Q2 2024 Unifi Inc Earnings Call
Good morning, and thank you for attending unified second quarter fiscal 'twenty 'twenty four 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 answer session speakers for today's call include Al Carey Executive Chairman, Eddie Ingle, Chief Executive Officer, a J Echo Chief Financial Officer. During this call management will be referencing a webcast presentation that can be found in the.
The relations section of unified Dotcom.
Please familiarize yourself with page two of the slide deck for cautionary statements and non-GAAP measures.
Now I'll turn the call over to Al Carey Al.
Good morning, everyone and thanks for joining our call. This morning.
I'd like to begin this call by telling you a little bit about some actions that we're taking to improve the long term long term performance of the company and allow us to reach the potential that we believe that we've got.
I'm not going to speak about the Q2 results as Eddie and H are going to take you through those in just a few minutes. The only thing I'd say about this quarter too.
Is that its right about what we told you what we told you it would be during our last earnings call. We continued to experience softness in the apparel category and the high inventory levels in that supply chain.
There are signs of a gradual pick up in our sales and that should continue as we go through the balance of fiscal 2024. So for the next six months.
The industry has had a solid end of the year apparel sales inventories appear to be pretty much back to pre COVID-19 levels.
Now for the last 12 to 18 months, it's been a very difficult period.
We've looked at we've had to deal with the macro issues that are affecting the apparel category and our volumes, but as you've heard before don't waste the crisis and we're not going to.
We found some weaknesses in our business as we've gone through the last 12 months and we think that we can turn those into opportunities for growth as we take the right actions and that's exactly what we've done and it's actually already underway.
We did a deep dive with our organizational structure and the processes and the costs that are associated with those and we are taking out significant costs.
Improving our operational efficiencies in North America.
Our intention is to take the large portion of those savings from this profitability improvement plan and reallocate some of those to improve the profitability of our North American operations.
To invest in product innovation for Repreve.
And to become less dependent on the apparel category by further penetrating other end use markets.
More to come on those priorities and boats eddies and a jay's comments, but we've made good progress on this so far we began the effort in Q2, probably around November December we've taken substantial actions already on the headcount front.
And most of these actions that were taken and this isn't this productivity and our profitability improvement plan should be completed by the end of Q3, a few actions trickling into Q4 most likely.
We expect that the results will be reflected mostly in the new fiscal year coming, but even a little bit into Q4, perhaps.
One other thing I'd like to add we've had several young leaders in our organization that will be elevated to key roles in the company as a result of these changes.
They were responsible along with Eddie for developing these plans and now they will be responsible for the execution of those plans, which gives us all a lot of confidence in what we're going after.
So let me turn it over to Eddie Ingle right now our CEO, who will take you through the details on all of this.
Thanks, Al and good morning, everyone.
So as I mentioned I'm going to talk about a second quarter fiscal results, which were in line with our expectations, but were negatively impacted by the ongoing inventory destocking challenges that would continue to say you're in the apparel industry and its supply chains. However, we remain optimistic that we will begin to see demand normalization in calendar year 2000.
24.
As Al mentioned, we are continuing to take proactive actions to control costs and improve the efficiency of our operations in order to strengthen the company's position and our <unk>.
Improved results.
Impact of these actions are beginning to show in the underlying performance of the business as.
As we delivered meaningful improvement in gross profit performance in the second quarter.
If you turn to slide three for an overview of the period, we recorded $136 $9 million net sales during the second quarter were essentially flat compared to $136 2 million in the second quarter of fiscal 2023 higher sales volumes were largely offset by lower average prices due primary.
Lead to lower raw material costs.
Our underlying performance has stabilized as the global apparel inventory destocking should be nearing its end, allowing us to make more strategic decisions in how we position the business for optimal performance while at the same time, maintaining the ability to meet the needs of our customers.
In the Americas segment, we saw modest improvements in volume, though sales levels remain below our historical averages and this can be mainly attributed to continued weakness in apparel demand in the Americas, we expect to continue to take share in calendar 2024 and benefit from the exit of one of our primary competitors in the region.
We've mentioned in prior calls.
In Brazil, we continue to see improved performance.
Our strong sales volumes and increased gross profit were partially offset by the continued unfavorable pricing dynamics from competitive imports.
In Asia.
While we continue to face challenges with the apparel demand our results were positively impacted by our rich and diverse sales mix.
Turning to operations, we continue to evaluate our expense structure and have been proactive in identifying opportunities to generate efficiencies and improved performance across the business.
We spent the last year, taking proactive strategic actions aimed at reducing ongoing costs and optimizing operation operations to enhance profitability.
In recognition of the current environment, we further bolstered those initiatives to the new profitability improvement plan, we announced last night.
This plan is expected to provide over $20 million in accumulative profitability benefit moving forward, which will put us in a stronger position to leverage the anticipated recovery in apparel demand in calendar 2024.
The first part of this plan focus on realigning our resources, reducing our head counts and resetting costs, primarily in the U S. This.
This has allowed us to significantly lower our variable operating expense across both the production had administrative functions. These actions will be completed in this quarter ending March 2024, and as a result, we anticipate a reduction in expenses by approximately $2 $5 million per quarter on a run rate basis, beginning in fiscal 2025.
