybe a little bit more commentary or color on what's driving a $55 to 65% tax rate and just trying to understand it and what is your effective tax rate in Asia, Brazil, I realize theres mix involved but that's still.

Above with what I would've expected.

Yes.

It does come down Dan to.

What we're now projecting to be more.

More of the profitability for FY 'twenty, three coming from Asia, and from Brazil, Asia headline tax there is 25% in Brazil closer to 35%.

But unfortunately, we're not able to use some of the tax attributes in the us because of our lower profitability. So really it's a reflection of what we're expecting.

As we were.

Just kind of helping to kind of frame the conversation more so in the first half of the year, we do expect that Americas profitability to be lower and that is going to impact our effective tax rate to the negative side. That's why it's the rate is being pushed out.

Okay got a follow up or two but I'll jump back in queue. Thank you.

Thanks Dana.

Your next question comes from Gus Richard with Northland. Your line is now open.

Yes, thanks for taking my question.

I'm just wondering.

Over the cycle of price variation of your input costs.

No.

Can you just talk about.

Yes.

Price spikes, you lose a little bit of gross margin prices come down you gave a little bit.

Gross margin.

Is the net effect over the cycle.

That it really has no impact on your profitability.

Or is it dependent on the frequency of the change a little bit of help on how to think about this is as the world evolves going forward.

Thanks, guys for your question, Yes, I would love to just.

And to that by saying, what we've seen really in our Q4.

Has been unprecedented both on the inputs for Repreve and Im talking specifically here in the U S.

And in our Virgin petrochemicals.

And so any anything we would have normally done in the past.

Wouldn't have been able to deal with with what happens I will say that we have been much more proactive in modifying our prices on the way up then we have been historically.

I do believe we have.

A very focused sales team that are doing a great job on making sure that they.

Pass through these these increases these input cost increases both on the raw side, but also on the manufacturing cost side, the inflation cost that we've seen both in packaging and labor.

So I would I would basically close out by saying we will.

Being a better position to manage our margins in the U S.

As these raw materials come down we do need we do need to and we will be giving some of these.

This benefit the raw materials back to the customer, but we will be very diligent about how we do that and very focused on.

Where we do that.

So what basically happened in the last quarter and is happening today as we move through this high price inventory is very very unusual.

I think the mix will refrain.

Going forward allows us to improve our margins down the road.

And I also think there are some processes that have been changed in sales.

He has brought to the team.

Where they individually can manage the profitability by customer, which is a big change over what we've had in the past. So for that reason I also think we see our margins go up in the longer term.

Got it. Thank you that's very helpful. And then in terms of the Lockdowns in China is the impact.

Just on the sales side or.

The Lockdowns impacting Europe .

The ability to manufacture product.

And.

And sort of what is the trajectory been over the last couple of months is as the lockdowns have eased a bit.

Yes.

Not had impacted our ability to manufacture our products for a customer it's really been on the sales side.

Because.

As the whole system backed up.

<unk> products.

As our customers were unable to make fabs.

Fabrics.

Their customers weren't able to make garments because of these regional lockdowns.

The need to have in addition, what is also happening is the brands and retailers that we talked about earlier the U S brands and retailers.

Western Europe brands retailers, they are cutting back on their orders.

Because of this inventory situation that they have so it's a combination of short term of coming out of the Lockdowns and then also the.

Inventory reductions and resulting in several orders, but from a margin perspective, as Greg mentioned, we haven't seen any impact.

Because we have had an asset light model in in Asia.

Childhood.

And then the lessons from me and this is probably a longer term question.

But California passed a very significant.

Single use plastic recycled plastic bill at the beginning of July .

Thought to be the.

So the template for other states and I am wondering talking to your.

Suppliers of Bill bottles.

Is there any thoughts on.

The trajectory of recycle rates and the availability of raw raw materials for Repreve.

Yeah, Great question and Thats, a good point, so, California get passed a bill like Oregon, New Jersey also passed a similar.

So much better from an EPR perspective extended producer responsibility, which puts the onus back on the the.

Companies putting.

