Q4 2023 Unifi Inc Earnings Call
Good morning, and thank you for attending unified fourth quarter fiscal 2023 earnings Conference call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time.
Press Star followed by the number one on your telephone keypad speakers for today's call include Al Carey Executive Chairman Eddie.
The Engle, Chief Executive Officer, Craig create Toro, Chief Financial Officer, and AJ Aker Treasurer. During this call management will be referencing a webcast presentation that can be found in the investor Relations section of unified Dot Com. Please familiarize yourself with page two of that slide deck for our cautionary statements.
non-GAAP measures I will now turn the call over to Al Carey.
Thank you Hey, good morning, everybody and thank you for dialing into the unified fourth quarter earnings call.
I could take a couple of minutes, telling you about the environment that we're operating in because I have to say, it's one of the most unusual I've ever seen and then what I'm done doing that I'll turn it over to Eddie Ingle our CEO .
So you've seen the sales and EBIT numbers for Q4, and you can see that they look very similar to Q3.
Because volume remains depressed in North America, which drives the low level of EBITDA.
Because we're not getting the throughput we needed to leverage our fixed assets.
Now most of you are probably saying what is going on with your business and I fully appreciate that because Q2 Q3 and Q4 had been weak.
Let me cut to the answer and then we'll work backwards into the details.
Inventories at retail have been massively high starting last fall on apparel.
They are still high today, the retailers are working them down but until they come down ordering for yarn has been scarce.
So you may ask when will the inventory to be done.
Probably the end of the calendar year, that's what we hear from our retail partners when will orders begin flowing back into unify.
Probably around the October timeframe.
How big will the ordering be and how fast will it come back I don't know, there's still a fair amount of uncertainty, but listening to retailers I would say it will probably be conservative at first as they are going to be cautious when they start back ordering and especially after they just came out of a troubled time of heavy inventories.
The other question you may be asking is what about the sales trends on apparel, they've been off for a whole year.
And in the last two quarters, they've been down 7% in units so.
Whats going on there.
My observation is that over the last 12 months. The consumer has spent a great portion of their income and again, the average consumer who makes probably $55000 a year.
They are spending their money on important basics of food fuel housing all at higher prices. So the discretionary income they have left the.
Seems to be allocated the things called experiences and that is primarily travel and entertainment, leaving a lot less money for things like apparel now we feel certain that there'll be a rebalancing between goods and services here. Soon we're already seeing some of that begin at the same time that thats happening the inventories will re.
Balance back to a more normal level and then we can expect to see some steady state and our half to our fiscal year and the beginning of 2024 for the rest.
So I think you can say that this synopsis that I gave you is probably accurate because it's a compilation of speaking to the majority of our customers our partners, our mills and analysts that follow the marketplace and.
And the majority are saying the same thing.
So is there any good news for unify and all of this and the answer is yes. Since we're at the front end of the supply chain, we can feel the pain first but we typically catch that tailwind first.
We began feeling the difficulty of the situation last summer and now one year. Later, we are beginning to see some green shoots in terms of improved orders for volume in and around the October timeframe.
Also during the last 12 months, we didn't waste the crisis. Our teams have been working on several initiatives that are going to make our company better in the long run. The first thing I had mentioned to you is that we have begun to get traction on building a business in categories that are outside of apparel.
Words, such as home auto industrial and packaging and.
These categories are incremental to our current sales portfolio and they also have much higher margins than the apparel categories that we sell today.
The second thing our teams have been working on is an activity based costing capability that allows our sales and operations people to collaborate very closely looking at our inputs true costs.
Capacity utilization, so that we can optimize pricing for better profitability and also improve our market share.
And I'll mention a third we have developed several repreve product innovations they offer consumer benefits that allow us to offer a premium.
On Repreve, but always use recycled material, so I would say.
Given this current difficult environment, we can now kind of see where things are going.
I would say that we feel optimistic about what's going on and I'm very proud of our teams and the way they've worked through all of this and I believe that when we get out on the other side of it our company is going to be a lot stronger than it was when we started the journey back before.
The pandemic, so with that backdrop, let me turn it over to our CEO , Eddie Ingle, who will take you through the details of our performance.
And good morning, everyone.
Our fourth quarter results reflect the pressures have continued demand weakness and as al mentioned across the apparel and textile supply chain as brands and retailers continue their efforts to normalize their inventory levels.
Now what it has been a challenging fiscal year I am very grateful for everyone on.
On the unifi team across the globe.
And once again I want to thank them for their unwavering commitment and hard work.
While we recognize that globally, our business is suffering alongside others in the textile space and retail environment, we presently see opportunities for capturing market share in each of the regions as we continue to move through the Destocking of the supply chain and then charged awards.
