Earnings Call Transcript - UFI Q1 2025

Operator, Operator

Good morning, and thank you for attending Unifi's First Quarter Fiscal 2025 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; and A.J. Eaker, Chief Financial Officer. 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. I will turn the call over to Al Carey.

Al Carey, Executive Chairman

Thank you, and thank you, everyone, for joining our call today. Those of you who have followed our quarterly earnings over the last two years know that the macroeconomic headwinds have been stubborn, not just for us but for our entire industry. Until recently, high levels of apparel inventory have been quite a problem, and slow consumer sales have held down our revenues and our profits. Now that has continued in Q1 and even very recently, but we believe that trend is now improving as we begin our new calendar year of 2025. We're finally seeing some green shoots in the form of customer orders and interest in our new innovation. While it's not all the way back to what we want to see yet, we are anticipating substantial improvements for the second half of our fiscal year or the first half of the calendar year. Q1 revenues, which you'll hear more about in the next few minutes, were about as expected. They were up 6% over a year ago, and our EBITDA was also about as expected at $3.3 million, significantly over last year, which was a very depressed level. So you can expect the second half will step up in both revenues and EBITDA well above the first half of this fiscal year. The improved outlook is coming from four areas. The first is the REPREVE innovation, which is being enthusiastically received by customers worldwide, especially our Textile Takeback product called ThermaLoop. These products will begin to show up in our sales initially in Q4. The second area providing optimism is our traction in the Beyond Apparel business segment, especially in home and carpet, military, and packaging. This has taken longer than expected due to extreme approval processes for new business lines, but we now have traction and we’re seeing orders come in. The third area is our Brazil business, which has momentum. We made an investment in Brazil some time ago on EvoCoolers, giving us the capacity needed to gain market share. The fourth area of optimism is cost reductions for North America, where we believe there's more to do. We expect to see an improvement in North America's profitability as we advance into the second half of the fiscal year. I'm proud of the team, mostly because we didn’t slow our efforts during this challenging time on innovation, Beyond Apparel, and cost management. If there's ever been a case where you shouldn’t let a crisis go to waste, this is our situation at Unifi. I believe we are set up to emerge as a better company starting soon in calendar year 2025, which will continue into the future, and I think that positions us to produce shareholder value. With that quick summary, I will turn the presentation over now to Eddie Ingle.

