Unifi Inc Q2 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to Unifi’s Second Quarter Fiscal 2022 Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised today's conference may be recorded. I'd now like to hand the conference over to A.J. Eaker, Vice President of Finance. Please go ahead.

Thank you, Liz and good morning, everyone. On the call today is Al Carey, Executive Chairman; Eddie Ingle, Chief Executive Officer; and Craig Creaturo, Chief Financial Officer. During this call, management will be referencing a webcast presentation that can be found at unifi.com and by clicking the conference call link. Management advises you that certain statements included in today’s call will be forward-looking statements within the meaning of the federal securities laws. Management cautions that these statements are based on current expectations, estimates and/or projections about the markets in which Unifi operates. These statements are not guarantees of future performance and involve certain risks that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecast or implied by these statements. You are directed to the disclosures filed with the SEC on Unifi’s Forms 10-Q and 10-K regarding various factors that may impact these results. Also, please be advised that certain non-GAAP financial measures, such as adjusted EBITDA, adjusted EPS, adjusted working capital and net debt may be discussed on this call. I will now turn the call over to Al Carey.

Well, thanks, A.J. Good morning, everyone. Thanks for joining this call so that we could cover Unifi’s second quarter results. I'll begin with an overview of the quarter. And then I'm going to turn it over to Eddie Ingle and Craig Creaturo, who will take you through the details of our company's performance in Q2, and then we're going to have a Q&A after that. So to get started, let me just say that I'm enthused about our company's growth potential, especially when you look at the 24% revenue growth in this quarter. But I want to say upfront that the under-delivery on profit for the quarter is largely due to U.S. labor shortages in our plants, which has hampered our ability to produce product to meet customer demand. We expect that to improve and we'll talk more about this in the next few minutes. On the sales front, our demand for our products continues to be strong in Q2 making it the six consecutive quarter of sequential growth. We're ahead of forecast and we achieved $201 million in sales, which is a milestone for us. The momentum is going to continue for the next two quarters and we feel confident to say that our revenue forecast could now be raised to $800 million in sales for fiscal year 2022. For perspective, you'll have to go all the way back to 2003 to see the last time we achieved $800 million in sales at Unifi, so it's a significant move forward for us. We also expect the trend to continue beyond fiscal 2022, because we now have all three of our regional geographies with positive top-line momentum and REPREVE brand continues to accelerate. In this last quarter, REPREVE got to 40% of our mix, which is the first time we've achieved that level and the growth on REPREVE was above 30%. We also see REPREVE expanding more rapidly into non-apparel products such as footwear, automotive, industrial furnishings, and PPE. This is something that our team has been working on for about a year and it's coming into reality now and Eddie will talk about that in a little bit. But our retail brands and customers are really moving forward with using recycled materials to achieve the sustainability targets for their 2025 and 2030 goals. So it's been a very positive trend for our business. Now a key point for this past quarter, our Unifi’s sales revenue increased 24% versus a year ago, but the performance could have been better. It should have been above 30% if we had the labor to produce for all the orders we had on hand in the U.S. plants. Now this labor shortage is a macro issue; it's affecting our industry and many others, resulting in higher turnover and difficulty hiring and training people fast enough to replace those who have left. That difficulty also comes with extra costs and is causing inefficiencies in the plant for the time being. It's also keeping us from producing to meet consumer demand. This dynamic that I'm speaking about on labor has caused about two-thirds of our $4 million miss for EBITDA in the quarter, with the other third coming from not fully passing the pricing increases along to cover our costs in Q2. I can tell you right now that those price increases took effect by January. So will the labor issues improve? The answer is yes. Our team has reacted by ensuring competitive wages, investing in quality training for our new people, and even experimenting with new methods of managing our front-line teams. All these efforts are beginning to pay off, but it will take a little more time as this recent COVID uptick has caused some quarantines in the plants, leading us to believe this labor issue will extend into Q3. However, we should see improvement by the end of Q3 and significant improvement in Q4. For example, two weeks ago, we had 100 people in quarantine in our North Carolina plants. This week that number is down to 70, and it should continue to improve as the weeks go on. We have our work cut out for us on U.S. labor, but we know what to do. We have strong sales momentum in all three geographies. Brazil and Asia’s gross profit performance remains strong and REPREVE is now 40% of our mix. We're listening to our frontline employees to find out how we can make their jobs more rewarding and ensure they feel proud of where they work. Interestingly, through extensive round tables in the plants, we find that if you ask employees how to accomplish these goals, they have most of the answers; then it’s just a matter of following through on acting on them. Finally, let me just say this, I really like the strong management team that’s assembled here at Unifi. I appreciate the agility they are demonstrating as we work through all the challenges that the pandemic has presented us over the last two years. Because of that, I am quite certain that we're going to emerge as a stronger company from this pandemic than we were going into it. So with that, let me turn it over to Eddie Ingle, our CEO, who will take you through more details regarding our performance.