Products on the market to take responsibility for.

The recycling rates somewhat.

We see this as a positive because it will.

Fourth I guess municipalities and other.

Acuity is collecting volumes to increase collections and California, they have to get to 25% recycled content by a certain few years out that will increase the demand for recycled content, which will increase the.

The emphasis to increase collections today, we have a very poor recycling rates in the U S and that part what drove the escalation are available the pricing in.

In the second year second quarter calendar second quarter of this year, so I see it as a positive long term two to encourage people to increase collections, we will mitigate some of our.

Needs.

For bottoms, but again that pressure is going to be on the west coast and all of the models that we collect in the U S are on the East coast.

Predominantly on the East coast.

Got it.

Total.

Increased cycle rates would reduce your input cost.

Am I getting that will eventually yes, eventually that will be great.

What happens in the spring.

Calendar second quarter.

There was a new Ottawa facility started up they were trying to get more build inventory of the raw materials that law Bill passed and people were very concerned about how they are going to meet the 25%, even though it's fairly far out.

It was very strange phenomenon, but long term, we do expect these bills will increase collections more partners that got on the on the market. The better off we are from a pricing point of view.

Got it. Thank you that's it for me.

Thanks Gus.

Okay.

Your next question comes from Anthony <unk> with Sidoti. Your line is now open.

Thank you and good morning, everyone and thanks for taking the questions.

So I know you guys talked about the price increases in July and August was one of the cheaper perhaps.

The extent of that and give us some more color as to the level of price increases and then.

Also the second part of that question would be so aside from price increases what are the other key initiatives that youre looking to do to strengthen and improve profitability in the U S.

Thanks.

<unk>.

I think I said in previous calls.

Anthony again, just welcome to covering unified.

We have been very.

Over the last 315 months 16 months been raising prices almost every month.

And what.

What we did in July and August was to really finally catch up with our pricing.

Relative to raw materials and as we mentioned it was a very very significant and June beyond what we had seen before from a scale. So in August .

I do see that our pricing is has leveled up to where it needs to be I feel very comfortable with the pricing we got too.

But.

We still have like I said this inventory.

Deal with which we will as we move through the month the key initiatives that we have.

Beyond the raw material of course.

Managing price points, it's going to be very important to us.

We are managing our purchases very very carefully in the U S. Both on the manufacturing side.

We've got a slowdown in our volumes. So we know we need to pull out as much cost as possible where we are.

Reducing some of our SG&A expenses here in the U S.

Where we can.

Our.

We're also really.

Pulling back our inventory significantly so from a cash point of view we are buying.

The least amount of materials account to try and take it take.

Take advantage of this downturn.

Raw material pricing and then <unk>.

Looking for a certain volume opportunities where it makes sense.

And of course, making sure we manage our price points very carefully on that and then lastly, our labor hours.

Part of our cost here in the U S and our manufacturing lead.

It's very rare and his teams are very very careful events.

What areas, we need and it's actually helping us.

<unk>, because it's giving us more time to train the people that we have that are new employees.

Sure.

They are the things we're doing beyond just the raw material cost reductions.

Got it okay. Thanks for that color and then.

So within your EBIT guidance for F 'twenty three.

It sounds like overall that Youre holding SG&A as much as you can and Thats really the <unk>.

There is really on the gross margins.

Fair assessment.

Yes, Anthony I think Thats, a very fair assessment.

We.

Yes.

The guidance for the range for EBITDA anticipated.

Different scenarios for each of the three reportable segment, but you are correct. It really most of that almost all of that centered around kind of manufacturing and operations and sales prices and not so much about SG&A.

Got it thanks for that and then.

As far as Brazil.

The gross margins have been kind of all over the place here a lot last the two quarters.

Whats the reasonable long term assumption for gross margins in Brazil.

Yes, Youre correct really at the height of the pandemic or the second wave of the pandemic.

Five six quarters ago, you are correct. We saw some amazing gross margins from Brazil, I think we were.

Careful to caution everybody not to pencil in for 30% to 40% gross margins for that business, that's really historically not where they've operated.

