Earnings Call Transcript - UFI Q2 2026

Operator, Operator

Good morning, and thank you for attending Unifi's Second Quarter Fiscal 2026 Earnings Conference Call. During this call, management will be referencing a webcast presentation that can be found in the Investor Relations section of unifi.com. Please familiarize yourselves with Page 2 of the slide deck for cautionary statements and non-GAAP measures. Today's conference is being recorded. Our speakers are listed on Page 3 of today's presentation and include Al Carey, Executive Chairman; Eddie Ingle, Chief Executive Officer; A.J. Eaker, Chief Financial Officer. I will now turn the call over to Al Carey. Please turn to Page 4 of the presentation. You may begin.

Albert Carey, Executive Chairman

Thank you. Well, good morning, everyone, and thanks for joining our call this morning. I'm happy to report that we're beginning to see results in our business that are coming from a major effort that began one year ago, which is essentially resetting our cost base in the North America business. The closing of the Madison facility and the reduction of costs across the board have created clear operating improvements that are going to allow us to make healthy profits on a much smaller sales level. Now a couple of highlights, and A.J. will go into more details on these later on. We're pleased to see improved profit margins and improved free cash flow. We have dramatically improved our inventory turns and it's probably the best we've seen in recent history. We have 25% fewer people in North America, and our plant efficiencies have come way up from the summertime now that all the changes are behind us in our Yadkinville facility and also the closing of the Madison facility. A.J. will take you through the details of these business results in a moment. But we finally have actions behind us now after a year of hard work and some difficult decisions. So that was a necessary step one for us to build our profitable business back here at Unifi. Now step two is building a strong revenue growth, and it's clear from the results of Q1 and Q2, those revenue levels need to improve dramatically. But don't forget, Q1 and Q2 of this fiscal year were largely impacted by the tariff complexity that started in about April. We've seen improvements in orders from many customers in early January, and we're cautiously optimistic about the recent order trends that we're seeing into February. You may recall back in about April, May timeframe last year, our revenues dropped precipitously. And that's when the reciprocal tariffs were placed in order that created turmoil in apparel and textile supply chains and most of the customers that we deal with placed large orders before the tariffs went into place, understandably, but it led to record inventory levels and it slowed orders across the board in the industry for the entire balance of the calendar year, which was seven full months. But here's what we're seeing in January and February. First of all, the holiday sales for apparel were what we would describe as solid, up 4%. I wouldn't say they were great but they weren't bad, and most of the retailers are satisfied with what they saw. Second, recently, we have seen customers come back in order to replace the inventories, especially those whose fiscal years ended on 12/31. Third, Central America demand has picked up, which is very important for us. It really does look like in the near future that this will be a good near-shoring opportunity for retailers and brands in North America. More on that later. And then finally, innovations. Our innovations of textile Takeback and on ThermaLoop are now gaining some traction. It's taken a long time to get there, but we're optimistic about what we're seeing and probably more to come in the summer. So in summary, we expect the sales to improve when you combine that with our lower cost base right now, it gives us quite a bit of optimism for what our profitability and our cash flow can be going forward. So to take a deeper look at all this, let me turn it over to Eddie Ingle, our CEO.

Edmund Ingle, CEO

Thanks, Al. And as Al just noted, our results for the second quarter were in line with our expectations, actually with some of the metrics showing up better than expected. And while we are only a few weeks into the third quarter of our fiscal 2026, we are also starting to see some initial signs of an improved operating environment driven by increased customer engagement and many of them are beginning the post-holiday restocking. Importantly, the strategic initiatives that we have put into place to realign our cost structure and operations have put us in a much stronger position to take advantage of these positive trends as we move forward. I'm going to walk you through this in more detail in a few minutes. But first, we're going to change things up a little bit slightly this quarter. I'm going to turn the call over to A.J. now to walk us through the numbers for the quarter, and then I'm going to come back then to discuss our near-term strategic priorities and what lies ahead. With that, I'll turn it over to A.J. now to review our financial results. A.J?