Thanks, Al and good morning, everyone. Our second quarter fiscal 2022 EBITDA results were lower than forecasted just three months ago. However, the revenue momentum we are seeing in several key areas provides us with a lot to be optimistic about going forward. We're also seeing volume growth across several market segments, which is encouraging. However, the quarter didn't come without its challenges. In particular, labor and input costs in the U.S. and Omicron has certainly added unforeseen pressures for management and our employees. With that in mind, I think it's important for me to take a moment to thank all our employees globally for their contributions, resilience, and hard work as we navigate towards a full recovery while continuing to grow our business and deliver goods to our customers. I’m proud to be part of this company because of the work each of you do on a daily basis. Moving into the slides, we will begin on Slide 3 with an overview of the quarter. As you can see, our revenue and volume growth was very positive and is largely a sign of the continued demand for sustainable materials. Q2 revenues were up 23.7% on a year-over-year basis, which was ahead of our expectations and the outlook we provided last quarter. We talk a lot about improving customer experience at Unifi, and I can tell you it is difficult when you cannot meet the demands of the market. By our estimate, had we not had the labor issues in the U.S., we could have potentially added another $5 million to $10 million in revenue during the quarter. While there is a certain level of confidence within Unifi to better service our customers in the second half of our fiscal year, there are several challenges domestically that continue to weigh on the Polyester Segment. During the quarter, performance was negatively impacted by inflationary pressures from labor and input costs outpacing our pricing levels. In the U.S., our most significant challenges are labor, as Al mentioned, and filling the open positions that strong growth has opened up for us remains our primary focus today. We are doing the right things as an employer and continue to allocate additional resources towards training and retention. We have implemented new and improved training programs that we feel will yield better results and reduce labor turnover. However, there is a learning curve, and it naturally takes time for workers to progress and gain the operating knowledge required to run the various machines in the manufacturing plants. We do expect our current pool of trainees who started in Q2 to continue to increase their productivity, and their contributions should be reflected in Q4. Furthermore, our HR team is doing a great job of marketing to our local communities about the open positions we have today, and we expect to be back to full staffing with new talent over the next few quarters. Lastly, we're opening up new overtime-related opportunities for our most seasoned personnel. That said, it should be noted that the escalation of COVID-19 has created additional short-term labor constraints in our manufacturing plants, with up to 5% of our plant workforce currently in quarantine, up from less than 2% last month. This is adding extra pressure on our domestic labor situation. However, as I talk to other CEOs in our industry, it seems that we are all facing the same challenges. We will continue to prioritize safety and our employees' health at the highest level while eagerly awaiting the time when the Omicron impact is behind us. As we look forward, we expect U.S. labor challenges to continue into the third quarter but believe the situation should incrementally improve as we move into Q4 and fiscal year 2023. In recent quarters, we have been proactive in adjusting prices to our customers to keep pace with the increasing cost of raw materials. With the inflation we have seen in other areas of the business, we've had to implement additional price increases starting in January. This was driven primarily by labor and other durable materials in the Polyester and Nylon segments. These increases should generate significant margin recovery as we move forward. From a market segment perspective, we are seeing an uptick in the Denim markets in Brazil, along with expected growth in the home furnishings and mattress market there. Our Asian business was stronger than usual in Q2 as apparel and shoe production in Vietnam resumed, the energy shortage in China eased, and the timing of the Lunar New Year being almost two weeks earlier than last year pushed demand into our first fiscal quarter. We saw a volume uptick in the U.S. and Central America, primarily driven by the demand for quick-turn apparel and sock programs. However, our automotive business was slower than normal in both Brazil and the U.S. due to the ongoing reduction in the production of light-duty cars and trucks. Moving to Slide 4, let's talk about REPREVE. Our market awareness continues to grow, and our customers' commitment to sustainable products is clearly expanding. As a result, REPREVE Fiber represented 40% of our sales mix during the quarter for the first time, an indication of the strong demand and growing momentum it is experiencing. Specifically, the H&M Circular Design Story collection launched in December, focusing on forward-thinking design and innovative materials with circularity in mind. The collection features REPREVE Our Ocean in multiple items, including puffer jackets, asymmetric dresses, Kodak slim blazers, pleated shorts, and suit vests. Continuing our momentum in Europe, the German retailer Tom Tailor launched new denim as part of their B part sustainable products collection, including Alexa skinny jeans, along with their existing line of jackets, scarves, and slim shorts. Next, Costco placements are continuing to grow across dry release, space layers, Kirkland Signature socks, and even more denim. Outside of the apparel market, De Novo brands have expanded REPREVE into CAJA chairs, which ranks among the top three in market share for camping and sideline seating. We're excited about the breadth of REPREVE and the brand placements that continue to grow. Now, stepping back into the overall business, our operating environment remains healthy outside of the tight U.S. labor market, and we have seen no significant disruptions to our operations despite the Omicron spike. Customer demand has been robust across all segments. We believe our supply chain partners and competitors are also experiencing similar headwinds that we've mentioned today. Our performance through these challenges makes us even more optimistic about what we can accomplish during normal business conditions. Financial performance in Brazil and Asia business segments remains solid and reflects the agility of their respective management teams in reacting to the ever-increasing changes in the marketplace. On a positive note, in the U.S., the installation and productivity for our new eAFK Evo cooler machines are meeting our high expectations, and the impact of increased efficiency should be notable starting in Q4 and beyond. I'll close with a quick update on our current trade actions before handing the call over to Craig. In November 2021, the U.S. International Trade Commission determined that the U.S. textile industry has been severely impacted by imports from certain countries. As a result, the Commerce Department finalized antidumping duties on all subject imports in December 2021. Accordingly, we look forward to an annual step up in sales for polyester moving forward. With that, I will turn the call over to Craig. Craig?