Eddie Ingle, Chief Executive Officer

Thanks, Al. As Al just mentioned, our results for the first quarter were in line with our expectations, demonstrating our continued progress toward repositioning our business for future growth. However, some of our customers were recently affected by Hurricane Helene in late September, which resulted in their operations being curtailed for a brief period. While Unifi's US operations were fortunate enough not to experience any material impact from the hurricane, this operational curtailment from some of our customers did result in a portion of sales being pushed out into the second quarter. The devastation from the hurricane is heartbreaking, and we are all hoping for a fast recovery for those impacted in our local communities here in North Carolina and elsewhere. With that said, I will now provide an overview of the quarter and some operational highlights on Slide 4. During the first quarter of fiscal 2025, we reported $147.4 million in consolidated net sales, which is up 6% year-over-year and down 6% sequentially compared to the fourth quarter, a typical seasonal effect. Our year-over-year improvement in net sales was largely driven by our Brazil segment, which has continued to deliver strong results. Our Americas cost reset efforts, as Al mentioned, are progressing as planned, helping us offset some inflationary impacts. Some savings are already evident in our year-over-year SG&A spend. We are also seeing benefits from our sales transformation, indicated by the significant year-over-year improvement in gross profit during the quarter. We recently took steps to strengthen the balance sheet, which AJ will provide more details on shortly. These efforts will enable us to strategically invest in exciting new product initiatives that will not only help us grow globally but also enhance our financial performance. I'll now provide a brief update on each of our business segments. In the Americas segment, our performance was relatively in line with expectations; however, we experienced a modest slowdown in the region due to a combination of seasonality and the recent weather event. Despite this, we believe our Americas segment is poised to benefit from upcoming Beyond Apparel initiatives that I will cover shortly. Our Brazil segment was the strongest performing for the third quarter in a row. This ongoing strength results from our ability to take pricing in the region and the market share we have captured, leading to stronger sales volumes. In Asia, we saw a slowdown due to the struggling economy in China and pricing pressure impacting sales volume. However, we remain hopeful that the recent Chinese government stimulus policies will help revive the economy and drive stronger performance in the long term. Moving on to Slide 5 for an update on REPREVE. During the first quarter, REPREVE accounted for 30% of sales, a slight decrease compared to the previous quarter, primarily driven by the slowdown in our Asia business. Nonetheless, we expect stability in our REPREVE fiber business as we progress through fiscal 2025, especially in the second half of the year, as we begin to recognize revenue and volume benefits from our new products. Now on to Slide 6, regarding new products, we announced the launch of two innovative offerings: our REPREVE Takeback white filament yarn and ThermaLoop, the world's first insulation powered by our textile takeback process. The response from customers, brands, and media has been overwhelmingly positive, validating the market's strong demand for scalable global textile-to-textile recycling solutions that are ready today. These new products were prominently featured at the Intertextile Shanghai Trade Show in late August, resulting in numerous productive meetings with direct customers, brands, and retailers. To further highlight the future opportunities for these launches, we plan to share exciting product placements for both soon. We are pleased with early success and customer reactions to these new launches and believe our focus on product innovation and circular storytelling is the right place to allocate resources. As I've said many times and it bears repeating, our job is to ensure that direct customers, brands, and retailers meet their sustainability goals, generally centered around the reduction of greenhouse gas emissions and reduced fossil fuel consumption. By adopting these new products built on our textile-to-textile recycling platform, we help them achieve their goals faster. In terms of media impact, the launch has generated significant coverage with 23 media pieces, reaching over 80 million impressions, and we secured interviews with key publications, allowing us to provide deeper insights into the uniqueness of these products. This level of exposure reinforces our position as a leader in sustainable innovation. Throughout the quarter, REPREVE secured additional media coverage, reaching over 1 billion impressions. Another highlight was strong performance from our co-branded product bases, showcasing growing market recognition of REPREVE. Burt's Bees Baby launched their REPREVE-powered Polarbee fleece products across their website, social media channels, and product packaging. Callaway Golf, Burberry, and Saucony have also featured co-branded mentions, with Burberry emphasizing our REPREVE TruTemp365 and Saucony Socks spotlighting our Spolktech moisture management technology. Additionally, media outlets like PIFA Magazine, the New York Post, and Women’s Wear Daily highlighted REPREVE's use in leading fashion brands like Dagne Dover and REPREVE Ocean in Tiffany & Co. This breadth of coverage underscores our role as a trusted technology partner for many of the world's top brands and retailers who rely on us for both performance and sustainability solutions. Before wrapping up this section of the call, I'd like to discuss exciting initiatives for our Beyond Apparel business. The first is flooring, specifically carpet, where we're seeing increased business opportunities. The second initiative relates to the military market, where our offerings will support a variety of military applications that will be margin accretive. We plan to provide more information on both programs in the near future once we can officially announce full details. Lastly, our flake and chip offering, our resin business in Beyond Apparel, grew nicely during the first quarter. We're excited about improvements in this segment, and these initiatives will help offset weaknesses in our traditional apparel business. With that, I would like to pass the call over to A.J. for a financial discussion.