While the execution of this plan came with very difficult decisions. We are confident that these changes will lead to a substantial improvement in profitability and operating profile of the basis going forward.
We believe unify as I.
A robust foundation for future growth and innovation.
And the second part of our plan is aimed at expanding our gross margins due to the transformation of our sales process.
The approach we've taken includes streamlining processes enhancing inventory management and realigning resources to boost efficiencies. Once completed we expect to see a $6 million annual improvement in our gross profits, which will phase in throughout the rest of the calendar year.
We plan to strategically invest these cost savings as I had mentioned and increased profits into the areas of our business that promise additional revenue and margin enhancing opportunities.
This reinvestment will not just bolster our traditional apparel market penetration, but would also enable us to explore and capitalize on new market segments.
Innovation remains at the core of our strategy and leveraging our innovation capabilities in new markets is essential to unlocking our growth potential we will continue to allocate resources and make investments to develop new and innovative products that expand our brand in new categories, particularly in the areas of our establish repreve platform as well as our <unk>.
Bridging beyond apparel initiatives, both of which we believe have significant growth opportunities.
In tandem with our operating realignment, we have made a number of strategic appointments across our leadership team to drive further growth and focus and innovation at unify.
And I'm very proud to make these announcements as leadership development has been a priority for our team and the promotion of these leaders onto our executive team is well deserved.
So these series of important decisions to streamline operations and realignment leadership team to maximize our growth and profitability profile going forward. We are fortunate to have a j's financial expertise and sophisticated accounting and business acumen.
He brings a robust knowledge of our operational and financial processes and has been a critical driver of our strategy over the last few years. These skill sets coupled with his abilities as a leader of our finance team separated him throughout the search process is clearly the best candidates.
Next Meredith Boyd has appointed has been appointed executive Vice President and Chief product Officer, Meredith joined Unifi in 2007 has held progressively senior roles throughout our organization, including our manufacturing operations brand sales and business development, where she had direct customer and industry interactions.
And then product development, where she was integral to our innovation initiatives.
For the last three years Meredith Meredith has served as our senior Vice President of sustainability technology and innovation her contributions and that capacity has been pivotal to our international growth and the expansion of the Repreve brand and value added product technologies.
We will leverage Meredith probe and success in international impact by having her lead all innovation plant technology marketing and business development. We expect this organizational change to be critical to promote our global growth initiatives.
Brian Moore will take on the role of Executive Vice President and President of Manufacturing, Inc. Brian started his career at unified back in 1993 and move to Asia for unify in the early two thousands.
For about 15 years, Brian gained additional experience in the private equity world returning to unify at the beginning of 2020.
Most recently he has served as the senior Vice President of direct sales and operations.
<unk> extensive experience and successful leadership in sales and operations are invaluable to our Americas footprint.
Greg Sigman, our general Counsel and corporate Secretary has also been promoted to executive Vice President and will continue to consume more and strategic leadership responsibilities, including the management of our government affairs and sustainability functions.
This refresh leadership team is central to our growth strategy and each has exemplified our commitment to innovation and market leadership over there 10 years with the company on behalf of the board I'd like to congratulate each leader.
Turning to slide four to discuss Repreve in marketing during the second quarter were pre represented 33% of sales, marking a sequential quarter and year over year increase as a percentage of net sales.
Sales of Repreve have been adversely affected by the current economic challenges in China, and a general downturn in apparel production, we expect a rebound in repreve sales once China sees improvement in economic conditions and apparel demand, we remain fully confident in the demand for sustainable fibers and reprieves brands position as a leader in the industry.
Now on the marketing front, our focus remains on elevating our flagship brand Repreve, we're thrilled to announce that this week repreve a once again have a present presence at the Wm Phoenix open the brand teamed up with Wm and Pete MLR to convert water bottles like those collected last year's events into our specialization people are 2024.
<unk> Phoenix open apparel collection that will debut at the upcoming event and we are honored to be part of such an exciting collaboration at a nationally covered events.
I will now pass the call over to Jay to discuss the financial results. Thank you Eddie before I discuss the financial results I'd like to recognize the promotions and achievements with Brian Greg and Meredith I look forward to working closely with a sustained leaders in our entire global team as we chart a path for a more profitable and successful unify the results this quarter were better.
Than our Q1, despite including the usual scheduled seasonal shutdowns and we continue to operate in a weak demand environment. In addition to the operating results that will cover on the next several slides we recorded the following unfavorable impacts.
$1 3 million of bad debt provision to recognize financial difficulties for a customer in our U S market.
$5 1 million in restructuring costs, which includes $2 7 million related to the dissolution of an unprofitable joint venture and $2 4 million of severance costs.
Beginning with slide five we have provided a year over year comparison on net sales and gross profit for each second quarter consolidated net sales were flat as the decline in pricing, which has started to stabilize in the current fiscal year was primarily impacted by lower raw material costs year over year.
Volume remained seasonally strong for the Brazil segment, although Chinese imports continue to pressure selling prices. The Asia segment continues to maintain a strong pricing and margin profile from growth and the Repreve brand and several key customer programs.
Which is helping to offset the impact on net sales from the volume weakness from a gross profit perspective on slide six the lower raw material costs and variable cost management efforts provided for overall improved profitability. However, the seasonally lower volume and weak apparel demand environment in the Americas combined.
