Earnings Call Transcript - UFI Q4 2024

Operator, Operator

Good morning, and thank you for attending Unifi's Fourth Quarter Fiscal 2024 Earnings Conference Call. Today's conference is being recorded, and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Speakers for today's call include Al Carey, Executive Chairman; Eddie Ingle, Chief Executive Officer; A.J. Eaker, Chief Financial Officer. And during this call, management will be referencing a webcast presentation that can be found in the Investor Relations section of unifi.com. Please familiarize yourself with Page 2 of the slide deck for cautionary statements and non-GAAP measures. And now I will turn the call over to Al Carey. Al, the floor is yours.

Al Carey, Executive Chairman

Thank you, Kathleen. Good morning, everybody, and thank you very much for joining us on the call today. I'm going to start with a brief, but broad overview of our performance for Q4, providing a couple of insights that have emerged for us. Then I'll turn it over immediately to Eddie and A.J., who will provide you with the real details of the quarter. The first insight is that the broader textile and apparel industry sales are coming back much slower than we expected, but they are improving. While the inventory to sales ratios at the retail level and for these brands are now close to the norms and at pre-COVID levels, customers remain very cautious about rebuilding inventories and are keeping a close watch on what I would describe as a sluggish consumer trend. Retail sales for apparel and furnishings in the first half of the year were growing at low single digits. When accounting for inflation, they are likely flat to slightly down compared to a year ago. Our sales for the fourth quarter are better than the previous quarters of 2024 and better than last year's Q4. Our EBITDA was $5.9 million, which is significantly better than the last three quarters largely due to the cost reductions we implemented in quarter two and quarter three, which are now fully in place. The second insight from the quarter is that we are seeing improved market share in North America despite the sluggish sales recovery. We are close to booking sales in the new categories we have mentioned previously, which include beyond apparel categories such as home, military, automotive, and industrial applications. These sales will help offset the low performance of apparel and will improve our mix, as the margins on these products are significantly better than our baseline apparel sales. The third insight is our ongoing work on innovation. We recently introduced our Textile Takeback program, along with new revolutionary insulation products and additional layering of our REPREVE platform. These products have been under development for several quarters and are expected to generate sales in calendar 2025. While we may not see any of these sales in the next couple of months, they will begin in 2025 and 2026. Two of these products, in particular, address customer demand around circularity and reducing carbon footprint. As we look towards the first half of 2025, we anticipate improvement compared to the prior year, but a gradual recovery may take longer, with a more pronounced upturn expected in the second half of the fiscal year. We are cautiously optimistic, and we believe that customers will soon need to start replenishing their inventories in preparation for the spring selling season. These inventories are currently quite low and below pre-COVID levels. During this period, we will manage costs tightly and preserve cash until market conditions open up. I believe that when it's all over, we will emerge as a stronger company than we were before all of this. I will now turn the call over to Eddie Ingle, our CEO, who will take you through the important details of the quarter. Eddie?