Thank you, Eddie, and good morning, everyone. As Al, Eddie, and A.J. mentioned, there were a lot of positive elements in the just completed quarter, and we are focused on the specific actions aimed at improving our North American labor challenges. Demand for our products continues to grow at a very high level, and our management team is determined to grow our business for the future. I'll summarize the financial performance from the quarter as follows: we achieved revenue performance ahead of our expectations, while the U.S. labor and employee cost challenges that Eddie and Al described dampened our ability to convert the strong revenue into similarly strong profitability. That profitability shortfall also unfavorably impacted our effective tax rate, as the step down in overall U.S.-based earnings did not allow us to fully benefit from certain U.S. tax attributes. Let's turn to Slide 5 of the webcast presentation. Consolidated net sales increased 23.7% from $162.8 million to $201.4 million, continuing the trend of sequential sales growth since the pandemic began two years ago. The just completed quarter represents our sixth consecutive quarter of increased revenues and the first time we exceeded $200 million in quarterly revenues in over eight years. For the Polyester Segment, the single-digit volume increase could have been better but was muted by the labor challenges Eddie mentioned earlier. The price and mix change reflects the selling price adjustments made over the past several months in response to rising input costs, although we have not fully normalized the portfolio for today’s cost. In Asia, the sales volume growth reflects new and existing programs that continue to succeed on the REPREVE platform, while higher pricing associated with raw material costs was offset by a greater mix of lower-priced products. In Brazil, year-over-year price levels followed market dynamics as this segment continues to exhibit strength in holding prices and market position, driving a price mix benefit of 33.3%, although lower volumes resulted from a comparatively strong quarter in the previous year. Nylon exhibited stability with much higher sales, production volumes, and pricing levels continuing its fiscal 2022 recovery. Turning to Slide 6 for the quarterly gross profit, the Polyester Segment's $10.5 million decline in gross profit and weaker gross margin percentage are attributable to the labor and input cost headwinds. We attributed approximately two-thirds of the gross margin decline in this segment to labor issues and approximately one-third to input cost increases combined with the normal lag for customer pricing changes. We look forward to this segment quickly recovering in calendar 2022 from recent pressures. The Asia segment's volume growth led to a $2.0 million improvement in gross profit as that segment continues its strong year-over-year growth trajectory and remains a significant component of the global commercial model. In Brazil, we've maintained much of our captured strength, demonstrated by a decline in gross margin from the exceptionally high 32.9% to a still very strong 27%. Despite the headwind, we achieved a combined Brazil and Asia double-digit percentage increase in both sales and gross profit. This strong performance is even more apparent when looking at the six-month comparisons on Slide 7 and 8. Slide 7 shows the consolidated six-month sales increase at 30.6% compared to the year-ago period, driven by a healthy combination of volume, pricing, and mix across our segments. Slide 8 provides a gross profit overview for the six-month comparison, indicating that the Polyester segment was pressured by previously discussed headwinds, while the Asia segment exhibited an increase in gross margin through recent mix and efficiency gains. The Brazil segment's exceptional performance is highlighted with a $4.9 million increase in gross profit. Moving on to Slide 9, which provides a brief update on our balance sheet and capital allocation priorities. We ended the second quarter with zero borrowings on our ABL revolver, which had an availability of $69 million as of December 26, 2021. Under our balanced approach to capital allocation, we expect to continue investing in the business to drive innovation and organic growth, maintain a strong balance sheet, and remain opportunistic with share repurchases and/or M&A opportunities. As noted on this slide and as described in the press release, we spent $1.2 million to repurchase 51,500 shares under the previously announced share repurchase program. Before passing the call back to Eddie, I remind everyone that Unifi will be hosting an Investor Day event next month, February 16, at our manufacturing facilities in North Carolina. We look forward to interacting with the investment community and providing an opportunity to hear from several members of our leadership team against the backdrop of our world-class facilities. For those who can't attend in person, we will also webcast the event. I'll now pass the call back to Eddie to take us through the last slide of the presentation and make some final comments.

