Q1 2024 Unifi Inc Earnings Call

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Good morning, everyone. Thank you for attending unifies first quarter fiscal 'twenty 'twenty four earnings conference call. We do apologize for the technical difficulties in the late start, but we will be quick and I hope to answer your questions as quickly as possible.

Today's conference is recorded and you have the speakers for today as Al Carey Executive Chairman at Ingalls, Chief Executive Officer, and myself, a J Edgar interim Chief Financial Officer and Treasurer.

During this call will reference our webcast presentation that can be found on the Investor Relations section of unify dot com. Please familiarize yourself with page two of that slide deck as I turn the call over to Al Carey. Okay. Thank you a J.

Morning, everybody. Thanks for joining the call. This morning, I'll start by sharing some thoughts on the quarter and then discuss how we're managing through this challenging environment. We're in right now, but also how we're preparing for what we think will be a much better calendar 2024 after that I'll turn it over to Eddie Ingle, our CEO. If you look at our results.

It was a tough quarter from a sales and a profitability standpoint is once again.

Impacted by these persistent high levels of apparel inventory at retail and also a slower consumer demand, but the big issue for US is the lack of orders to our plants and that's the primary issue.

While there are signs of inventory levels that have come in near the nearing a bottom across the industry. This destocking process that we've talked about in the U S for quite some time has moved at a slower pace than we expected.

And I believe based on our feedback from customers and also public disclosures by others that are in our sector. The majority of industry would say the exact same thing.

One thing we've heard from our customers is that while brands and retailers are showing encouraging progress towards the destocking and the inventories are getting actually back to write about pre pandemic levels. Some retailers are taking a more conservative approach as they plan for the upcoming orders and they've been instructed their buyers.

Place smaller more frequent waters than they have in the past in an effort to preserve cash while the interest rates are where they are we're beginning to see that now.

All that being said inventory levels are declining and at some point the apparel industry has the stock back up to start to normalize and it looks like that would be after the holidays.

During a time like this is very important for our organization to focus on things that we can control and we're doing that and I would tell you that our team's morale is good that our heads are down and we're working hard.

But those things that we're focused on preserving cash and managing inventories closely as well as capex, we're managing our costs tightly.

We are gaining market share in the U S is our number one competitor has exited the market.

We're gaining traction with new customers in the segment called beyond apparel, we have several new categories that we're moving forward on.

And Additionally, we have some very interesting innovations on repreve, which will contribute to our long term growth.

And we would like to tell you more about that as soon as we have a little bit more details in the future.

So we're going to keep executing against the things in our control in this difficult environment. We believe the future of sustainability only gets bigger with the consumer as time goes on and this bodes well for our <unk> business and we see the business getting substantially better in 202004 calendar year.

So thats my piece I'd like to turn it back over to Eddie angle our CEO.

Thanks, Al and good morning, everyone.

As Alan highlighted our first quarter results came in below our expectations as conditions across the apparel industry have continued to create difficult circumstances for our business.

While it's been badly and challenging for us the last several quarters. We believe we are nearing the bottom of this destocking situations and we're optimistic that the industry will begin its recovery in the first half of calendar 2024.

In the meantime, we will continue to be nimble in managing our operations navigating this environment and adapting as necessary.

But at the same time remaining positioned to meet the current and future needs of our customers.

I'm pleased to note that we were able to generate positive free cash flows and a significant increase over recent periods are facing the macro headwinds.

Now turning to slide three for an overview of the quarter.

<unk>, a weak demand levels led to lower than expected revenue and EBIT performance during the quarter.

In the first quarter, we recorded $138 8 million in net sales, marking an 8% sequential decrease compared to the fourth quarter of 2023.

During the quarter, we made a focused effort to recapture customer interests in Central America spending time re engaging with customers.

Now based on these efforts and new competitive dynamics, we expect to gain market share in the Americas in the coming quarters.