Eddie Ingle, Chief Executive Officer

Thanks, Al. As Al highlighted, we believe that in most aspects of our business, Unifi has finally begun to turn a corner, and the operating environment is getting closer to normal levels. Over the past year, we've worked hard to reposition our business to respond quickly to customer demands, resulting in solid year-over-year revenue and volume growth, as well as a significant improvement in our margins. We are also seeing strong momentum across our segments and recently announced some exciting product innovations, which I will discuss in greater detail shortly. Turning now to Slide 4 for an overview of the quarter, during Q4 of fiscal 2024, we reported $157.5 million in consolidated net sales, which was up 4% year-over-year and 6% sequentially compared to the third quarter. This improvement in net sales was largely driven by our Brazil segment, which has performed very well recently. Additionally, our operations in China have continued to build momentum and contributed to our strong performance this quarter. We are reaping the benefits of our Americas cost reset efforts, evident from the significant improvement in our gross margin and subdued operating expenses. We expect to see these efforts continue in the next few quarters, though some of these savings will be slightly offset by inflation. Still, we believe we have driven sustainable efficiencies and cost discipline that will be leveraged into the future. Our sales transformation has also been progressing well, as demonstrated by the $6 million sequential improvement in gross profit during the quarter, giving us confidence that our operating profit will continue to improve during fiscal 2025. Now, I'll provide a brief update on our business segments. In the Americas segment, we are continuing to gain market share, although we experienced a slight slowdown due to competitive shifts and some customers pushing out orders, we are well positioned for further improvement as our initiatives in beyond apparel are helping to offset weaknesses in our apparel programs. Our Brazil segment has been the strongest performer in Q4, driven by our pricing strategy, full utilization, and capturing additional market share following our main competitor's exit from the region. In our Asia segment, we see signs of recovery and remain optimistic about improved performance despite a seasonally slower first quarter. Now turning to Slide 5 for an update on REPREVE. During the fourth quarter, REPREVE accounted for 34% of sales, a meaningful increase compared to the previous quarter, driven by positive recovery trends in Central America as well as a moderate recovery in Asia. Looking ahead, we expect to see additional improvements in our REPREVE Fiber business during fiscal 2025, aided by revenues projected from calendar 2025 as we forge ahead with our recent innovations and product launches. We also achieved several exciting co-branding initiatives this quarter, notably with Dolce Vita footwear integrating REPREVE into its products, Kate Spade featuring REPREVE in a pajama line for Costco Canada, and Teva launching an iconic version of their original universal sandal that contains REPREVE, powered by our Textile Takeback program. If you're familiar with our calls over the last few quarters, you will know that our Textile Takeback program aims to increase circularity in textile production by transforming fabric waste into recycled resin, converting it into a pre-fiber. Through this process, we are leading the transition towards a more circular supply chain while helping our customers meet their sustainability goals. Regarding our new REPREVE products, our innovative REPREVE filament yarn powered by our Textile Takeback process will be showcased at the Intertextile Shanghai Apparel Fabrics convention next week. This filament yarn consists of 50% Textile Takeback waste and 50% recycled bottles, making it the world's first 50% textile waste filament yarn with tracer and U-TRUST verification. Our second product is ThermaLoop, an insulation solution designed for home goods and outdoor applications that uses 50% textile waste and is being launched as 100% recycled content. Both ThermaLoop and the new filament yarn will be sampled by customers throughout fiscal 2025, and we expect revenues and volume benefits from these innovations in fiscal 2025 and 2026. Furthermore, in our beyond apparel initiatives, we have ongoing discussions with several customers in key end markets, and we are hopeful to provide further updates soon. With that, I will now hand the call over to A.J. to discuss our financial results for the quarter.

A.J. Eaker, Chief Financial Officer

Thank you, Eddie. As both Al and Eddie noted, we've made significant strides in improving our business position, enabling us to pivot towards growth and stronger profitability moving forward. Our focus has been on keeping variable expenses low across production and administrative functions, and we are seeing sustainable reductions in those expenses. We plan to reinvest these cost savings to increase profits in key areas driving innovation and margin expansion. Let me summarize our financial results. Consolidated net sales for the quarter were $157.5 million, reflecting a 6% sequential increase compared to the third quarter and a 4% year-over-year improvement, driven by beneficial pricing actions, continued market share gains, and demand normalization alongside our profitability improvement plan. This enhanced performance led to a gross profit improvement of more than 100% sequentially, marking our third consecutive quarter of gross profit enhancement. In the Americas segment, net sales were flat sequentially but down 4% year-over-year, a decline primarily driven by a spending slowdown and customers pushing back orders. However, the Americas segment experienced a significant gross profit improvement due to enhanced productivity effects in the region post-holiday impacts in the third quarter. The Brazil segment, as shown on Slide 10, recorded net sales growth of 9% sequentially and nearly 19% year-over-year, benefiting from effective pricing strategies, full utilization, and securing market share. In the Asia segment, we observed a sequential net sales increase of 21% and over 17% year-over-year, fueled by higher sales volumes and improved market conditions. As Asia continues to recover, we remain well-positioned in the region, and our portfolio expansion will help enhance future performance. Before passing the call back to Eddie for closing comments, on Slide 12, let me briefly discuss our balance sheet. This quarter, we focused on managing working capital and cost controls, which improved our free cash flow situation for both the quarter and year-to-date periods. Our efforts enable us to maintain a focus on debt repayment, with capital expenditures concentrated at maintenance levels being significantly lower than the previous two fiscal years, attributed to the diligence of our various teams. With our financial performance improvement and focus on managing our balance sheet, we are confident that our business is prepared to leverage profitable growth opportunities in fiscal '25 and beyond. I'll now pass the call back to Eddie for the last few slides and to share final comments.