Normalcy.
While you look at slide three of the presentation I'll make some comments on our overall performance at a high level in Q4, we recorded $151 million net sales, which was a modest decline when compared to the third quarter and not unexpected I might add.
We believe our underlying performance has stabilized through a difficult market and challenging operating environment, which is a byproduct of a few external factors and strategic actions we've taken.
One of these factors is that for the last two quarters, we did not see any of the erratic increases in input costs that we've seen in the prior calendar year.
And are currently experiencing a period of low volatility in raw material pricing.
As a result, we're in a solid position from a pricing standpoint, and this stability will serve as a catalyst for a quick rebound in performance when demand recovers.
Bayer bottle prices, which had been really challenging in calendar 2022 for us have also been stabilizing to seasonally normal levels.
As a reminder, the price we pay for Bel bottles in the U S and the yields associated with the recycling process at the most important input costs through our Americas business segments were pre products and this reduction has been a welcome relief and we'll play it to play to our advantage as the Repreve demand opens up in the coming quarters in the U S and central <unk>.
Erica.
From an operations perspective, we have taken several actions to maximize productivity and drive efficiencies across the business.
Diligently managing our costs through several cost containment measures.
We've also reoriented, our capital spend to preserve cash and bolster our liquidity position to further solidify our balance sheet and we will highlight a few of these actions in a few minutes.
I should also mention that we are not backing off on developing new innovative products. During this period.
Which I hope to be able to talk about as we move through the fiscal year.
Our focus on innovative technologies with Repreve at the core is now much more driven by the pairing of commercial opportunities with performance attributes that are responsive to the consumer demand that we're seeing.
Turning to slide four to discuss for pre even marketing.
During the fourth quarter with pre sales were $444 $5 million or 29% of all sales compared to $49 6 million and 32% of sales in the preceding quarter.
This reduction is primarily driven by an economic slowdown in China as textile exports and we do not view it as a review of sustainability based on our ongoing commercial conversations.
Any improvement at all in China sales will drive a commensurate rebound of our pre sales.
Moving to marketing, we continue to drive a pre awareness globally.
Ongoing media outreach, including plant tours and an Influencer event in Los Angeles has resulted in a meaningful increase in media coverage based on our internal metrics.
Beyond the U S. We continue to execute marketing initiatives tailored for specific markets and this ranges from the launch of Repreve in Brazil do partnerships with local brands in China.
During Q4, we exhibited at a variety of trade shows globally any interest in sustainability was high across all shows and particularly textile takeback, our innovative solution for tackling textile material waste was particularly well received now.
As we close out fiscal 'twenty three we are happy with the progress made in the marketing front I look forward to building on that momentum in 2020 for both the industry and consumers are actively focused on sustainability and Repreve is now very well positioned to capitalize on this opportunity.
So before I pass the call to Craig for his financial review I want to take a moment to thank Craig for his service to unify.
This will be his last earnings call and as we noted in our SEC filing on July 26, 2023, he is moving to pursue another CFO opportunity.
Craig it's been a great partner for me.
And has helped us build a well rounded finance team. So Greg. Thank you for that and for all the work you've put in beginning next week, a J eckert will serve as our interim CFO .
We are fortunate to have a strong industry veterans like AJ, who has had almost 10 years of service at unify in addition to his public company audit experience with a big four firm.
And we have a great financial team to support us and a J as well I'll now pass the call over to Craig. Thank you.
Thank you Eddie I wanted to say, thank you to both al and you as well as the rest of the board of directors for allowing me to be a part of the unified leadership team for the last four years.
We're in a good spot to make a CFO change a J has long been a valued member of the unified team and he is someone who will use his leadership and abilities for the betterment of unify.
My comments today will be shorter than normal. So we can give a J a time to make some financial commentary that's one during this call.
Let's move into the financial results beginning with slide five.
We have provided the year over year comparison on net sales and gross profit for each fourth quarter.
As expected consolidated net sales were 36% lower from Q4 fiscal 2022 to Q4 fiscal 2023, primarily resulting from the weak demand environment and the associated decline in pricing.
Fortunately as you will hear from Eddie the expanded chip and flake product line sales are enhancing the portfolio in the Americas segment, which also contributed to the lower average selling prices in the quarter for this segment.
The Brazil segment maintained strong volume levels throughout fiscal 2023, but experienced pricing pressures from competitive Chinese employees in connection with the lower utilization levels in China driving down the average selling prices of their exports to countries like Brazil.