A.J. Eaker, CFO

Thank you, Eddie. I'll start off by discussing our consolidated financial highlights for the quarter on Slide 5. Net sales for the quarter were in line with our expectations, as Eddie said, but down 12.5% year-over-year, primarily driven by lower demand in the Asia segment and pricing pressure in the Brazil segment. Consolidated gross profit was $3.6 million and gross margin was 3% during the period compared to gross profit of $0.5 million and gross margin of 0.4% for the second quarter a year ago. SG&A was just $9.7 million during the quarter, a 25% improvement from the prior year period, and adjusted EBITDA was just a loss of $0.7 million which represents an improvement of $5.1 million compared to the year ago period. These favorable and improving results are the initial benefits of the hard work we have put into implementing our cost-saving initiatives which we anticipate will continue throughout the remainder of the fiscal year. On Slide 6. In the Americas, net sales were down 7.1% compared to the prior fiscal year due to a lower portion of fiber sales which normally carry a higher selling price, along with the tariff uncertainty that Al mentioned. Gross profit in the Americas region increased by $6.1 million during the quarter, primarily due to the previously noted cost saving initiatives that included the consolidation of the yarn manufacturing operations in this region. While we are likely to continue to have some short-term challenges in the Americas, we do believe that the mid- and long-term outlook is improving given the better customer engagement that we're seeing today. Slide 7 displays the Brazil segment, which saw net sales and gross profit decrease versus the prior year due to some pricing pressures associated with lower competitive prices and imports from Asia. That said, demand and growth opportunities continue to remain strong in Brazil, and we are anticipating that we will see an improved performance in the region during the second half of this fiscal year. On Slide 8, our Asia segment net sales and gross profit declined by 27% and 10%, respectively, primarily due to lower sales volumes and pricing dynamics in the region. Despite these headwinds, gross margin in the region improved, expanding by 260 basis points on a year-over-year basis, underscoring the effectiveness of our asset-light model and its flexibility. From a demand standpoint, we're beginning to see signs of improvement in that region with December outperforming both prior months, October and November. However, tariffs are continuing to create uncertainty and brands are still evaluating the most appropriate course of action for their businesses in Asia. As we've noted in the past, we continue to see immense opportunity in Asia once trade pressures begin to subside given that the majority of the world's polyester is still produced from China-based assets. Slide 9 outlines our balance sheet and capital structure. Our year-to-date free cash flow reached $13.3 million, reflecting a significant increase compared to the previous year's first half results. CapEx during the first half came in at just $3.1 million, around a 60% decline compared to the prior period as we prioritize our spending and cost savings. Our net debt was reduced to $75 million at the end of December, a stark improvement from recent levels and our working capital on a year-to-date basis came in at $149 million, which was 9% lower than levels seen during the prior fiscal period due to our leaner operations in the U.S. This significant improvement to our balance sheet and capital structure was directly attributable to our recent cost-saving measures, footprint consolidation and reductions in working capital, which have helped us establish a more efficient manufacturing base in the U.S. We expect these efforts to minimize the drag on free cash flow through the remainder of fiscal '26. At the same time, as customers begin to rebuild their depleted inventory levels into calendar year 2026, we do anticipate a moderate increase in working capital spend to support disciplined inventory builds and accommodate higher sales activity. As a result, we expect the third quarter will exhibit lower operating cash flows compared to the second quarter to support these efforts. This concludes the financial review, and I will now pass the call back to Eddie.