Quarter to date, just add they did run through some additional high cost and got through quite a bit of those actually a little bit faster than we anticipated. So we do think there'll be back more towards the normal rate of profitability, which has lower gross margins in the kind of mid to upper teens, even approaching up into 20% range for gross margin.

It's a well run business, it's a really.

It is.

We have a great customer base. They do a lot of the right things. There. They are also starting to see the early stages of benefiting from the Evo texturing equipment, that's going into their operations. So those are some of the things that gives us confidence that they will they will rebound nicely here and are starting to rebound already nicely here in this quarter, but I think.

That kind of mid high teens, and maybe even just a little bit better than that as kind of a better longer term model for Brazil.

Got it thank you very much and best of luck.

Thanks Anthony.

Your next question comes from Daniel Moore with CJS Securities. Your line is now open.

Okay.

Thank you again.

Showing up on the margin question and just kind of thinking longer term, you mentioned margins getting back to more normal levels by H two.

I assume more normal overall is something in the 10% plus range, maybe 10 to 12.

That sort of the right way to think about it given all the puts and takes over the last year or two with Brazil et cetera.

And then the bigger question is just how do we think about the bridge implied between.

What would be kind of more normal fiscal late fiscal 'twenty three margins in your 25 goals of 14% to 15%.

What are the key drivers or levers there. Thanks.

Yeah.

I think yes, Dan you are correct I think when we say normal margins and we kind of blend all that together you are correct, we're talking something in excess of.

10%.

Our longer term model that we have on marching toward higher profitability at closer to 15% longer term and part of that transition will be.

As we have talked about more repreve.

A better margin profile for those products that will definitely help us as we increase that percentage longer term, but you are correct in the shorter term, saying getting back to the second half margins gross margins kind of 10% to 11% 12%.

That is more of that right.

A range there so craig on ongoing move towards 15, and the longer for Arbor farther out years.

Recruit mix in Evo coolers are probably the two biggest impact yes, I would say those definitely the biggest impacts and also the continued input from Asia as well, yes, we do feel like that will continue to pull up.

<unk> made good progress there again, they have the highest level of.

Pre products and we expect that to continue to grow Eddie do you want to add onto that I think the other we have engaged somebody to help us understand where.

Where the best opportunities for unify.

As in the beyond apparel area and.

We're doing a deep dive in some segments that I think are going to.

There are a lot of food and that's been one of the in our strategy presentation.

Back in February we said, we were trying to look for segments that had higher.

Gross margins and we see that being something thats very important for us to get us to that 14% or so gross margin levels across the globe.

Perfect.

Go ahead, Craig I'm, sorry, Investor day, and it's the mix of Asia.

Today versus when we get to 25 is quite a difference and that carries along quite a bit of a <unk> margin.

Got it. Thank you that's helpful and.

I think you read my mind My last question was just.

Updating us on some of those growth initiatives outside of apparel I realize youre, not one or two quarter thing.

Multi year projects, but when you look at auto packaging medical.

Footwear.

There are you seeing any of those who are you seeing more dialogue.

Folks getting more excited about sustainability and longer term partnerships.

Any color you might be able to provide would be helpful.

Yes, as you've mentioned as a longer term initiative, we should complete this analysis sometime this quarter and.

That will allow us to really drive further faster into those segments. You mentioned plus another few that we've sort of come across that have been quite interesting anything we do that we know it's going to take several quarters.

And apparel market takes 18 months to get a program, sometimes but we know that there'll be.

We will be putting a lot of time and effort into taking down into these opportunities that have come to the surface and they will be beyond those four segments that you mentioned, but for me personally I think exciting is the transition to the electrification of cars I think these automotive companies are going to be looking to be.

As we've said before on these calls more sustainable not just on the drivetrain, but also in the <unk>.

Textile inputs into the cars and I think thats, probably the shortest.

<unk>.

Visibility, we're going to see.

Thank you.

Very good thank you.

Okay.

There are no further questions at this time. This concludes today's conference call. Thank you for joining you may now disconnect.

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