The Asia segment was most impacted by apparel weakness driving lower sales volumes, but and maintained the strong pricing and margin profile. Thanks in part to unifies innovative pipeline.
From a gross profit perspective on slide six the volume pressure in the Americas and Asia segments.
Along with the selling price pressures in Brazil negatively impacted gross profit.
Turning to slide seven for the sequential sales comparison, we can see the stability that was expected to occur from Q3 to Q4 of fiscal 2023.
On the whole sales performance was generally flat across the segments. During the noted six months period, Although Americas segment experienced yarn volume declines that were mostly offset by chip and flake sales.
Carry a lower fixed cost absorption factor.
Slide eight demonstrates the change in gross profit, which is predominantly characterized by weaker fixed cost absorption in the Americas based on the lower yarn sales concept, we just covered.
I will now pass the call to Ajay Hey, Jay.
Thanks, Craig as we move away from the segment analysis, I will remind everyone that we incurred an impairment charge in this fourth quarter in connection with a highly specialized asset for which the investment was fully returned but carried a longer original useful life than today's environment would support the impairment was recorded in operating income outside of gross profit.
It was non cash and non tax and below any particular segment results now lets spend a moment discussing our balance sheet and liquidity position on slide nine where I will cover the high level points before passing the call back to Eddie for his closing commentary. We're pleased to have refinanced our asset backed credit facility in October 2022.
Where we continue to have significant liquidity available to complement our global cash on hand, our diligence around working capital and cost control has been critical in our ability to produce operating cash flows and a suppressed fiscal 2023 environment and we've made an immediate impact on free cash flows by delaying elevated capex spend until the <unk>.
The environment is much more amenable.
Accordingly, we're confident that our business remains well positioned for realizing profitable growth opportunities when the apparel industry and its supply chain has normalized I'll now pass the call back to Eddie to take us through the last slides of the presentation and make some final comments. Thank you AJ I'd like to take a moment to review some of our new key commercial and operational initiatives.
We have implemented in the Americas business.
As we move through the fiscal year, we expect to see continued recovery in revenue and profit growth from our commercial initiatives beyond the normal.
Environment, we're seeing today.
We can already see some of the operational initiatives beginning to reduce manufacturing costs and we expect this benefit to increase and become more reflective in our financial results as they move to the new fiscal year as our volume levels normalize.
Those are outlined on slide 10, and as you can see from this slide the commercial initiatives center around growth and improving the commercial process.
As we face the hard reality of a longer demand challenged environment we.
Look for areas of opportunity within the business, where we could really drive near term growth in volumes and diversify our portfolio.
The first phase of such commercial diversification was the expansion of our chip and flake business into the nonwovens specialty films and packaging markets now.
Now while unify it's been selling Repreve RASM in place for quite some time, we traditionally had seen these products most phase of feedstock to our Repreve yarn business.
And I'm pleased to say that the team responsible for this initiative has had some meaningful wins here in the fourth quarter were pre RASM in flake sales were strong and represented more of the Americas quarterly sales mix than ever before and we will continue pursuing this revenue opportunity along with our high quality pre beyond products.
In addition, there are continued efforts to build what we call our beyond apparel business, which we're finding to be a margin accretive further we've implemented new sales processes that support unify and improve our customers' experience.
Lastly, we are spending more time with customers to find ways in which we can bring more value to them.
It's a long road, but we feel that we are well on our way to implementing changes that will drive long term value.
I'd now like to detail some of our other operational priorities.
Despite the pausing capex spend towards new Evo installations, a significant number of these machines are already in place and the benefits are positively impacting our underlying results with faster speeds lower energy use and fewer labor hours.
Of our other key operational initiatives include continuing to manage our head count conservatively, while not sacrificing quality lead times or long term performance.
Following customer product production activities for example, like many of our customers we shutdown during the production for the week of July 4th and focusing our attention on working capital through effective planning and staying close to the real demands out there in the marketplace.
Now, let's turn to slide 11 of the presentation to discuss our expectations for the upcoming September quarter.
Our first our forecast for the first quarter of fiscal 2024 includes sales and profitability performance that is about the same as the just completed fourth quarter sales volumes are not expected to change significantly in any of our business segments and on the tax fronts. We are expecting continued volatility in the effective tax rate.
Capital expenditures will continue to trend down a clear benefit of our prudent spending spending measures that Jay mentioned earlier.
As we move through fiscal 2024, and anticipate the demand environment to improve in calendar 2020 for our plan for the full fiscal year is very much weighted towards the back half of the fiscal year.
We are confident in our position as the partner of choice to brands and customers across the globe.
And we believe we have the right short and long term strategy to drive value for our stakeholders with that we will now open the line 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.