Thank you, Craig. Before we conclude today's call, I'd like to finish with Slide 10 of the presentation and discuss our outlook and expectations for the second half of the fiscal year. As disclosed in our earnings release, we have issued guidance for the remainder of the fiscal year, and we remain confident in achieving these targets despite near-term challenges in Q3. As we've highlighted on this call, our revenue numbers have exceeded our expectations, leading us to increase our previous top-line outlook for fiscal year 2022. Still, we must continue to work through all of the global uncertainties including ongoing labor pool constraints in our domestic segments, the Omicron Variant and the impact of the pandemic, and the inflationary pressures on packaging and supply costs. We anticipate uncertainties in the near term, but are confident in our workforce, as well as the new training initiatives in place to better prepare our staff. Despite these uncertainties, our strong revenue performance from the second quarter supports our belief in continuous improvement throughout fiscal 2022. For the full fiscal year 2022, we expect sales to reach $800 million or more, an increase of 20% from fiscal year 2021 revenues. Given this quarter's profitability results, we've adjusted our fiscal 2022 EBITDA forecast slightly lower, but we believe our recent pricing initiatives will help us recover a fair amount of the recent challenges. Our CapEx outlook remains consistent with the first quarter and should fall in the range of $40 million to $44 million. Sustainability remains a key focus area for our business, and we are pleased to see the demand for recycled products increase as awareness around the market for sustainable products continues to grow. Knowledge about the importance of sustainable products is continuing to move markets on a global scale. We look forward to continuing our path of long-term organic growth through our global business model and aim to capture the demand for more environmentally conscious materials. We will now open the line for questions.

