Unifi Inc. Q3 2023 Earnings Call

These efforts are aided by the additional evo quota machines in place, which are leading yielding the benefits of increased efficiency and productivity faster speeds lower energy use and increased flexibility.

Additional cost containment measures that we've taken include tight SG&A management with a focus on large scales sales opportunities minimal back billing in both manufacturing and administrative roles and diligence around working capital and inventory.

I want to reiterate.

That this belt tightening in no way hinders, our ability to drive our commercial efforts as inquiries around our sustainable solutions remain at very high levels.

While the inventory and demand normalization process plays out our resources remain flexible and we are well positioned to meet increased demand levels as we move through the calendar year.

So moving to slide four I'd like to take a moment to discuss repreve fiber <unk>.

During the third quarter were <unk> sales were $49 6 million or 32% of all sales compared to $42 9 million and 31% of sales in the preceding quarter, a healthy increase despite the negative impacts of demand disruptions in Asia.

This positive momentum and are still very challenged environment speaks to the strength and demand of the three brands and.

And we are fully confident in repreve, maintaining a positive sales growth trend as we move through towards a more normal and stabilized environment in both Asia and the rest of the world.

Now shifting to marketing.

We continue to elevate our flagship brand repreve through a mix of <unk> and <unk> initiatives.

We believe our strategy is working as we secured 69 media placements, resulting in almost 500 million reported impressions during the third quarter.

Over the past few quarters, we have referenced both our innovative creative direction and focus on brand partnerships, especially across social media.

This continued in Q3 with partnerships with dignity to over <unk>.

Linda bug.

Tom Taylor.

Arizona Love, Qualcomm and Tom shoes, among other brands, which resonate with consumers.

We drove further awareness and engagement through a very targeted AD spend and we are currently incubating and influence our seeding program, which will further drive engagements.

In addition to that we continue to leverage our mobile tour to engage with consumers and customers alike.

As a continuation of our partnership with Asics, We hosted a two day mobile tour activation at the ASIC sponsored La Marathon.

And on the customer front, we recently conducted headquarter mobile tour stops with board riders guests and Disney.

These mobile tour stops provide us with the opportunity to engage with customers in a unique way as we walk employees from across their organizations through the repreve process.

In Q3 was also busy from a tradeshow perspective.

In addition to exhibiting at trade shows focused on a power marketing, including winter outdoor retailer show in Salt Lake City, and the northwest materials show important week.

We exhibited at the plastics recycling conference and National Harbor.

In Washington, DC, and the world of concrete in Las Vegas.

The latter two supports our strategic initiatives to expand beyond apparel.

Internationally.

We were thrilled to see some traffic at our.

Presence of the inter textiles, Shanghai trade conference, which had been rescheduled due to COVID-19.

In February we announced the launch of our 2022 sustainability reports and through our strategic mix of diligent media relations. We garnered eight pieces of notable media coverage from the likes of the Wall Street Journal.

The sourcing journal just style.

Environment and energy meter and more.

These efforts have garnered over 32 million impressions across business and trade media.

Starting off Q4, we celebrated earth months with our sixth annual Repreve champions of sustainability awards, which recognized leaders in sustainable production and retail.

The Global awards honor the transformation of single use plastic bottles into new consumer products saving them from the waste stream.

We kicked off this celebration with our media launch in New York last week.

And just this week textile takeback, which launched in Q2 was named a SaaS company World changing ideas honorable mention in the category of sustainability and energy.

We are honored to be recognized for the innovative way, we're tackling material waste.

Now.

Before I hand, it over to Ed I want to thank you Craig.

I just want to reaffirm we are very excited.

About the opportunities for Repreve.

And the continued growth of the brands. Thank you Craig.

Thank you Eddie and good morning, everyone.

Quarter, we just completed exhibited the continued impact of reduced demand by retailers and brands throughout the apparel supply chain.

Like the rest of the team I am very pleased to see the beginning stages of demand recovery and production activity. During the just completed quarter and we look forward to seeing more progress on this recovery in future periods.

We believe the initial demand rebound supports the overall demand for our products, allowing our management team to focus on managing operating costs and working capital to remain nimble as we continue to pursue our strategic initiatives.