The selling price pressures in Brazil continued to Unfavourably impact gross profit.
Turning to slide seven for a sequential sales comparison, we achieved a similar volume level compared to the first quarter. Despite the impact of domestic holidays.
Sales volume in dollars were generally flat, although seasonally impacted by the normal holiday period for the Americas and Brazil segments.
Slide eight.
Displays and increase in gross profit on a sequential quarter basis as variable cost management and benefited the Americas and <unk>.
<unk> segments.
I'll now make a few comments on our balance sheet and liquidity position from slide nine before passing the call back to Eddie for his closing commentary.
During the quarter, we continued to focus on working capital management and cost controls as you've heard from Eddie earlier net debt increased by $6 8 million from the previous quarter and $2 8 million from the prior year end.
Primarily due to the working capital needs of the business and the continued weak demand environment.
Our capex spend of $3 million in the second quarter mirrored the outflows in the first quarter as we await anticipated recovery and apparel industry demand before those levels are lifted.
Operator: Good morning, and thank you for attending Unified's second quarter fiscal 2024 earnings conference. Today's conference is being recorded, and all lines have been placed on mute to prevent any background noise.
You will recall that we began in 18 months pause on our texturing machinery repurchases beginning in March 2023.
Operator: After the speaker's remarks, there will be a question and answer session. Speakers for today's call include Al Khairi, Executive Chairman; Eddie Ingle, Chief Executive Officer; and AJ Ecker, Chief Financial Officer. During this call, management will be referencing a webcast presentation that can be found in the Investor Relations section of Unifi. Please familiarize yourself with page 2 of that slide deck for cautionary statements and non-GAAP measures. We will now turn the call over to Al Carey. Okay?
And in December 2023, we extended this pause for an additional 12 months. We continue to remain confident that our business is well positioned for realizing profitable growth opportunities when the apparel industry and its supply chains normalize, especially with the recent actual actions outlined by al and Eddie earlier.
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 a J I'd like to turn your attention to slide 10 before turning the call over to our Q&A session. Despite the ongoing challenges in the apparel industry, we have taken and will continue to take the necessary strategic actions to adapt to the current environment.
Albert P. Carey: Thank you. Good morning, everyone, and thanks for joining our call this morning. I'd like to begin this call by telling you a little bit about some actions that we're taking to improve the long-term performance of the company and allow us to reach the potential that we believe that we have. I'm not going to speak about the Q2 results, as Eddie and AJ are going to take you through those in just a few minutes.
And also position unify for long term success.
Our focus remains steadfast on driving efficiency enhancing profitability and seizing the growth opportunities on the horizon, particularly in our innovation innovative repreve and beyond apparel initiatives.
Albert P. Carey: The only thing I'd say about this quarter, too, is that it's right about where we told you it would be during our last earnings call. We continued to experience softness in the apparel category and high inventory levels in that supply chain. However, there are signs of a gradual pick-up in our sales, and that should continue as we go through the balance of fiscal 2024, so for the next six months. The industry has had solid end-of-year apparel sales. Inventories appear to be pretty much back to pre-COVID levels. Now, for the last 12 to 18 months, it's been a very difficult period.
We believe we are positioned to expand our global market share.
I mean this is already taking place in the Americas, and we expect to gain a meaningful volume and capture a significant portion of this opportunity as we move through the first half of calendar 2024.
The strategic alignment of our resources on new appointments to the leadership team combined with the anticipated recovery in the power industry on the horizon will put us in a position of strength and growth going forward.
As we continue to implement cost saving measures and invest in areas with high growth potential we are confident in our ability to deliver value to our stakeholders.
Albert P. Carey: We've had to deal with macro issues that are affecting the apparel category in our volumes, but as you've heard before, don't waste a crisis, and we're not going to. We've found some weaknesses in our business as we've gone through the last 12 months, and we think that we can turn those into opportunities for growth if we take the right actions, and that's exactly what we've done, and it's actually We did a deep dive into our organizational structure and the processes and the costs that are associated with those.
Now turning to the last slide 11, and our forecast for the third quarter of fiscal 2024 is as follows net sales between $149 million and $154 million adjusted EBIT between minus $2 million and $1 million.
Capital expenditures between $4 million and $5 million and the effective tax rate is expected to demonstrate continued volatility.
As we look ahead, we remain cautiously optimistic that our markets are positioned to rebound in calendar 2024, and we expect to deliver quarterly revenue and earnings improvement on a sequential basis.
Albert P. Carey: And we are taking out significant costs and improving our operational efficiencies in North America. Now, our intention is to take a large portion of those savings from this profitability improvement plan and reallocate some of those to improve the profitability of our North American operations, to invest in product innovation for Reprieve, and to become less dependent on the apparel category by further penetrating other end-use markets. More to come on those priorities in both Eddie's and AJ's comments, but we've made good progress on this so far. We began the effort in Q2, probably around November-December.
We are very 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.
Thank you at this time I would like to remind all participants in order to ask a question. Please press the star followed by the number one on your telephone keypad, we will pause for just a moment to compile the Q&A roster.
Our first question comes from the line of Anthony <unk> Li <unk>.
<unk> from <unk>. Please go ahead.