And our first question comes from the line of Anthony <unk> from Sidoti <unk> Company. Your line is open.
Good morning, and thank you for taking the questions. So first Craig it's been a pleasure to work with you and best of luck going forward.
Eddie and a J look forward to continuing to work with you and the rest of the U S team in.
Al was also great to hear your synopsis at the beginning of the call. So I guess I wanted to follow up first about the one of the points you said, you're seeing some green shoots in the business and in the release you also talked about.
Some positive recent market share developments, so wanted to start off with that and I'll have a few other questions as well.
Yeah, I'll take that Anthony.
Like we said all of us throughout this call we are still in this environment where.
It's been very challenging.
And the Green shoots we're talking about we're talking about green shoots and new product launches that we're making.
Is that sort of teasing out to the marketplace and we're getting a lot of interest in that.
The four.
Markets that al talked about auto co packaging and industrial.
They are a key focus of ours and in the home space.
Seeing already lots of interest in the new products that we're launching we have some placement and repreve our ocean in leading mattress brand and Repreve <unk>, which is our climate control at Yamana out there and so.
Alongside the growth that we've had in Reprieved RASM and Repreve flake.
Xian opportunities that we're seeing are these repreve will cover plus.
Opportunities that are really starting to show the show there.
The interest by the consumer so.
More on that as we go through the fiscal year.
So Anthony just I'll add to it.
You've spoken to many customers and they are all I would say most of them are lining up give indicating that the orders will begin I don't know how big they will be I think some of these retailers made some big Arizona ordering last year and I don't think they want to get themselves back into high inventory, but I expect that we will start seeing that in October and.
With a little luck maybe earlier.
But then there is a fair amount of new business that Eddie spin, Andy just talked about but there is lots of interest and some new products in this new space call. It we call it beyond apparel. So it's energizing to finally see something happen in there and we're excited about it.
Thank you for that perspective, and then so just just to quickly follow up as far as the segments beyond apparel.
Which ones out of the ones that you listed that you think have the most near term potential.
Yeah right now we're seeing.
Significant interest in the home space and.
That's both on the the value by deciding.
Also the the regular part of that business. We do as Al mentioned, we are expecting to see significant volumes and be able to talk about that starting in October . So by the next earnings call, we'll be able to give more specifics but to answer. Your question briefly it is in the home market that we're seeing a lot of interest and also in the packaging space because of a rhythm.
Got you, Okay, all right and it sounds like you have some other new products and were proof silver so it's great to hear.
As far as chip and Flake you mentioned that you are seeing strong adoption can you talk about I don't know if you want to give out specifics, but maybe just broadly speaking like what part of your sales that is in.
What's the margin profile of that product.
At the margin profile actually is quite healthy we're very pleased with that it is above our normal margin profile from a gross profit point of view at what's nice about it also is the fact that we're not just selling into one market, we're selling into the nonwoven space into the film space and into the specialty packaging space as it relates to.
Some cosmetic end uses so.
It's it's it's very diverse and.
And the story really is all about sustainability and the innovation that we can bring in some of these end users are also very interested in or are you just verification system and the fact that we have a tracer in there that can verify it is recycled materials. So it really plays out well to the <unk> story that we've been working on it on the fiber side.
Seems to be translating nicely over to the packaging side and one other thing you know we design our.
Our RASM performance.
Perform at a very high level and are you on business.
I tell people, we make gone at 3000 meters a minute and these these product attributes that we have are surprising us because they are playing the clarity of our of our RASM. The purity of is playing well into these new markets.
Mhm.
Got you, Okay and then.
So the pricing it was down in the Americas in Brazil, but up in Asia.
I think part of that is the shipments flake.
Increases, but yes.
Yes.
How do you see that going forward here as far as the dynamics near term as far as pricing.
To get your thoughts on that.
Yes in Brazil, it's really driven by the.
They.
Very depressed pricing from China.
The competitive products the imports that are coming in.
We are seeing just in the last few weeks some opportunities to raise prices down there, but it's still early days yet we do expect once China.
Really returns back to normal production levels as the the supply opens up there very reactive to pricing and that would result in higher prices in Brazil, and the Americas at most of the most of the.
Driven by the higher sales of.
Packaging that we talked about our resident pre RASM in the packaging space So beyond business.
The prices are more are pretty much stable.
Okay. That's good to hear and then in terms of the <unk>.
Competitive environment in Brazil have you seen any changes there.
Lately.
Yes.
We did have one competitor.
Actually move.
The move away from the markets and Thats.
We're looking forward that they still have inventory in the <unk>.