A.J. Eaker, Chief Financial Officer

Thank you, Eddie. I would first like to express my sympathy for all families impacted by the recent weather events, and I sincerely hope everyone receives the necessary help and relief as soon as possible. Our first quarter was another step in the right direction for Unifi as we successfully met our financial expectations and continue taking steps to position our business for growth and stronger profitability in fiscal 2025 and beyond. To sustain this momentum, we remain focused on keeping our variable expenses low across both production and administrative functions, which will create cost savings and increased profit that we will reinvest in key business areas to enhance revenue performance and drive margin expansion, including the REPREVE and Beyond Apparel initiatives that Eddie just touched on. Transitioning to financial results, on slide 7, our consolidated financial highlights for the quarter show consolidated net sales of $147.4 million, up 6% year-over-year but seasonally down 6% sequentially versus the fourth quarter. The improvement in net sales year-over-year was primarily due to higher sales volumes in all segments, certain favorable pricing dynamics, and continued benefits from our previous initiatives. On slide 8, in the Americas segment, net sales were down 5% sequentially and up 6% year-over-year. The sequential decrease is due to a mix of seasonality and recent weather impacts, but year-over-year results are largely in line with expectations. We are pleased to see year-over-year gross profit improvement from our cost containment efforts and higher production activity. Slide 9 highlights our Brazil segment, which experienced net sales growth of 6% sequentially and 15% year-over-year. This was led by our ability to take price in the region and benefit from our growing market share, as Eddie mentioned earlier. On slide 10, our Asia segment saw a 2% year-over-year decline in net sales, driven by difficult economic conditions and pricing dynamics in that region. I'll now briefly discuss our balance sheet on slide 11. CapEx spend continues to be focused on maintenance levels, and we expect to maintain those levels around $12 million for fiscal 2025, thanks to the diligence of our various teams in operations. I'd like to highlight the strengthening of our liquidity following the balance sheet date. We entered into an additional $25 million facility with favorable terms into 2027, avoiding a lengthy third-party financing effort that could have resulted in burdensome interest rates, thanks to lending support from one of our Board members and largest partners, Ken Langone. Ken has been a long-time supporter of Unifi and understands the cyclicality our business has faced over the last several quarters. Collectively, we anticipate this support will provide Unifi with the liquidity it needs to avoid constraining our growth and take the appropriate time to evaluate where we should invest. Our steps to strengthen the balance sheet, combined with continued improvement in financial performance, give us confidence that the business is positioned well to pivot to growth in fiscal 2025 and beyond. With that, I'll pass the call back to Eddie for the final slides and comments.

Eddie Ingle, Chief Executive Officer

Thank you, A.J. Let's now turn to slide 12 to discuss our forecast for the second quarter of fiscal 2025. We are expecting net sales between $140 million and $145 million, with adjusted EBITDA ranging from negative $4 million to negative $2 million due to the current economic environment in China and the typical seasonality of the holiday period in the Americas and Brazil. Lastly, we continue maintaining discipline around capital expenditures, expecting CapEx for the quarter to be between $4 million and $5 million. Now moving to slide 13 to discuss our outlook for fiscal 2025, we are reiterating our forecast, which includes our belief that we'll see a return to more normal conditions, supporting top-line growth of 10% year-over-year. We also believe that the proactive decisions we've made to control costs and streamline operations will continue resulting in stronger profitability in fiscal 2025. Despite global market softness, we continue to expect a significant year-over-year increase in gross profit, gross margin, and adjusted EBITDA. We are budgeted to keep capital expenditures contained and are on track to reach around $12 million for fiscal 2025. On slide 14, you will see key areas of focus supporting our pivot to growth. We have taken proactive steps to sustain the momentum experienced over the past few quarters by strengthening our balance sheet to provide liquidity for reinvesting in our product portfolio to support innovation and growth. We look forward to opportunities ahead, not only for our REPREVE Fiber business but also for our growing Beyond Apparel initiatives, as highlighted earlier. This gives us confidence that we're well-positioned to fulfill customers' needs with an innovative portfolio of sustainable solutions while creating value for our stakeholders through improved financial results. Lastly, I'd like to thank the dedicated Unifi employees worldwide for their hard work daily. Thank you. We would now like to turn the call open for questions.

Operator, Operator

Our first question comes from the line of Anthony Lebedzinski with Sidoti & Company. Please go ahead.

Anthony Lebedzinski, Analyst

Good morning and thank you for taking the questions. I have a few questions. First, we'll go through the different segments. You called out the impact of severe weather and the storms in the Americas segment. I’d like to also share my sympathy for those impacted as well. But is there a way for you guys to maybe provide a dollar amount for what you think the sales impact was due to the storms late in the quarter?

A.J. Eaker, Chief Financial Officer

Sure, Anthony, it's A.J. Thanks for the question, and thanks for your concern for North Carolina and others impacted. We see that the impact to Q1, the September quarter, was approximately 1% on a consolidated basis, around 2% specific to the Americas segment. Unfortunately, some impacts linger into the second quarter, so at this point, we're seeing a similar effect as we still have some direct and indirect customers whose damage and impact have persisted, and they're still trying to ramp up their sales and operations to get the supply chain back on track.

Anthony Lebedzinski, Analyst

Understood. Okay, I hope that improves sooner rather than later. Moving on to the Brazil segment, very impressive performance there, especially with the gross margin at 23%. How should we think about your ability to sustain those strong margins going forward?