Albert P. Carey: We've taken substantial actions already on the headcount front, and most of these actions that were taken in this productivity and profitability improvement plan should be completed by the end of Q3, with a few actions trickling into Q4 most likely. We expect that the results will be reflected mostly in the new fiscal year coming, but even a little bit into Q4. One other thing I'd like to add is that we have several young leaders in our organization that will be elevated to key roles in the company as a result of this change. They were responsible, along with Eddie, for developing these plans, and now they will be responsible for the execution of those plans, which gives us all a lot of confidence in what we're going after. So, let me turn it over to Eddie Engel right now, our CEO, who will take you through the details of all the plans. Thanks, Al, and good morning, everyone.
Good morning, and thank you for taking the questions. So first.
Congratulations to a J and others on their well deserved promotions.
So I guess first question is just wanted to get a better understanding of the volume and pricing dynamics. I know you guys talked about the lower material costs impacting that but maybe if you could just be a little bit more specific as to what happened in the second quarter.
Whats embedded in your third quarter guidance from a volume and pricing perspective.
How should we think about these two.
Issues on a longer term basis.
I'll take that Anthony Thanks for call and thanks for joining us today.
Yes.
Q2 was obviously impacted by the seasonality of the Christmas holiday in both the Americas and in Brazil.
And we I'm pleased to say in Brazil, we are seeing very strong volumes, but the pricing as we mentioned on the call is significantly impacted by the.
Eddie Ingle: As I mentioned, I'm going to talk about the second quarter fiscal results, which were in line with our expectations but were negatively impacted by the ongoing inventory de-stocking challenges that we continue to see in the apparel industry and its supply chains. However, we remain optimistic that we will begin to see demand normalization in calendar year 2024. As Al mentioned, we are continuing to take proactive actions to control costs and improve the efficiency of our operations in order to strengthen the company's position and improve results. The initial impacts of these actions are beginning to show in the underlying performance of the business, as we delivered a meaningful improvement in gross profit performance in the second quarter. If you turn to slide three for an overview of the period, we recorded $136.9 million in net sales during the second quarter, really essentially flat compared to 136.2 million in the second quarter of fiscal 2023. Higher sales volumes were largely offset by lower average prices, due primarily to lower raw material costs.
Chinese environments as they seek to find opportunities and sell the extra polyester outside of China.
We're not expecting to see pricing improve.
<unk> significantly.
In Q3 in Brazil, but we do expect to improve somewhat and the volumes will.
Continued gets stronger as we move through the quarter and get away from any seasonal impact in Asia.
As we move through the quarter, we did.
<unk> seen improvement in our.
Mix, which really improve the average price in that in that region and the volumes are coming back slowly as we mentioned on the call and it's driven primarily by.
Some of the brands.
Really getting to the end of this destocking process, which we're very excited about in the U S where you have a.
The dynamic pricing structure.
We have been.
Reacting to the to the needs of the customers as the raw materials have come down and I I.
Eddie Ingle: Our underlying performance has stabilized as the global apparel inventory destocking should be nearing its end, allowing us to make more strategic decisions in how we position the business for optimal performance, while at the same time maintaining the ability to meet the needs of our customers. In the Americas segment, we saw modest improvements in volume, though sales levels remain below our historical averages, which can be mainly attributed to continued weakness in parallel demand. In the Americas, we expect to continue to take share in calendar 2024 and benefit from the exits of one of our primary competitors in the region that we've mentioned in prior calls. In Brazil, we continue to see improved performance. Though our strong sales volumes and increased gross profit were partially upset by the continued unfavorable pricing dynamics from competitive imports.
I am very excited about what will happen in Q3, because all of the inventories of that competitor that went out it should be.
<unk> have been eliminated by the end of Q2.
Our volumes should improve pricing will still be under pressure.
But raw materials have been stable so our margins.
As we move through the quarter are expected to.
Certainly improved slightly but more importantly, our volume is going to improve as we move through the quarter.
Okay.
Thank you for that.
Thank you for those details.
So.
So I guess as far as your.
The year announcement about.
Your cost improvement plan.
So I know you guys have talked about moving beyond apparel for a while so as you look to invest in margin accretive growth opportunities I guess, maybe maybe what's new here in this plan that there wasn't in the prior plan as far as moving beyond apparel maybe.
Eddie Ingle: In Asia, while we continue to face challenges with apparel demand, our results were positively impacted by rich and diverse sales. Going to operations, we continue to evaluate our expense structure and have been proactive in identifying opportunities to generate efficiencies and improve performance across the business. We spent the last year taking proactive, strategic actions aimed at reducing ongoing costs and optimizing operations to enhance profitability. In recognition of the current environment, we further bolster those initiatives through the new profitability improvement plan we announced last night. This plan is expected to provide over $20 million in accumulative profitability benefits moving forward, which will put us in a stronger position to leverage the anticipated recovery in apparel demand in calendar 2024. The first part of this plan focuses on realigning our resources, reducing our headcounts, and resetting costs, primarily in the U.S. This has allowed us to significantly lower our variable operating expenses across both production and administrative functions.
Maybe you could talk about maybe some low hanging fruit opportunities in.
Which vertical market do you think it will take longer to penetrate.
Yes.
We have been talking about beyond apparel.
Even going back to our Investor day, two years ago.
I can say, while we were not going to.