There are selling but do you expect that opportunity to bring us some increased volumes as we move through the end of this calendar year and again I think we'll be able to talk more about that and the impact on that in our October call.
Got you Okay. That's good to hear and then.
Longer term, how should we think about the path back to profitability. So I mean, if I look back.
The fiscal 2016 and 17 revenue those years was you know a little bit higher than what you just reported for this year, but certainly the operating margins.
Back then were closer to 7% so.
How do we how do you guys think about that.
Returning to <unk>.
Being EBITDA profitable or just EPS profitable I know you guys talked about some headcount reduction as well, but you've done, but just maybe kind of FICO.
Could walk us through how you see this playing out.
Sure Anthony it's a J.
<unk> is definitely one of our biggest piece here.
Good piece here that will get us back to profitability you are aware of the Evo installations that we've completed over the last couple of years and they are very much a path to profitability as well when you think about the long term, we still very much believe that the underlying drivers that we've spoken over the last few years will contribute to further.
Their growth recovery from where we are.
As well as much of the other lean initiatives and efficiencies that we've found in both the.
The manufacturing space across our facilities as well as our SG&A structure. So we do feel confident that that path to profitability does does still.
Rely on the underlying drivers that we've talked about over the last couple of years.
Alright, Thanks, a J.
Anthony This is al I, just wanted to add to that.
As the beyond apparel categories become a bigger part of our mix then that helps as well.
Got it okay. Thanks, and then.
As far as your debts, obviously, you refinance that last year, which was terrific.
I assume that sure.
Well in compliance with your debt covenants. So just wanted to make sure that that's not an issue that you see anytime soon.
Yes, Anthony it's a J again, absolutely still in compliance from a debt perspective, as you mentioned very favorable that we were able to refinance the facility just under a year ago.
Providing us great runway both in this constrained environment as well as positioning us for growth as we head into the next couple of years on.
On top of that we still have a significant balance of global cash that we can help assist with that liquidity.
And we haven't had to institute any extreme measures at this point, so still feeling quite comfortable from both a compliance perspective and the remaining liquidity.
Gotcha, Okay, and then just to quickly follow up I know the vast majority of your cash is outside the U S.
If needed can you easily repatriate that are like that.
How should we think about that.
Sure Anthony.
Youll note in fiscal 'twenty, three we did repatriate.
$20 million from our operations in Asia part of that was connected with the refinance that we completed we still believe those.
Those processes those procedures to repatriate cash are still applicable.
And relevant as we move forward.
We still believe that.
Everything would be just fine in terms of repatriating.
As needed from the from those subsidiaries.
Well alright.
Sounds good well, thank you very much and best of luck.
Thank you Thanks, Anthony Anthony.
And again, if you would like to ask a question Press Star then the number one on your telephone keypad. Your next question comes from the line of Chris Reynolds from Neuberger Berman. Your line is open.
Good morning, and thanks for taking my call.
Before you all had addressed.
Hello.
Question I have sort of re shoring of apparel production, that's been a long term trend nets.
Benefited you or you.
Still seeing that as well.
Positive.
And perhaps maybe just.
An update on how you your company is integrated with the CAFTA Treaty for.
For your apparel customers.
Customers that produce in the Caribbean.
Area.
Yes, the two major.
Piece of legislation that benefit us and our location really a cap that you mentioned and also.
What was napkin now U S MCA.
Sure.
I was.
Very interesting for us before this destocking occurred our volumes in Central America were growing significantly and we have an operation in El Salvador, It was really benefiting from that.
It seems like the biggest.
The most forceful destocking part of the whole process of these retailers is impacted central America more than more than other regions, but I think what we're still seeing from these brands and retailers that they are very interested in supporting sourcing out of Central America, and we're getting an entry increased conversations around how can we get product.
Made in Mexico, which also has that.
Compliant yarn agreements and benefit to us so.
Bottom line, it's not kind of way, we shoring is still happening.
Can't see it because of this destocking phenomenon.
Okay, just one follow up question on <unk>.
A question that was asked before about some of these new categories that Youre moving into do you have the hired a different sales person to sell into because they had.
The home or where auto market I know you've had limited exposure there.
In the past and are there upfront investments in marketing that you need to make to.
Capitalize on some of these new opportunities.
Yes, we've done a.
As a J mentioned, a super job on managing our SG&A over the last year as our business.
Our revenues declined however, we are to your point investing both in Asia and here in the U S. On hiring some new talent that can help us accelerate the growth into those markets.
Thank you.
Right. Thank you Chris.
And this ends our question and answer period and also concludes today's conference call. We thank you for your participation and you may now disconnect.
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Yes.
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Okay.
Yes.