Eddie Ingle, Chief Executive Officer

Thank you, A.J. Let's now move to Slide 13 to outline our forecast for the first quarter of fiscal 2025. We're optimistic about ongoing positive discussions with our customers, as destocking is behind us in most of the industry, which will aid as we navigate past the impacts of this unusual period. Specifically, for the first quarter, which is typically one of our slower sales periods due to seasonality, we anticipate net sales between $147 million and $153 million, which at the midpoint represents roughly 10% top-line growth year-over-year. We expect adjusted EBITDA to range from $1 million to $3 million, indicating a remarkable improvement over last year's EBITDA loss. We will also maintain a disciplined approach to capital expenditures, estimating CapEx for the quarter to be between $3 million to $4 million. Concerning our fiscal 2025 outlook, Slide 14 provides further context. Our underlying momentum is rebuilding, and we expect fiscal 2025 to return to more normalized conditions, supporting top-line growth exceeding 10% year-over-year. Moreover, proactive decisions to control costs and streamline our operations will continue yielding stronger profitability results next year. We're projecting positive EBITDA in every quarter of the fiscal year, anticipating a significant rise in gross profit, gross margin, and adjusted EBITDA. Lastly, we've budgeted to keep capital expenditures contained, estimating them to range from $10 million to $12 million for fiscal 2025. Moving to Slide 15, I'll outline some key strategic initiative items we focus on to maintain our momentum and expand our business. Although we are excited about our fiscal 2025 opportunities, our primary goal remains pivoting towards sustainable growth in the foreseeable future. Despite challenging conditions over the past 1.5 years, we never halted investments in our business, placing new leaders in key areas to invigorate it and position ourselves for sustainable profitable growth. Moreover, we are significantly investing in innovation, as discussed today, to fuel growth globally. We believe we are just beginning to realize our potential as demand for sustainable solutions grows from our customers' customers. Our REPREVE offerings are gaining recognition in name and diversity, while our beyond apparel initiatives will further expand our product portfolio with new avenues for innovation and growth. Finally, we've just commenced leveraging our Textile Takeback process at scale with our new ThermaLoop products and REPREVE filament yarn. We also have a pipeline of future Textile Takeback innovations that we will share over the coming quarters and years. Before concluding our remarks, I must acknowledge the challenges we've collectively faced over the past few years. Our global team has risen to the occasion, not only streamlining our operations but also setting us up for long-term success. I want to personally thank the entire team for their hard work. With that, we would now like to open the line for questions. Thank you.

Operator, Operator

And your first question comes from the line of Anthony Lebiedzinski. Your line is now open.

Anthony Lebiedzinski, Analyst

Hi, good morning, and thank you for taking the questions. It's certainly nice to see the improvement in sales and profitability during the quarter. As you pointed out, Brazil showed the most improvement from a top and bottom line perspective. Just wondering what is your confidence level regarding sustaining that type of improvement going forward?

Eddie Ingle, Chief Executive Officer

Specifically in Brazil, we are very confident in the demand signals we are receiving. We expect to run at full capacity throughout the fiscal year. There may be some margin pressure as raw material inputs normalize, leading our margins to catch up with the new higher input costs. Nonetheless, we expect to maintain strong performance in Brazil this year compared to last.

Anthony Lebiedzinski, Analyst

That's good to hear. Just a follow-up regarding raw material costs. Are you experiencing this across all regions, or is this specifically related to Brazil?

Eddie Ingle, Chief Executive Officer

It's specifically in Brazil due to our supply chain structure. Most of the inputs come from Asia, and freight costs for international containers have risen significantly, which presents us with a pricing opportunity.

Anthony Lebiedzinski, Analyst

Understood. And what are you seeing regarding raw material costs in other regions?

Eddie Ingle, Chief Executive Officer

Raw material costs have been relatively flat for the most part.

Anthony Lebiedzinski, Analyst

That's good to hear. Okay. What insights can you share regarding conversations with your top customers in the Americas, clearly your largest region? When do you anticipate improved results?