Should disclose exactly the details, but we are very much focused on two segments here in the U S. At the automotive segment and the home, particularly in mattress and we are seeing.
And opportunities there that we expect to grow in the coming quarters part of the changes that we made in the leadership was to create an organization that was very focused on innovation and growth in these beyond apparel areas and as these new leaders get 70, and the ROE you are going to be hearing more about that.
Results of that but certainly the innovation.
Coupled with Repreve in these new markets are going to be the targets are the targets and.
Eddie Ingle: These actions will be completed in this quarter ending March 2024, and as a result, we anticipate a reduction in expenses by approximately $2.5 million per quarter on a run rate basis beginning in fiscal 2025. While the execution of this plan came with very difficult decisions, we are confident that these changes will lead to a substantial improvement in profitability and operating profile of the business going forward. We believe UNIFI is a robust foundation for future growth and innovation, and the second part of our plan is aimed at expanding our gross margins through the transformation of our sales process. And the approach we've taken includes streamlining processes, enhancing inventory management, and realigning resources to boost efficiencies.
The challenge we have is.
Getting our costs right, which we have done now and getting taking those additional dollars and funding these growth opportunities. So the organizational changes along with additional monies available for these growth opportunities are going to be the fuel for these initiatives.
Uh-huh okay.
Sounds good Okay and then.
So as far as the cost reset and head count reductions was that mostly.
Corporate office or.
More in the.
And your facilities or was it.
Kind of.
Across the border or is it just more targeted cuts.
Yes.
Eddie Ingle: Once completed, we expect to see a $6 million annual improvement in our gross profit, which will phase in throughout the rest of the calendar year. We plan to strategically invest these cost savings, as Alan mentioned, and increase profits into the areas of our business that promise additional revenue and margin-enhancing opportunities. This reinvestment will not just bolster our traditional apparel market penetration but will also enable us to explore and capitalize on new market segments.
Hey, Anthony it's a J. Thanks for the comments earlier on <unk> question.
So the.
The reductions that we took in terms of the cost reset are very central to the U S. We certainly have some of those impacts to.
Corporate duties corporate office as well as some of our manufacturing facilities and the vast majority of those relate to salaried.
Understood. Okay. Thank you a J, okay and then.
Eddie Ingle: Innovation remains at the core of our strategy, and leveraging our innovation capabilities in new markets is essential to unlocking our growth potential. We will continue to allocate resources and make investments to develop new and innovative products that expand our brand in new categories, particularly in the areas of our established Reprieve platform, as well as our emerging beyond apparel initiatives, both of which we believe have significant growth opportunities. In tandem with our operating realignment, we have made a number of strategic appointments across our leadership team to drive further growth and focus on innovation at UNIFI, and I'm very proud to make these announcements, as leadership development has been a priority for our team, and the promotion of these leaders onto our executive team is well deserved.
So just switching gears.
So.
Looking at Asia, So obviously that has a high.
We're pre market.
That's the market, where you have the most the repreve penetration.
A lot has been talked about China as far as the post COVID-19 recovery being slower than a lot of people would have expected.
Just wondering if you guys could comment on China, what are you seeing there so far.
What's your expectation here.
Going forward.
Yes, as we said on several calls before Anthony annually discussions with you we.
We see Asia as a as a for us for our business as a feeder to western Europe and the U S brands. So the challenge we've had with the Asia environment is that it is cause ciao.
Eddie Ingle: So these series of important decisions to streamline operations and realign the leadership team to maximize our growth and profitability profile going forward. We are fortunate to have AJ's financial expertise and sophisticated accounting and business skills. He brings a robust knowledge of our operations to financial processes and has been a critical driver of our strategy over the last few years. These skill sets, coupled with his abilities as a leader of our finance team, set him apart throughout the search process as clearly the best candidate.
Chinese market to try and find other markets for their texture polyester, which is impacted particularly.
Our Brazil operation.
But as these brands have and retailers have reached there.
Their normal inventory levels, we are beginning to see the business come back and that is sort of somewhat separate from the difficult environment.
Economic environment, that's still occurring in China, as China, economic economy recovers and the capacity utilization increases they will very quickly as they normally have done modify their pricing methodology and that should improve what happens in Brazil and it also should.
Eddie Ingle: Next, Meredith Boyd has been appointed the Executive Vice President and Chief Product Officer. Meredith joined UNIFI in 2007 and has held progressively senior roles throughout our organization, including our manufacturing operations, brand sales, and business development, where she had direct customer and industry interaction, and in product development, where she was integral to our innovation initiative. For the last three years, Meredith has served as our Senior Vice President of Sustainability Technology and Innovation. Her contributions in that capacity have been pivotal to our international growth and the expansion of the reprieve brand and value-added product technology. We will leverage Meredith's proven success and international impact by having her lead all innovation, plant technology, marketing, and business development. We expect this organizational change to be critical to promote our global growth initiative. Brian Moore will take on the role of Executive Vice President and President of Manufacturing, Inc. Moore started his career at Unifi back in 1993 and moved to Asia for Unifi in the early 2000s. For about 15 years, Moore gained additional experience in the private equity world, returning to UNIFI at the beginning of 2020.
Improve some of the business that we have in China for China.
So were still awake and safer for China and a lot of people are looking at it but we are hearing.