Let's turn to slide five of the webcast presentation and review segment performance here.

Here, we will start with a discussion of the year over year changes followed by a review of the sequential quarter recovery.

For the Americas segment revenues decreased 14, 9% driven by lower sales volumes, the price and mix impact demonstrate a higher proportion of chip and flake sales commensurate with our beyond apparel initiatives in.

In Brazil higher volumes from the pursuit of market share were offset by lower average selling prices in connection with the anticipated pressure from Asia and Asian imports that we mentioned in our most recent earnings call.

For our Asia segment sales volumes were challenged by the overall apparel weakness, especially in the Asian countries, we service outside of China, while pricing and mix remains strong occur.

Accordingly, consolidated net sales were $156 7 million impacted by the near term apparel production weakness.

Turning to slide six for the year over year gross profit overview.

Consolidated gross profit decreased from $19 1 million to $9 $7 million with gross margin declining from nine 5% to six 2%.

The gross profit declines in the Americas segment, and Asia segment, where both attributable to the apparel demand disruption.

While gross profit from the Brazil segment was impacted by selling price pressures brought on by Asian imports.

Moving to slide seven we will review the sequential quarter net sales comparison consol.

Consolidated net sales increased from $136 2 million to $156 7 million or 15, 1%.

All three segments demonstrated sequential volume increases most notably in the Americas and all were impacted positively by the modest rebound in apparel production that Eddie mentioned earlier.

Along with the volume increases we saw stability in pricing in the Americas and in Asia.

On slide eight I'll highlight the significant improvement in gross profit for all segments, and especially the Americas segment.

Andy outlined our efficiency initiatives and those are very much on display with the Americas gross profit increasing significantly following the 18% increase in volume.

We are pleased with the gross margin rate in Asia. During this common demand environment and while Brazil's margin remains below its typical range. It is expected to recover within the next couple of quarters.

Outlined on slide nine our balance sheet highlights and capital allocation priorities.

I'll remind everyone that we refinanced our asset based lending facility in October 2022, with a higher borrowing capacity and continued favorable favorable rate structure.

It's helpful to remind our audience that the leverage ratio drives our interest rate pricing, but is not a covenant for compliance purposes.

Fixed charge coverage ratio only springs into consideration if our available borrowings fall below an established trigger level as I'll describe.

At the April 2023 quarter, and our trigger level was $22 8 million into our available borrowings were $69 million.

Thus $46 million could be borrowed before the trigger level became applicable.

Accordingly, we have great flexibility in run rate on our new credit facility.

We ended the third quarter with $10 $2 million borrowed against our ABL revolver.

And $112 $7 million borrowed against our term loan following the initial $2 3 million quarterly principal payment made during the third quarter.

To further update on our capital priorities and in order to help preserve our liquidity and the demand suppressed environment.

Negotiated an 18 month pause of the remaining Evo cooler installations beyond fiscal year 2023 in the U S and El Salvador.

With Pas commencing at a time when we paid approximately 75% of the total $100 million capital outlay. We now expect the capital project to reach completion in calendar 2025.

The Brazil installations continuous plan with all machines set to be in place during this calendar 2023.

I will now pass the call back to Eddie to make some final comments.

Thank you Craig.

Before we turn the call over to our Q&A session I'll turn to slide 10, and provide an outlook for the fourth quarter and an update to our longer term financial goals.

For the remainder of calendar 2023, we expect the operating environment and textile demand trends for the apparel market to continue to recover at a modest pace.

And as this recovery unfolds and our cost control measures show benefits. We expect continued improvement in our sales and profitability to take hold in fiscal 2024.

Our outlook for the fourth quarter include sales and profitability performance that is generally consistent with the just completed third quarter along with the continued volatility in the effective tax rate.

Capital expenditures should also trend downwards in connection with the pause of the afk Evo cooler machinery purchases.

Let's talk quickly through the financial goals, we laid out in our Investor day back in February of 2022.

Due to the to the unanticipated significant disruptions to our business such as.

The fluctuating China Covid policies conflict in Ukraine inflation, and elevated interest rates and the inventory Destocking situation. We are revising the timeline to achieving our initial goes past 2025.