Eddie Ingle, Chief Executive Officer

Yes. Welcome, Anthony, and thanks for the question. Q1 was exceptional for us, and Q2 is generally our weakest quarter from both revenue and margin perspectives due to the holiday at the end of the quarter. However, we are confident that in the second half, we will return to normal margins and gross profit levels. The volume there remains robust; we’re still running full. As Al mentioned earlier, the capacity we installed continues to be very helpful, especially since our largest competitor exited the market about a year ago.

Anthony Lebedzinski, Analyst

Understood. Yes, thanks, Eddie. Regarding the Asia segment, the gross margin here was roughly 11%. Historically, it's been a mid-teens gross margin business. I recognize the challenges in China, but do you expect to return to those types of margins at some point in the future?

A.J. Eaker, Chief Financial Officer

Certainly, we did see lower margins in the Asia segment this period. A couple of stronger programs were pushed out into the second quarter and beyond. The impacts are unfortunate for the overall industry and are reflected in our results. From a mid-term and long-term perspective, we see Asia as continuing to be a growth engine and a strong contributor to consolidated margin, remaining accretive to the business. We do expect to return to those recent margin levels in the future.

Al Carey, Executive Chairman

Hey, Anthony, this is Al. There's one particular product line that I can't mention, but it's very profitable and had to be pushed out, significantly impacting margins.

Anthony Lebedzinski, Analyst

All right. Yeah. Thanks, Al and A.J., for that. It’s great to hear about traction in the Beyond Apparel segment. You talked about these lines having better margins. Can you share how much better are the margins for the markets beyond the apparel segment?

Eddie Ingle, Chief Executive Officer

Thanks for the question. Yes, I would say that they are significantly better, primarily for two reasons: we're offering an innovative product that performs better for our customers and replacing products that were very challenged in performance. This allows us to create value for the customer, which in turn creates value for our company. We’re seeing margins about 30% better than our normal product gross margins.

Anthony Lebedzinski, Analyst

That's good to hear. Regarding the new product introductions for textile take back and Thermal Loop, it sounds like you've done some trade show appearances. Do you plan to do more of those? How should we think about investment in marketing or branding, whether in the back half of fiscal 2025 or maybe fiscal 2026?

Eddie Ingle, Chief Executive Officer

Great question. We know we need to invest in promoting these products, and the promotion landscape includes social media, which is increasingly important. We also see the value of trade shows. We participated in one in Europe two weeks ago, very well-received, and we have another coming up in Portland, Oregon. We feel it's vital to show brands the actual fabrics and insulation we're producing so they can experience it. Additionally, we're conducting a roadshow with technical and marketing staff to help educate these brands on utilizing our offerings for their sustainability goals. It's a three-pronged approach. We’re investing some money but not excessively, as we recognize the need for education alongside direct engagement with brands.

Anthony Lebedzinski, Analyst

That makes a lot of sense.

Al Carey, Executive Chairman

Some of these companies we're working with are very large brands. We will invest to promote these products publicly, and their marketing capabilities are significant.

Anthony Lebedzinski, Analyst

That's great to hear. Last question from me on cost reduction efforts. Can you talk about what inning are we in regarding your profit improvement plan and what you think about efficiency savings?

A.J. Eaker, Chief Financial Officer

We're very pleased with the progress made on cost-saving initiatives and sales transformation. We see ourselves about halfway through many of those efforts, but we aren’t stopping with one single plan. We’re continually reinvigorating our focus to ensure that production and administrative functions are where they need to be based on business levels, continuing to reduce necessary costs and concentrate on the commercial initiatives Eddie described.

Al Carey, Executive Chairman

A.J., in Anthony's baseball analogy, would you say we're in the fourth inning?

A.J. Eaker, Chief Financial Officer

Yes, somewhere around the fourth or fifth inning probably makes sense right now.

Anthony Lebedzinski, Analyst

Got you. Assuming it doesn’t go to extra innings. Well, thank you very much, guys. I definitely appreciate it and best of luck.

Al Carey, Executive Chairman

Thank you, Anthony, for your time.

A.J. Eaker, Chief Financial Officer

Thank you, Anthony.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.