As you are things that the Chinese government are doing to try and kickstart the economy there.
And that should benefit us somewhat also as well as the destocking.
That has been.
More or less finalized now in the industry.
Got you, Okay and it sounds like you guys are seeing I guess, some green shoots in terms of.
Inventory restocking or not yet.
Obviously, we've been in this prolonged period of Destocking. So are you seeing actually signs of actual restocking or where are we are we there yet.
Well hope to be there.
And the next quarter.
And we are seeing signs, but I will tell you that they whether it's because of the interest rates.
Or because the brands retailers are trying to be a little different there is a lot more smaller.
Walter orders more frequent orders than we would normally see in the past.
So I think theres, a cautiousness in the brands and retailers not to get back to having excess inventory that is changing how they sell but I would tell you over the last several months, we have seen to business in Asia, particularly in.
Eddie Ingle: Most recently, he served as the Senior Vice President of Direct Sales and Operations, and with successful leadership in sales and operations, Greg Sigmund, our General Counsel and Corporate Secretary, has also been promoted to Executive Vice President and will continue to assume more and strategic leadership responsibilities, including the management of our government affairs and sustainability functions. This refreshed leadership team is central to our growth strategy, and each has exemplified a commitment to innovation and market leadership over their tenures with the company. On behalf of the board, I'd like to congratulate each leader. Turning to slide four to discuss reprieve and marketing. During the second quarter, Reprieve represented 33% of sales, marking a sequential quarter and year-over-year increase as a percentage of net sales.
Improve.
As they move through the quarter so.
We don't think Chinese lunar new year is happening in February.
Or would you expect to continue to see that growth as we move into the March and the following.
The rest of our fiscal year so.
It's <unk>.
Like we said in the call we're cautiously optimistic about.
The brands and retailers getting back to normal, but I think they are still a little cautious about what inventory they have and how they respond to the consumer demands.
Gonna be ready and we are ready to react.
The way they do.
Whether they're going to.
Spike it or just be very cautious we will be ready for the growth that we're seeing.
Sounds good Okay, and then just a quick follow up on that so so as youre seeing these.
Smaller and more frequent orders.
Are you how are you dealing with pricing for those orders.
Eddie Ingle: Sales of the Prius have been adversely affected by the current economic challenges in China and a general downturn in apparel production. However, we expect a rebound in reprieve sales once China sees improvements in economic conditions and apparel demand. We remain fully confident in the demand for sustainable fibers and the Reprieve brand's position as a leader in the industry. Now on the marketing front, our focus remains on elevating our flagship brand, Reprieve. We're thrilled to announce that this week, Reprieve will once again have a presence at the WM Phoenix Open.
Just just making sure that you guys get the.
The margin that you guys deserve to get.
Yes, there is as part of this.
Sales transformation and we are continuing to match our pricing to the value we're giving so we we are changing.
Our approach as the market has changed.
And their demand because in the past people would want to have more stable pricing for longer programs. Since that is not the case we are reacting.
Our pricing is much more targeted based on the value that we're bringing to that product and as we move.
Move through the next two quarters, we're going to see the benefit of that from a profitability point of view and a margin perspective.
Eddie Ingle: The brand teamed up with WM and Peter Millar to convert water bottles like those collected at last year's event into a special edition Peter Millar 2024 WM Phoenix Open Apparel Collection that will debut at the upcoming event. We are honored to be part of such an exciting collaboration at a nationally covered event. I will now pass the call over to A.J. to discuss the finances. Thank you, Eddie.
One other thanks Bill.
This is al I'll, just I'll throw in one more comment.
In this.
Efficiency move we've taken out close to 20% of the.
Mark of the line items.
And most of those are line items that were very low volume low run times low margin.
And that effectively gets us to a positive margin mix, that's contributing there too. So some of these items that had been around forever.
AJ Ecker: Before I discuss the financial results, I'd like to recognize the promotions and achievements of Brian, Greg, and Meredith. I look forward to working closely with these esteemed leaders and our entire global team as we chart a path for a more profitable and successful UNIFI. The results this quarter were better than our Q1, despite including the usual scheduled seasonal shutdowns, and we continue to operate in a weak demand environment. In addition to the operating results that we'll cover on the next several slides, we recorded the following unfavorable impacts. 1.3 million of bad debt provision to recognize financial difficulties for a customer in our U.S. market. $5.1 million in restructuring costs, which includes $2.7 million related to the dissolution of an unprofitable joint venture, and $2.4 million of severance costs.
And finally, a jay and his team.
After.
Well, thank you for that additional detail.
Thanks, very much and best of luck going forward.
Thank you. Thank you. Thank you Anthony.
Thank you, ladies and gentlemen, as we have no further questions. At this time, we will conclude today's conference call. We thank you for participating and you may now disconnect.
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AJ Ecker: Beginning with slide five, we have provided a year-over-year comparison of net sales and gross profit for each second quarter. Consolidated net sales were flat as the decline in pricing, which has started to stabilize in the current fiscal year, was primarily impacted by lower raw material costs year-over-year. Volume remains seasonally strong for the Brazil segment, although Chinese imports continue to pressure selling prices. The Asia segment continues to maintain a strong pricing and margin profile from growth in the Reprieve brand and several key customer programs, which is helping to offset the impact on net sales from the volume weakening. From a gross profit perspective, on slide six, the lower raw material costs and variable cost management efforts provided for overall improved profitability.