From a competitive standpoint in the Americas, one of our direct competitors in the region Acura, a Mexico based production plant and subsidiary of Outback recent announced it was shutting down its operations.

As a result.

Meaningful volumes are in our sites, we expect to capture a large portion of that opportunity.

We project that we'll start to see the benefit of this as we move through the first half of calendar 2020 for once the inventory from the closure has been flushed out of the market.

Additionally, in the Americas, we continue to securing new orders for what we are calling beyond apparel and non apparel markets, such as mattresses soft flooring and more.

In Brazil, we are experiencing record volumes and currently operating at 90 plus percent capacity utilization.

However, our profitability has been negatively impacted due to the continued margin pressures, resulting from Chinese competitors dumping import volumes due to weak demand in the local market, which is causing us to stay at lower pricing levels.

Our pricing position should start to improve once China's operating environment occurs.

Our overall profitability has been temporarily hampered by some pricing adjustments, we've made to align lower raw material input costs.

To mitigate these pricing pressures, we've been deliberate with our actions to optimize our operation to maximize the productivity of our resources.

This includes aligning labor and manufacturing resources to meet the needs of the current demand environment to protect margins and boost efficiency.

Our continued focus on controlling costs across the business as evidenced by our positive cash flow generation during the quarter, despite the challenging profitability landscape.

We remain committed to controlling costs and disciplined capital management going forward in order to maintain a healthy balance sheet, while ensuring we're strategically positioned to meet the recovery in demand levels in an efficient manner.

It's important to note that we will continue to invest our resources to develop new innovative products as we believe our innovation capabilities are central to our growth potential and the expansion of our brand into new categories, especially as it relates to our strong repreve platform.

Turning to slide four to discuss Repreve in marketing.

During the first quarter were pre represented 31% of sales, marking a sequential quarter and year over year increase as a percentage of net sales pre sales continued to be negatively impacted by the ongoing economic environment in China and the overall slowdown in apparel productivity.

We remain confident in the demand for our sustainable fibers and believe that as China begins to recover we will see a rebound of repreve as a branded leader in this space.

On the marketing front, our focus remains on elevating our flagship brands repreve through a mix of <unk> initiatives.

Leveraging our brand partners is vital as evidenced by marketing partnerships with Tom Telecom for meal and <unk> among others during the quarter on the <unk> front, we exhibited at a number of trade shows globally over the quarter, where our interests in our costs cutting edge textile takeback remains very very strong.

Providing our mill partners for the marketing support they need to tell there were pre story is also critical and as we move through Q2, we will continue to build on our established momentum with the new mix of partnerships combined with new product launches.

I'll now pass the call over to Jay to discuss the financial results.

Eddie let's move into financial results, beginning with slide five we provided a year over year comparison on net sales and gross profit for each first quarter as expected consolidated net sales were 22, 7% lower than the prior year, primarily resulting from the weak demand environment for apparel and the associated decline in pricing from lower raw material costs as mentioned on our last call the.

Expanded chip and flake product line sales continue to broaden the portfolio in the Americas segment, which also contribute to overall lower average selling prices for this segment. The Brazil segment again saw pricing pressures from competitive Chinese imports in connection with aggressive pricing on production coming out of China. The Asia segment maintained strong pricing and margin profile.

And parts of unified innovative pipeline, which is helping to limit the impact on net sales from the overall volume weakness from a gross profit perspective on slide six the volume pressure in the Americas together with a selling price pressures in Brazil unfavorably impacted gross profit.

Turning to slide seven for a sequential sales comparison, there was a mix of volume and pricing impacts across the segments specifically in the Americas yarn volume declines were mostly offset by chip and flake sales in Brazil pricing pressures weighed heavily slide eight conveys the change in gross profit, which is very similar to Q4 of fiscal <unk>.

23, and that weaker fixed cost absorption in the Americas was partially offset by modest sequential increases in gross profit within both the Brazil and Asia segments now moving onto our balance sheet and liquidity position on slide nine I will cover a few highlights before passing the call back to Eddie.