Our first question comes from Chris McGinnis with Sidoti.

Hi. Good morning. Thanks for taking my questions. It's been a strong quarter for revenue, but I understand there are challenges on the profit side. I want to clarify about the pricing and raw material inflation. Did I hear correctly that the price increase in January will bring you in line with current pricing? How do you anticipate pricing will develop over the next year? Additionally, could you provide more details on the labor situation? It seems like the challenges may be more about staffing than regulations. Can you elaborate on the difficulties in retaining or finding labor?

Yeah. Two questions. Thanks for those, Chris. On the pricing side, you've been on these calls for many years and you've heard over the years that we've lagged generally speaking as prices go up and we tend to be slow to adjust our pricing when raw materials drop. We have been raising prices over the last nine to ten months and we took proactive steps to catch up on pricing that was necessary at the beginning of January. We do believe it has been difficult for our customers and challenging for our sales team, but those price increases were passed on effective January 3. You will see us being more reactive to rising raw material costs and other input costs moving forward. Regarding the labor situation, Q2 was very dramatic as you can see from our margins this quarter, resulting from our need to catch up. We have been working on changing how we approach hiring and training. That big initiative was implemented mid-Q2, and that's why we feel confident saying our labor situation is going to be much improved as we move to Q3 and Q4. We were expecting a big bump up in applicants at the beginning of September when many of the benefits were winding down, but we didn't see that, which didn’t impact our business. It seems many people across the country, including North Carolina, have saved up enough money and aren’t returning to the workforce. We are improving our onboarding process, training, and employee engagement. We offer competitive pay rates, maintain clean workplaces, and are enhancing our training and retention plans. I hope that answers your question.

And Chris, just for one more in here, the actual turnover rates have improved as we near the end of the calendar year. The trainees are being retained better than they have in the past. So we feel progress is being made, although we faced unfortunate challenges when the COVID uptick returned and resulted in many quarantines in January. The silver lining is that many employees are returning. We are optimistic because we asked employees what they needed, and we acted on their feedback. We have incurred costs to support our employees, and we now look to stabilize turnover rates in order to manage those costs effectively. So I'm optimistic, though it has been a difficult process.

Great. I really appreciate the insight. Another question related to Asia and the strong growth you’ve experienced there. It sounds like with the guidance for $800 million there is even more upside to that. Could you elaborate on your order book and the growth largely related to REPREVE?

As you saw, we had a record REPREVE percentage at 40%. That is a big part of our growth. Of course, there is growth because of the price point management we've been doing, and our price adjustments over the past several months. However, the volume growth we saw in Asia, which is predominantly driven by REPREVE, reflects strong market sentiment around sustainable products. Each quarter, we are adding more brands committed to the safety and security associated with the REPREVE brand. This momentum is projected to continue throughout the fiscal year. In Brazil, we expect to see growth in volume in Q4, and I anticipate that, even from a small base in Brazil, we are poised to double our REPREVE revenue year-over-year in that region. In the U.S., if our labor situation improves by Q4, we expect to produce a higher volume of REPREVE.

This is an anecdote, but Walmart has begun to work on these recycled materials extensively. We just received news that they crossed the $1 billion bottle mark; it’s remarkable how quickly they scaled from a fairly low volume to that figure. They can potentially reach up to 2 billion bottles if they fully commit. This is just one indicator, but it's significant.

Great. Thanks for taking my questions. I'll yield back.

Thank you.

Thanks, Chris.

Our next question comes from Daniel Moore with CJS Securities.

Sorry about that. Thank you. Good morning and thanks for taking my questions. I wanted to follow up on that last train of thought, focusing on the 30% growth you saw in REPREVE in the quarter. Any more detail in terms of price versus volume comparisons, and a similar inquiry regarding the 20% plus expected revenue growth for fiscal 2022?