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AJ Ecker: However, the seasonally lower volume and weak apparel demand environment in the Americas, combined with the selling price pressures in Brazil, continued to unfavorably impact gross profit. Turning to slide 7 for a sequential cells comparison, we achieved a similar volume level compared to the first quarter despite the impact of domestic holidays. Sales volume in dollars was generally flat, although seasonally impacted by the normal holiday period for the Americas and Brazil segments.
Thank you.
Okay.
AJ Ecker: Slide 8 displays an increase in gross profit on a sequential quarter basis as variable cost management benefited the Americas and Brazil segments. I'll now make a few comments on our balance sheet and liquidity position on slide nine before passing the call back to Eddie for his closing commentary. During the quarter, we continued to focus on working capital management and cost controls, as you've heard from Eddie earlier. Net debt increased by $6.8 million from the previous quarter and $2.8 million from the prior year end, primarily due to the working capital needs of the business in the continued weak demand environment.
Yes.
Thank you.
Okay.
AJ Ecker: Our CapEx spend of $3 million in the second quarter mirrored the outflows in the first quarter as we await an anticipated recovery in apparel industry demand before those levels are listed. You will recall that we began an 18-month pause on our texturing machinery purchases beginning in March 2023. And in December 2023, we extended this pause for an additional 12 months. We continue to remain confident that our business is well positioned for realizing profitable growth opportunities when the apparel industry and its supply chains normalize, especially with the recent actions outlined by Al and Eddie earlier. I will now pass the call back to Eddie to take us through the last slides of the presentation and make some final comments. Thank you, AJ.
Eddie Ingle: I'd like to turn your attention to slide 10 before turning the call over to our Q&A session. Despite the ongoing challenges in the apparel industry, we have taken and will continue to take the necessary strategic actions to adapt to the current environment and also position Unify for long-term success. Our focus remains steadfast on driving efficiency, enhancing profitability, and seizing the growth opportunities on the horizon, particularly in our innovative reprieve and beyond the parallel initiatives. We believe we are positioned to expand our global market share. And this has already taken place in the Americas.
Eddie Ingle: And we expect to gain meaningful volume and capture a significant portion of this opportunity as we move through the first half of calendar 2024. Strategic alignment of our resources and new appointments to the leadership teams, combined with the anticipated recovery in the apparel industry on the horizon, will put us in a position of strength and growth going forward. As we continue to implement cost-saving measures and invest in areas with high growth potential, we are confident in our ability to deliver value to our stakeholders. Turning to the last slide, 11, our forecast for the third quarter of fiscal 2024 is as follows. Net sales between $149 million and $154 million, and adjusted EBITDA between minus $2 million and $1 million. Capital expenditures between $4 million and $5 million, and the effective tax rate is expected to demonstrate continued volatility.
Operator: As we look ahead, we remain cautiously optimistic that our markets are positioned to rebound in calendar 2024, and we expect to deliver quarterly revenue and earnings improvement on a sequential basis. We are very confident in our position as a 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. Thank you. At this time, I would like to remind our participants that in order to ask a question, please press the star followed by the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Our first question comes on the line from Antony Lebedzinski from Zidotti. Please go ahead.
Operator: Good morning, and thank you for taking the questions. So first, congratulations to AJ and others on their well-deserved promotions. So, I guess, you know, the first question is you just wanted to get a better understanding of the volume and pricing dynamics. I know you guys talked about the lower material costs impacting that, but maybe if you could just be a little bit more specific as to what happened in the second quarter. What's embedded in your third-quarter guidance from a volume and pricing perspective? And how should we think about these two issues on a longer-term basis?
Eddie Ingle: I'll take that, Anthony. Thanks for calling. Thanks for joining us today. Q2 was obviously impacted by the seasonality of the Christmas holiday in both the Americas and in Brazil.
Eddie Ingle: I'm pleased to say in Brazil, we are seeing very strong volumes, but the pricing, as we mentioned on the call, is significantly impacted by the Chinese environment as they seek to find opportunities to sell textured polyester outside of China. We're not expecting to see pricing improve significantly in Q3 in Brazil, but we do expect it to improve somewhat, and volumes will continue to get stronger as we move through the quarter and get away from any seasonal impact. Now as we move through the quarter, we did see an improvement in our mix which really improved the average price in that region, and the volumes are going back slowly, as we mentioned on the call, and it's driven primarily by some of the brands... really getting to the end of this destocking process, which we're very excited about. In the U.S., we have a dynamic pricing structure.
Eddie Ingle: We've been reacting to the needs of the customers as the raw materials have come down, and I am very excited about what will happen in Q3 because all of the inventories of that competitor that went out should have been eliminated by the end of Q2. Our volumes should improve. Pricing must still be under pressure, but raw materials have been stable, so our margins as we move through the quarter are expected to certainly improve slightly, but more importantly, our volumes cannot improve as we move through the quarter. Thank you for that. Thank you for those details, Eddie.