As you recall a year ago, we successfully refinanced our asset backed credit facility, providing significant liquidity to complement our global cash on hand during the quarter. We continued to focus on working capital management and cost controls, enabling us to produce operating cash flows and reduce net debt in this weak demand environment. Furthermore, we produced.

Positive free cash flows in the quarter as we were able to limit our capex spend until there is a more pronounced recovery in apparel industry demand. Accordingly, we are confident that our business remains well positioned for realizing profitable growth opportunities when the apparel industry rebounds, and its supply chain has normalized I'll now pass the call back to Ed.

Hey.

Thank you AJ.

Before we turn the call over to our Q&A session I'd like to turn to slide 10 for a review of some of our main fiscal 2020 for commercial and operational initiatives, we implemented in the Americas business at the start of the year.

I have already discussed the ways in which we have executed against many of these initiatives during the quarter and some capacity with our remarks today.

But I'll take a moment to provide a summary of the developments we've made across the initiatives during the quarter in respect of go forward strategy for each.

Starting with the commercial initiatives, we are focused on growth and optimizing the commercial process our efforts to diversify our portfolio in the Americas through chip and flake sales had been successful and have experienced strong adoption and we will continue to pursue this revenue opportunity going forward.

Additionally, on the commercial front, we continue to develop our beyond apparel business and are excited about the growth opportunities in those markets.

Further we are constantly evaluating potential ways to enhance our sales process and improve our customers' experience.

We believe our newly implemented sales process supports better outcomes for us and better experiences for our customers.

These efforts should also help us attack the Americas opportunity I mentioned earlier and capitalize on the exit of a competitor from the market.

Lastly on the commercial side.

We're allocating our time to more frequent customer engagements to better understand their needs and identify ways to deliver the most value to them that we can this.

This is an ongoing constantly evolving process that we believe will enhance our customer relationships, which in turn drives increasing value creation over time.

Moving to our operational priorities, the existing evo installations, and the benefits, resulting from automation, including improved efficiency and productivity have been value valuable, especially as we navigate the demand challenged environment.

From a labor standpoint in the Americas, we continue to manage our head count through attrition during the quarter and will maintain a diligent hiring approach in this environment.

And I want to make sure that this is clear we have not taken actions to significantly adjust our head count but have managed that through a careful attrition process. We've done so because we know that we need to flex our organization when market conditions return to normal, which we continue to believe will start in the first half of calendar 2024.

Some of our other key operational initiatives include aligning our customers aligning our production with our customers' production activities.

Focusing our attention on working capital to improve cash flows through effective planning and.

And I want to reiterate how well our team executed on this initiative during the quarter. This will remain a critical focus area for us.

Now, let's turn to slide 11 of the presentation to discuss our expectations for the upcoming second fiscal quarter, our forecast for the second quarter of fiscal 2024 includes sales on profitability performance that is generally consistent with the just completed first quarter.

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 shareholders now I want to close by thanking all of our unify employees for their hard work and efforts as we move through this difficult period with that we will.

Now open the line for questions.

Your first question comes from the line of Anthony <unk> from Sidoti Anthony Your line is now open.

Hey, good morning, and thank you for taking the questions. So first I guess, just a quick observation overall nice job as far as managing your cash flows.

A tough demand environment.

Congrats on being able to do that.

So as far as my first question as far as pricing so that was down I believe about 18%.

The year over year basis.

And one of the slides you guys talked about.

Doing some things as far as.

Transforming the pricing execution components of the sales process. So maybe.

Can you just walk us through.

Now what happened with pricing.

In the quarter versus a year ago, and how do you think of the year.

Your new initiatives that will help too.

Certainly improve on that.

Sure Anthony it's a J I'll start off with that question.

The year over year difference that youre seeing labeled as price mix.