If you look at where a lot of the volume growth was, it was in Asia and the volume growth corresponded with the revenue growth. This growth was driven by our adoption of more programs and products across the REPREVE platform. We've expanded the product portfolio in Asia beyond our traditional textured yarn to stable fiber, offering many different types of products. This reflects the market interest in REPREVE, and we are excited about this because we foresee that momentum continuing throughout the fiscal year. Of course, the Chinese New Year is approaching, which will impact operations as we always expect. However, we are also expecting volume growth in Brazil from Q4. Interestingly enough, we project to double our sales of REPREVE in Brazil year-over-year.

It's encouraging to see that Walmart has been working intensively with recycled materials lately, and that has potential implications for overall market sentiment and behavior regarding sustainability.

Got it. Very helpful. You've been more aggressive with pricing to protect margins as input costs rise and confront labor challenges. Can you discuss customer conversations — are you experiencing any pushback after several price increases, especially with the more notable increase in January?

Yes, it has been very challenging for our sales team and for our customers. However, most of our customers have stated that everyone else is doing it, so they understand the realities of the current situation better than before. In the past, we were more hesitant to pass along price increases but this has changed. The inflation shock has made it clear that we need to be responsible and pass those costs on as quickly as possible, and we are doing that now. Although it has been difficult for us and for our customers, we recognize we're not alone.

For the most part, your competitors are following suit? That was my follow-up question?

Yes, they definitely are.

All right. Last one is, you projected previously $20 million in incremental revenue from the tariffs in ‘22. Are you seeing early indications that this is taking hold, and how is your visibility around that today compared to six months ago?

We are seeing a lot of interest from customers who have traditionally imported a lot of yarns from overseas. We are engaging with them and beginning to form commercial relationships and discuss pricing, and we expect to start seeing that volume come through starting in Q4.

Yes. Thanks for taking the question. Just wondering about the price and availability of recycled PET plastic at this point.

In Q2, the prices were slightly lower compared to Q1 for various reasons. We are seeing an uptick, which is normal for this time of year as the collection rates drop due to weather and reduced consumption during colder temperatures. As such, prices for PET are rising, and we expect supply pressures. As I've mentioned previously, we have the ability to buy the materials, we just need to be prepared to pay more for it.

Can you give a sense of your cost of goods, what percentage is labor at this point?

The percentage of labor costs varies by product. We have some products that aren't labor-intensive. Our challenge is to ensure we have the right labor in place. We haven’t discussed this, but our installation of the Evo eAFK machines is alleviating some of this labor pressure. As we've mentioned on the call, we expect significant improvement in labor pressures by Q4 because we'll have more of these efficient systems running.

I assume that the new texturing machines require fewer operators per pound compared to the older versions?

Yes, there is indeed higher productivity with the new equipment.

Can you parse out how much of the growth is from pricing versus volume?

For the just completed quarter, roughly about 8 percentage points of that growth came from volume, while the remainder largely came from pricing adjustments and a bit of favorable FX, specifically related to the strength in China’s currency. So in this quarter, the majority of what we saw was from price, but we also saw an 8% volume increase.

Got it. Thank you. That'll be all from me.

Thanks, Gus.

Our next question comes from Marco Rodriguez with Stonegate Capital.

Good morning, everybody. Thank you for taking my questions.

Good morning, Marco.

I have a couple of quick follow-ups. A lot of the questions have been asked and answered, but circling back on the inflationary pressure as the price increases you've implemented. You've mentioned in previous questions that pretty much everyone is in the same boat, most people expect these changes and are pushing prices through. I was wondering if you could share any anecdotal feedback from clients regarding the overall impact of increasing prices on retail demand and what sort of expectations exist as we look ahead in the next six to twelve months?

We haven't had any customers inform us that because of our price increases, demand will fall. Demand for our products remains strong. While we cannot predict what will happen in twelve months, current trends suggest that price increases have not negatively affected demand for our products. This is due to a scarcity of inventory in the supply chain; additionally, many brands are moving production to the region to provide quicker products to market for their U.S. and Central American customers. Our local positioning has greatly aided in maintaining demand in the current environment.

Very helpful information, thank you. I appreciate your time.

Thank you.

Thank you, Marco.

Our next question comes from David Silver with CL King.