Eddie Ingle: So, I guess as far as your announcement about your cost improvement plan. I know you guys have talked about moving beyond apparel for a while. So as you look to invest in margin-accretive growth opportunities, I guess maybe what's new here in this plan that wasn't in the prior plan as far as moving beyond apparel. Maybe you could talk about maybe some low-hanging fruit opportunities and which vertical markets you think will take longer to penetrate. Yeah, we have been talking about Beyond the Parallel, and even going back to our investor day two years ago, what I can say, while we're not at liberty to disclose exactly the details, but we are very much focused on two segments here in the U.S., the automotive segment and the home, particularly in the mattress segment. And we are seeing some of that, and Mark Borden. Thank you. Thank you very much.
Eddie Ingle: I think we've got a lot of opportunities there that we expect to grow in the coming quarters. Part of the changes that we made in the leadership was to create an organization that was very focused on innovation and growth in these areas beyond apparel. And as these new leaders get settled into the role, you're going to be hearing more about the results of that. But certainly, innovation coupled with reprieve in these new markets are going to be the targets. And the challenge we have is... getting our costs right, which we have done now, and taking those additional dollars and funding these growth opportunities. So the organizational changes, along with additional monies available for these growth opportunities, are going to be the fuel for these initiatives. Mm hmm. Okay, sounds good.
AJ Ecker: Okay. And then, so as far as the cost reset and head count reduction, so was that mostly in the corporate office or more in your facilities, or was it kind of, across the board with just more targeted cuts? Hey Anthony, it's AJ.
AJ Ecker: Thanks for the comments earlier on the question. So the reductions that we took in terms of the cost reset are very central to the U.S. We certainly have some of those impacts on corporate duties, the corporate office, as well as some of our manufacturing facilities, and the vast majority of those relate to salary. Understood. Okay. Thank you, A.J. Okay.
Eddie Ingle: And then, just switching gears, so, looking at Asia. Obviously, that is a high reprieve market, you know; it's the market where you have the most reprieve penetration. You know, a lot has been talked about China, as far as the post COVID recovery being slower than a lot of people would have expected. Just wondering if you guys could comment on China; what are you seeing there so far? What's your expectation here?
Eddie Ingle: Going forward? Yeah, as we've said on several calls before, Anthony, I know in discussions with you, we see Asia as a feeder for us, for our business, as a feeder to Western Europe and to U.S. brands. So the challenge we've had with the Asian environment is that it has caused the Chinese market to try and find other markets for their textured polyester, which has impacted, particularly our Brazil operation.
Eddie Ingle: But as these brands have reached their normal inventory levels, we are beginning to see business come back, and that is sort of somewhat separate from the difficult economic environment that's still occurring in China. Now, as China's economy recovers and their capacity utilization increases, they will, very quickly, as they normally have done, modify their pricing methodology, and that should improve what happens in Brazil. And it should also improve some of the business that we have in China for China. So we're still at wait-and-see for China. A lot of people are looking at it, but we are hearing, as you are, things that the Chinese government is doing to try and kick-start the economy there, and that should benefit us somewhat also, as well as the de-stocking that has been more or less finalized now. Gotcha, okay.
Eddie Ingle: And it sounds like you guys are seeing, I guess, some green shoots in terms of inventory restocking, or not yet? I mean, obviously, we've been in this prolonged period of destocking. So are you seeing actual signs of actual restocking, or are we there yet or hope to be there in the next quarter? We are seeing signs, but I will tell you that, whether it's because of the interest rates or because the brands and retailers are trying to be a little different, there are a lot more smaller orders, more frequent orders than we would normally see in the past. So I think there's a cautiousness among brands and retailers not to get back to having excess inventory, which is changing how they sell. But I will tell you, over the last several months, we have seen business in Asia, particularly in China, particularly improve as they move through the quarter. So the Lunar New Year is happening in February, but we do expect to continue to see that growth as we move into March and the rest of our fiscal year.
Eddie Ingle: And like you said, we're cautiously optimistic about the brands and retailers getting back to normal. But I think they are still a little cautious about what inventories they have and how they respond to consumer demands. But we're going to be ready, and we are ready to react whatever way they do, whether they're going to... like it, or just be very cautious. We'll be ready for the growth that we're seeing. Sounds good!
Eddie Ingle: Okay. And just a quick follow-up on that. So, as you're seeing these smaller and more frequent orders, how are you dealing with pricing for those orders? You know, just making sure that you guys get the margin that you guys deserve to get. As part of this sales transformation, we are continuing to match our pricing to the value we're giving. So we are changing our approach as the market changes in its demand because in the past, people would want to have more stable pricing for longer programs. Since that's not the case, we are reacting, and our pricing is much more targeted based on the value that we're bringing to that product.
Eddie Ingle: And as we move through the next two quarters, we're going to see the benefit of that from a profitability point of view and a margin. One of the things, this is Al, I just want to throw on one more comment. In this, we've taken out close to 20% of the line items. And most of those are line items that have very low volume, low run times, and low margin. And that effectively gets us a positive margin mix that's contributing there, too.
Albert P. Carey: So some of these items that have been around forever, you know, and finally, AJ and his team went after them. Well, thank you for that additional detail, and thanks very much, and best of luck going forward. Thank you. Thank you, Anthony. Thank you, Anthony. Thank you, ladies and gentlemen. As we have no further questions at this time, we will conclude today's call, and Eman El.