Our goals of $1 1 billion in revenue with 50% of the mix coming from repeat fiber sales and a $110 million and adjusted EBITDA are still realistic and attainable targets as the long term drivers of our business has not changed.

We will however need to work through the immediate and near term lingering economic issues. So we're so we are moving these goes to long term targets.

As our markets and the economy heal.

We'll reconsider putting a time table to these critical milestones and they will continue to guide our strategy and focus on long term goals moving forward.

One trend has not changed despite all the headwinds as the demand for sustainable products and specifically the reuse of plastic water bottles.

With this we still expect to reach our target of recycling 50 billion bottles by December 2025, despite the change to our financial targets.

We look forward to the quarters ahead, when more normalized volumes and macro economic factors will convey our underlying strength and hard work as we remained focus on sustainable growth for unify and delivering long term value for our shareholders. We will now open the line for questions.

Yes.

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.

I'll pause for a moment to compile the Q&A roster.

Your first question comes from the line of Anthony Lubensky Anthony.

Yes. Good morning, guys. Thank you for taking the questions. So surely not nice to see some sequential improvement in the business.

Stabilization or at least near term so.

Eddie I guess I'm just curious so when you talk to the key apparel retailers and brand partners.

The comment about the inventory levels still being high but also therapeutic levels I mean.

When you talk with them.

What is there a sense as to when do they expect their inventories to be.

Good shape.

Yes.

Across the board with the exception of one or two brands of retailers Theres still inventory.

<unk>.

At there.

And there.

The version, but also across the mills that supply them as inventory and the slowdown in the consumer demand has what sort of made this last longer than was expected. We're still hearing from these brands and retailers that they expect.

This inventory hang to last for another one to two quarters.

Everybody is.

Quite optimistic that by the end of calendar 2023, most of that Destocking would have taken place not just at the retail level, but also at the mill level.

There's one other factor one other factor I'd mentioned is some of the retailers have mentioned to us that there is less deep discounting going on in the marketplace, because they'd like to hang on to the pricing that you've taken in and see an improved margin.

So a little bit of that is slowing down volume as well, but as you know in retail usually.

That won't last long, mostly some some customers will want to get back in there and gain market share and that should change things but.

They still have a fair amount of inventory is expected to be down as Eddie said soon.

That's very helpful color and then.

Can you comment on the also the China reopening.

The impact on the Asia segment, obviously, there was sequential.

Improvement.

I guess, a little bit less of a recovery than what we would've expected. So just wanted to see if you could give some additional color on them.

The Asia segment, Thats really more China more specifically if you can.

Yes.

As we've had.

The majority of our business in Asia is through our China.

Business.

And it was.

Surprising to us that the business didn't bounce back more aggressively after the lunar new year.

It did come back and we were encouraged by that.

But as I mentioned earlier the inventory that still is hanging out there is impacting the demand and I also think on top of that there is a general nervousness.

In the market about jumping back in place.

Placing orders due.

Due to the <unk>.

Services around that.

The consumer situation in the U S and western Western Europe .

So I think its nice for us to have seen this business come back.

Stronger today than it was.

Right before the new year and of course during the January period.

But it still has some from some of.

It'll be some time before although those inventories stock trends translating into.

Bigger orders for us, but we are encouraged by the conversations we had Shanghai textile show is the first time that foreign buyers went to the show and in Shanghai and a lot of interest in our <unk> brand a lot of interest in our textile takeback supply chain. So we're encouraged by that it's just going to take longer than expected.

Understood. Okay. That's definitely helpful color there and then.

Can you also comment on the trends that youre seeing for your input costs.

What is your expectation for that.

Yes, as I mentioned on the.

Paul we have quite a stable environment.

Environment right now when it comes to both our Virgin and recycled inputs.

<unk>.

Okay.

With the brand and.

This year will be probably for the whole year under $50 million or so in SG&A, but it will probably tick up a little bit from there not drastically I don't think especially during the first half of FY 'twenty four but we.

Okay.

Sure.

Again, if you would like to ask a question Press Star then the number one on your telephone keypad.

Yeah.

So there are no further questions I would like to thank our speakers for today's presentation and thank you all for joining US. This concludes today's conference you may now disconnect. Thank you.

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