Edmund Ingle, CEO

Thank you, A.J. As you heard from A.J., our team's hard work is beginning to show results, and we are pleased with the promising start of a recovery in our core operating metrics. I want to begin by discussing the cumulative results of two years of strategic initiatives and investments that we believe have positioned Unifi for long-term success. Let's look at Slide 10 for an overview of our priorities for the second half of fiscal 2026. Moving forward, we are focused on returning Unifi to long-term growth and profitability, and to achieve this, we are concentrating on four key areas. First, we have significantly improved our operating model through targeted cost decisions and consolidation of our manufacturing footprint. We need to continue to leverage the work we've done in this area. Simultaneously, we are committed to investing in ourselves to strengthen and scale our leading brands. Next, our culture emphasizes innovation and new product development, and we will keep prioritizing customer adoption of our innovative solutions to drive future growth. Lastly, it's crucial for us to translate our operational progress into sustained financial momentum. The next few slides will provide more details on each of these priorities. On Slide 11, you can see the strategic initiatives we've executed over the past three years that have helped us better align our cost structures and operations. We started this process back in December 2023 with our profitability improvement plan, which streamlined our organization, realigned leadership for a more efficient go-to-market structure, and initiated a sales transformation plan to enhance operational efficiencies and gross margins. Throughout calendar year 2025, we completed a U.S. manufacturing transition, selling our Madison, North Carolina facility for $45 million, using the proceeds to pay down our debt. This transition has improved efficiency and utilization at our Yadkinville, North Carolina facility, optimizing our operating footprint and productivity while leveraging existing automation assets. Most recently, at the end of calendar year 2025, we implemented an additional cost restructuring program that reduced our headcount and lowered labor hours, operating spend, and CapEx. As a result, we expect reduced operating expenses and $4 million in SG&A savings, which will impact fiscal year 2026. As A.J. mentioned, we're already beginning to see the initial benefits of these initiatives, estimating that they've lowered our annual revenue breakeven point by about $125 million to around $575 million currently. Some of these initiatives were challenging to implement, and I want to thank our teams across the business units for their efforts in turning ideas into action and adjusting our cost structure. Moving forward, we must leverage this enhanced operating platform to drive long-term results, which requires top-line growth. On Slide 12, you can see our ongoing efforts to further scale our innovative brand. In the second quarter, we secured several new co-branding placements for our latest product technologies and our REPREVE offering with prominent brand leaders. Save The Duck introduced a collection featuring ThermaLoop, showcasing our circular textile-to-textile insulation. The Spanish brand El Ganso integrated REPREVE into their stores with new signage and branding. In the U.S., co-branding efforts from winter wear outfitter Obermeyer with Sealy and REI, as well as furniture from Brentwood Home, highlighted diverse REPREVE branding. Co-branding continues to be pivotal in reinforcing REPREVE and our role in global textile recycling solutions through our REPREVE Takeback and ThermaLoop brands. The interest in our recently launched products, particularly those integrating A.M.Y. Peppermint technologies, has received great feedback. Conversations about our circular textile-to-textile offerings, especially REPREVE Takeback and ThermaLoop, are increasing. We're also leveraging Instagram to collaborate with key brands on their use of REPREVE. For example, our partnership with Dario Mittmann showcased the use of REPREVE in a runway presentation at São Paulo Fashion Week. While we recognize this won't lead to immediate sales, it highlights that designers are considering sustainability and are eager to connect with young influencers. Furthermore, Dovetail Workwear, a leading U.S. women's workwear brand, collaborated with us to create a co-branded announcement for their denim launch utilizing REPREVE and our Climate Control Technology, TruTemp365. Overall, we are pleased that our ongoing efforts to promote our innovative brands through partnerships, trade events, and digital engagement are bearing fruit. Moving to Slide 13, you will see the output from our investments in developing and launching our crucial innovative products during fiscal '25 and '26. Although the adoption of these products has been slower than expected due to current circumstances, we are intensifying efforts to boost customer adoption to support future growth. There are significant opportunities for these products globally, especially among our customers in Europe who face increasing legislative pressure to provide circular solutions from their governments and consumers. Turning to Slide 14 for an overview of our outlook and how we plan to sustain our financial momentum, we expect to fully realize the benefits of our cost reduction initiatives and improved working capital efficiency in the third quarter. We anticipate gaining more clarity on the global trade environment, which should support revenue improvement as we progress through calendar year '26. We will also maintain our focus on margin-accretive efforts, particularly emphasizing our REPREVE value-added products and expanding our Beyond Apparel initiatives. Regarding global trade, just last week, El Salvador and Guatemala signed a reciprocal tariff deal with the U.S. government, allowing apparel made from regional yarns produced in these two countries to receive duty-free treatment when shipped to the U.S. In conclusion, we acknowledge there is still important work ahead to sustain our recent successes as we pursue our long-term objectives. That said, we are encouraged by the progress we've made so far. As we enter the second half of fiscal 2026, our focus remains on transforming our operational improvements into sustained financial momentum and ultimately creating long-term value for our shareholders.

Operator, Operator

And our first question comes from the line of Anthony Lebiedzinski with Sidoti.

Anthony Lebiedzinski, Analyst

So by the way, it was a really good cash flow quarter, which is great to see. So I guess my first question, in terms of your comments about the pickup in demand that you've seen since the quarter end. Is that in all segments? Or is one segment particularly doing better than others? I just wanted to get more flavor, more color on what you're seeing thus far since the quarter ended?