Yeah. Hi. Good morning. I had a few questions, mostly follow-ups. First, on the antidumping duties decisions that have been made, in my experience of tracking these actions in other products for other companies, it typically takes a while to finalize the decisions, but those final decisions can directly impact trade flows. In your release, you commented on the anticipated $20 million or more in annual revenue boost and cited pricing as the source. However, I noted that in your previous comments you focused more on incremental demand. Could you discuss the expected impact of the final antidumping duty decisions on the market? Specifically, what percentage of imports relevant to Unifi is represented by the four countries mentioned, and what improvement in volume potential do you foresee?

Yes. As we've indicated, we expect to gain about $20 million in revenue, stemming from efforts with essentially lower-priced, more commodity-type items. We’re witnessing greater interest from companies traditionally purchasing imports either through distributors or directly from Asian suppliers. These changes are taking time; we’ve experienced adjustments from anti-dumping cases in both India and China which shifted business to these four specified countries. We are observing increased inquiries about products from us and anticipate the potential for volume growth starting in Q4.

Great. Thank you. Moving to the cadence of price increases. It seems you have been trying to catch up to the cost environment, and I understand you believe you'll be back in line starting in January. Can you share what type of cadence you typically see for implementing price increases before they become formalized across the board? Does this vary by customer or region? I'd imagine Brazil handles price swings differently compared to other markets.

In Brazil, they have been quick to react to price increases, largely driven by raw material inflation, which they passed on efficiently. In Asia, we have seen price increases conveyed and the margins have remained fairly stable, even increasing due to an improved product mix. In the U.S., however, it has been a tougher and lengthier process. Historically, our conversations with customers focused on raw material cost increases; this last round was different as we discussed the full range of costs including manufacturing, labor, and packaging expenses. Moving forward, you can expect us to react swiftly to changes in cost in the U.S. and Central America.

Okay. Thank you. Regarding your investment in new yarn texturing machinery, is that equipment fully installed and operational, or where do you currently stand in terms of completing that investment and upgrades?

We have been steadily installing the new equipment since the beginning of our fiscal year. At our upcoming Investor Day, we will provide more detailed information about the timing and scope of that capital investment. If you can wait a couple of weeks and join us there, you will gain a deeper understanding of our plans.

We are still in the early stages of installing that equipment.

Understood. Thank you very much. I appreciate it.

Thank you, David.

Thanks, David.

Thank you again. We’ve covered a lot of ground. One or two more quick ones. North American polyester margins have significant recovery potential. Could you share your confidence in the sustainability of margins generated in Asia and Brazil, and is there still long-term upside potential?

In Brazil, we've observed reduced gross margin pressure over time, though we’ve managed to maintain it longer than expected. However, in the coming quarters, we will return to more normal margins, but we expect an increase in volume in Q4 which will help offset any margin declines. In Asia, margins have remained stable. Here in the U.S. and Central America has been challenging. We anticipate a significant margin recovery beginning this quarter due to the pricing initiatives we've undertaken. Additionally, we expect improvements in productivity as we stabilize our workforce and enhance our training efforts, helping increase margins over the next six months.

For upcoming Investor Day, any preview you can provide on the types of longer-term targets or goals you might address?

That's a great question, Dan. We are planning the day to deliver deeper insight into Unifi's strategy beyond quarterly results, focusing on innovation and sustainability interwoven with our REPREVE demand. Additionally, attendees will have the chance to tour our facilities, with a specific focus on the EvoCooler and other technical advancements at our Yadkinville site. It should be an informative day for investors and stakeholders.

Look forward to it. Thanks for the detailed insights.

Thanks, Dan.

Thanks, Dan.

That concludes today's question-and-answer session. I'd like to pass the call back to management for closing remarks.

Thank you, Liz, and thank you everyone for participating today. Our momentum is clear and we believe we're set up for a strong second half of fiscal ‘22. Our next earnings release for the third fiscal quarter ending March 27 is tentatively scheduled for Wednesday, April 27 after the close of the market, with the conference call to follow the next morning Thursday, April 28 at 8:30 AM Eastern Time. Thanks again for joining today's call.

This concludes today's conference call. Thank you for participating. You may now disconnect.