There is very much a mix effect in there as well for price, we certainly need to align for our customer value best align the pricing with the raw material costs as well as we can.

And then I'll, let Eddie you also comment on some of the other sales and commercial activities.

As we mentioned in the last call we are.

We are having to react to the.

The demand situation and we are being very careful about making sure we support our customers at this time and one of the main initiatives. We have in this area is activity based costing process. So we're really evaluating what does it cost to make these specialty yarns and what does it cost us to make the.

More.

What are your top yarns high running volume items, and so we're giving the opportunity for our customers to place larger orders and in turn we can adjust our price accordingly, so we're going through this process right now.

We have a long way to go but certainly something that we are focusing on to make sure. We bring the right value to our customer at the same time protect our business.

Understood. Okay. Thank you for that and then.

As far as the changing competitive dynamics that you use.

You spoke about that anyway that you guys maybe.

Quantifiable about the as far as what the opportunity could be for you guys as far as.

Benefits.

In calendar 'twenty four.

Yes.

We were very.

We are very confident right now that we're going to pick up.

The majority.

John do you have that business.

For several reasons that business was being that product was being produced in Mexico that was being exported up here.

Roughly 30 million pounds, a year and we talked about beyond apparel a lot of that is in the beyond apparel areas like mattress and automotive and we believe we are well positioned to service the customers actually better out of the U S and out of Mexico, we have built.

A lot of new relationships with some of our customers in the last several months as we learned about this new development and we're getting a lot of really positive signals from from our customer base. We don't expect to see that business pick up from this until beginning of the calendar year as as as the inventories are depleted.

Like we said on the call but.

Very confident that we'll be able to.

Support the market as this competitor exits.

Understood Okay.

That sounds good and then in terms of the.

Flake and chip revenue.

How much of your sales is coming from that.

What's the opportunity you think going forward.

Anthony I'll start there is still a modest just modest not significant portion of the sales portfolio right. Now we've continued to use much of that product to balance external sales and internal consumption, but we do see a lot of interest with customers in terms of.

Some of the non textile and beyond apparel applications.

Applications with that but currently again not a significant portion of the portfolio, but something we are we continue to charge towards and I'll add to that is obviously, a lower price point than yarn, because there's fewer steps involved but what we are excited about it as a continuation of our drive to put more sustainable products out in the marketplace.

We do.

We believe we have some quality attributes and our chip, especially on our RASM our repreve resin.

The market has taken up very nicely. So as we move through the year and while we did have a big jump.

Quarter over quarter year over year.

We do expect to continue that growth as we move through this calendar.

This fiscal year.

Understood. Okay. Thank you for that and then.

So if you look at the business kind of longer term.

Obviously, the current demand environment is not good at the moment, but.

Do you think perhaps maybe there's an opportunity for some facility consolidation.

Maybe perhaps some streamlining opportunities I mean, you do have a lot of.

Fixed costs a lot of.

Again facilities here in the U S. So how do you think about this longer term in the context of the of this.

The environment that we're in and you mentioned also that retailers may be more careful as far as placing new orders. So just what are your longer term thoughts.

On that.

And good question.

First of all on the retailers I think they are going to be cautious around what they order and but what that does mean, they will be waiting till the last minute, but when the last minute comes we do expect to see a sharp increase in demand, especially in Central America as.

As as the inventories are funny.

Stopped and the consumer demand.

Gets back to more normal but from the fixed cost point of view, we are looking at that all the time and we've done a lot of work already around trying to reduce.

Our fixed costs.

We are very diligent about looking at all and every options and as we move through the fiscal year.

We're going to be looking at what is the real demand out there in the marketplace and we adjusted accordingly.

Yeah.

Okay understood. Okay, well, thank you very much and best of luck.

Thank you very much.

Thank you Anthony.

Yeah.

There are no further questions at this time I will now turn the call back over to the presenters.

Thank you.

Okay.

This concludes today's conference call you may now disconnect.

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