Edmund Ingle, CEO

Yes. Thanks, Anthony, for the question, for joining us today. We're seeing it really across the board. Brazil is coming out of the holiday season, so there's destocking taking place, but also there's stimulation in the economy by the government, so there seems to be positive momentum in the orders that we're seeing down there. China, the new year there is happening in mid-February. So there was a lot of activity in January in our Asia business in particular. And so that seems to be actually continuing more positively than expected because we're closing that new year period now. And then the U.S. and Central America, that's where it's shining because we are seeing the impact of the restocking of the inventories post everybody's year-end trying to get their inventories down, but also the news around the reciprocal tariff agreement with Guatemala and El Salvador is positive for us. And so we're seeing more brands taking orders to the mills and the mills are placing orders with us. So it's really across the board.

Anthony Lebiedzinski, Analyst

So that's encouraging to hear certainly. So when we look at your business, I mean you've talked about Beyond Apparel for a bit. Can you give us an update? And I guess as we talked about this, maybe just kind of give us an update where you are like as far as apparel or footwear, what percent of revenue is that at the moment? And kind of how should we think about the Beyond Apparel initiatives kind of going forward?

Edmund Ingle, CEO

Yes. Beyond Apparel is really centered around carpet, packaging, military/tactical, and auto. And I can say that last quarter, we had a very, very strong quarter in the packaging sector. Carpet actually grew slightly also and our military and tactical, while we didn't get orders, we are still continuing to do a lot of sampling. So in the Q3, we won't see as much impact as we expect to see in fiscal Q4 as the orders start to come through. But definitely, we're still seeing very positive signals from the market around all of those initiatives so we're excited about that. And as a percentage of our business, apparel is still, of course, a large part of that. But we are moving towards making that a lower percentage, still very, very important, of course, but we do think that we're still on the right track with these Beyond Apparel initiatives here in the U.S.

Albert Carey, Executive Chairman

This is Al. Watch military in the next couple of quarters. It looks like it's bigger than expected, and we're making a lot of progress with it. It just takes a long time to test for durability and colors. But when you get the business, it's usually a good long-term one and with high margins.

Anthony Lebiedzinski, Analyst

That's good to hear certainly. And can you also give us an update on the pricing dynamics in each of your segments that you talked about? I think you really highlighted Brazil as dealing with pricing pressures. But maybe if you could just go over the pricing dynamics that you have seen and expect to see here going forward in each of the three segments.

Edmund Ingle, CEO

Yes, we discussed the ongoing influx of products from Asia into Brazil, which has continued. However, in recent weeks, as anticipated, we have seen oil prices rise and the Brazilian Real strengthen. Additionally, some inefficient assets in Asia are being closed down. This situation has led to an increase in pricing in Asia, influenced by the raw material supply chain. Consequently, we are experiencing some positive pricing momentum heading into Q3 in Brazil. While the increase isn't substantial, it’s enough for us to feel optimistic. The Asian market is quite reactive, and we are noticing a slight uptick there as well. I want to emphasize updates regarding the U.S. and Central America. We have undertaken considerable downsizing in that sector, focusing on exiting challenging business areas concerning pricing and implementing targeted price increases. We've also ensured that our pricing aligns well across the complex mix of product lines we offer. We are beginning to see the benefits of these efforts reflected in our revenue. As our volumes rise, this will become clearer and contribute to our margin improvement. This enhancement has been aided by the restructuring we implemented, cost reductions, and the effect of pricing improvements.

Anthony Lebiedzinski, Analyst

It's encouraging to hear that. As you mentioned, a lot of work has gone into restructuring and transitions in manufacturing. Regarding the $575 million revenue needed to break even, how do you view the mix among the three segments? What is necessary to achieve that? Historically, the Asia and Brazil segments have shown better gross margins compared to the past couple of years. So, generally speaking, what is the right mix across the three segments to return to break even?

A.J. Eaker, CFO

Yes. Good question, Anthony. Thanks for bringing the breakeven topic, certainly proud of the actions we've been able to get through the system and get to this point. When we look at how that's distributed across the segments, you're looking at mid- to high 300s generally for the Americas and then the other two segments filling in the gap really from some of their historical run rates similar to those historical run rates. So that's how we would see the distribution that would get you to a high single-digit gross margin for the consolidated entity and therefore, breakeven on an operating income zero basis.

Operator, Operator

Ladies and gentlemen, that concludes the question-and-answer session. Thank you all for joining in. You may now disconnect. Everyone, have a great day.