Eddie Ingle, Chief Executive Officer

When reviewing our top customers across all regions, they are indicating to us that fiscal Q1, the July through September period, will be slightly slower than anticipated. However, they unanimously expect an uptick in October. We have already seen significant improvement in our business in Central America, which may serve as a leading indicator. We expect this business to continue improving in the following months. The U.S. markets we serve typically slow down in the summer, but in late September to early October, we anticipate a return to higher normalization rates. Generally speaking, customer sentiment is much improved compared to the same time last year.

Anthony Lebiedzinski, Analyst

Okay. So this appears to be typical seasonality affecting these results. Regarding the new product offerings you announced this week with the white dyeable filament yarn and ThermaLoop, how meaningful could these new products be? I understand you mentioned fiscal 2025 as the primary timeframe for benefits, but can you provide further details regarding the opportunity these new products present?

Eddie Ingle, Chief Executive Officer

I am personally very excited about launching these new products. We have been asked for years about how to create a more circular supply chain. Additionally, pending legislation in the EU will require input contents to be from recycled sources, not just bottles but also textile waste. We believe we've hit the right note with our new offering, comprising 50% Textile Takeback materials and 100% recycled content. Feedback from brands indicates that we are aligning perfectly with their marketing needs. I have had personal discussions with brands in Europe and the U.S., and their responses vary, but overall they confirm we are addressing important customer desires regarding sustainability and carbon reduction. Notably, one of these products represents a new product line for insulation, enabling us to engage directly with brands and be incorporated into their offerings.

Anthony Lebiedzinski, Analyst

That sounds promising. Regarding the timing of the anticipated EU legislation, when do you believe we might see it pass? This could have significant implications for your business.

Eddie Ingle, Chief Executive Officer

We believe that in the second half of this fiscal year, specifically from January to July, we will begin sampling our products, and production orders should start becoming meaningful at the beginning of our fiscal 2026, approximately 10 to 12 months from now. This timeline aligns with our revenue and margin expectations as we prepare to fulfill sampling needs for our customers.

Anthony Lebiedzinski, Analyst

Understood. Regarding the beyond apparel initiative, are you gaining new customers and witnessing increased purchase orders? Further details on this initiative would also be appreciated.

Eddie Ingle, Chief Executive Officer

We have noted traction and are receiving commercial orders for our beyond apparel initiatives. I anticipate that in the next call, we will be able to outline the revenue impacts from these initiatives. At this moment, I cannot provide specifics, but I am confident that by the next call in October, we will detail our progress and its implications for our business. We are on track to integrate beyond apparel into our product offerings.

Al Carey, Executive Chairman

This is Al. I wanted to add to Eddie's comments. In fiscal 2026, we will see an impact from our initiatives, with some contributions expected by the end of this fiscal year. Excitingly, the new products Eddie mentioned possess significantly stronger margins than our baseline business. Regarding the beyond apparel initiative, qualifying customers takes considerable time to ensure product quality and timing and to finalize contracts. We are currently experiencing positive movement in qualifying new customers, which bodes well for our financial outlook. This new Textile Takeback program bolsters our environmental sustainability strategy, and while these products won't contribute to revenue this quarter, they are expected to emerge by the end of this fiscal year.

Anthony Lebiedzinski, Analyst

Thank you for the comprehensive response. One last inquiry concerning the margin differential—could you quantify the margin difference between your new products and legacy offerings?

A.J. Eaker, Chief Financial Officer

Certainly, Anthony. Thank you for your questions and for joining us this morning. On average, we see margins for these new products being double what we traditionally obtain from our base business. For context, previous base business margins ranged from the low double digits, about 8% to 12%, whereas with these new products, we frequently see margins crescent into the 15% range and beyond due to their innovative nature and alignment with customer needs.

Anthony Lebiedzinski, Analyst

I appreciate that information and look forward to seeing your progress this year. Thank you very much, and best of luck.

Al Carey, Executive Chairman

Thank you.

A.J. Eaker, Chief Financial Officer

Excellent. Thank you, Anthony.

Operator, Operator

And that concludes our Q&A session and today's call. Thank you, everyone, for joining. You may now disconnect.