Earnings Call Transcript - UFI Q1 2026

Operator, Operator

Good morning, and thank you for joining Unifi's First Quarter Fiscal 2026 Earnings Conference Call. Today's conference is being recorded. 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 reference a webcast presentation available in the Investor Relations section of unifi.com. Please review Page 2 of that slide deck for cautionary statements and non-GAAP measures. I will now hand the call over to Al Carey.

Albert Carey, Executive Chairman

Thank you. Good morning, everybody, and thank you for joining us today. Listen, I'll get started with a few comments. And to start out, I'd say our UNIFI business had a challenging quarter. However, I'd like to spend a few minutes to explain what unusual obstacles occurred in quarter 1. I think it would be helpful for those of you that follow our company to understand that this quarter had 2 primary challenges. One is beyond our control and one is within our control, but it's temporary. So let's start out with the first item, which is what is beyond our control. Most of you have probably read about this in our industry; the majority of our customers placed orders for goods that will get them through the holiday season, but they ordered them just before the tariffs went into effect in April. Then since April, orders have been extremely light and only for goods that are absolutely necessary, and this seems to be consistent across our industry, not just a UNIFI issue. This has had a significant impact on our sales revenues, particularly in Asia and also in Central America, and it's going to affect sales probably for another 8 weeks. So it will take us through our quarter 2. This is as best as we can determine. But most of our customers, retailers and brands have communicated to us that they expect to return to some level of normal ordering in January. And if not, we have a plan to deal with that. One positive development that we are keeping an eye on is that the sales growth of apparel remains solid at a plus 5% versus a year ago and inventory is declining pretty significantly. So ordering should follow. So that's topic one. Topic two, what is within our control. I think I mentioned this on the last call. We closed our Madison facility in June. We moved out of that volume. We took it from Madison to Yadkinville, our bigger facility, which added 40% to their capacity. The transition required us to hire many people, train them, move equipment and incentivize employees to stay working in Madison until we shut down so that we didn't miss out on business and kept our service up with our customers. We've had increased costs because of these transitions, but I will tell you that we've taken actions. You'll hear more about them today to put our costs back on track. And while you don't see it in our Q1 results, we are now seeing it in our October operating results, which is the first month of the quarter, the new quarter. And you can expect these transition costs are now fully complete for our company. The third item I wanted to mention is that we really have resized our company's cost model. We now have resized the operating cost to fit this new level of revenue, this new low level of revenue so that we can be profitable even at the lower levels. So we've taken some new cost reductions, headcount reductions, and price actions that are now complete as of last week. These actions will allow us to deliver improved cash flow and EBITDA, and the performance will step up as we move from quarter 2 through quarter 4. Then when the revenues do improve, and they will improve, we will see much, much better leverage on our fixed cost as a total company. Now A.J. will take you through how our net debt is being reduced and our cash flow improves with these changes. And I'd like to mention that last, but not least, we have a plan on improving revenue growth with our efforts at beyond apparel products, which we've been talking about for quite some time, topics such as military segment, carpet, resin sales, and packaging. All these products are relatively new to our business with better margins than the base. There have been a lot of work going on meeting qualifications for these projects. That's the one thing we probably didn't realize is how long it will take to qualify, but there's lots of work being done and orders are now coming in. Our efforts on the REPREVE innovation and textile Takeback are gaining a high level of interest from customers. They will see progress in the second half of calendar 2026. So in summary, despite the obstacles we faced in quarter 1, I'd say our team was agile in taking action that will make us a more profitable company and deal with these tariff uncertainties. While our comeback has taken longer than I would have liked, we have used this adversity to take additional actions fairly quickly and to be more sure of our ability to generate profits and cash flow even as the market has periodic downturns in the future. So now let me turn it over to Eddie Ingle, our President and CEO, who will take you through the actions that went on during this quarter.

Edmund Ingle, President and CEO

Thanks, Al. I will begin with an overview of the first quarter, so please refer to Slide #4. As noted, our first-quarter results fell short of our expectations due to softer ordering trends tied to recent tariff and trade uncertainties. Many of our global customers have been cautiously slowing their ordering patterns until they can develop a strategy to navigate this evolving tariff landscape. While it's disappointing to see this cautious approach from customers, we anticipate that the holiday season will reduce apparel inventories to relatively low levels, allowing us to gain revenue momentum at the start of calendar 2026. It’s important to update you on the current trade environment in key markets we operate in. In the Americas, although the short term remains challenging, the mid- and long-term outlook appears to be improving. Many brands and partners are beginning to shift some of their production to Central America in calendar 2026. While we will need more clarity on the global tariff situation, we are collaborating with these retailers to emphasize that using our U.S. yarn in Central America can allow them to recover a significant portion of the 10% reciprocal tariff, as our Central American supply chain is U.S.-sourced. In Asia, brands are also reconsidering where to position the final assembly phase of their supply chains. While uncertainty persists regarding which country will be the most advantageous, our asset-light model remains effective. As we've mentioned before, we believe there are vast opportunities in Asia once trade pressures ease, given that most of the world's polyester production still relies on China. In Brazil, we are still experiencing relative demand stability and are confident in the long-term growth potential of the textured polyester yarn market. However, we are facing challenges from Asian companies that are dumping products in our market, and the textured polyester industry has filed an antidumping case with the Brazilian government, which is currently under evaluation. If successful, this could help alleviate some short-term challenges in the region, though the resolution may take until the end of our fiscal year. Looking at the broader picture, the current tariff and trade situation has negatively impacted all our business segments in the short term, but it may provide greater long-term support specifically for the Americas segment. Given the uncertainty, we believe it was essential to further adjust our cost structure to enhance our potential for profit and cash flow in fiscal 2026. The first step was implementing a cost restructuring program immediately after the close of Q1. A.J. will provide further insights on the financial implications of this program, but these restructuring efforts have reduced our workforce and decreased hours in some facilities as we await demand recovery. These decisions were not made lightly, but we view them as necessary measures to navigate the financial challenges we currently face and to achieve better financial outcomes. We managed to accomplish this while maintaining our manufacturing capabilities in the Americas segment. As we move forward in the fiscal year and revenues increase, we will be selective about where we reinvest in costs. Additionally, during the September quarter, we communicated to customers about price increases related to inflation and tariffs. This pricing adjustment should partially improve our financial results in Q2 and will be fully reflected in our third fiscal quarter results. Now, regarding our performance, during the first quarter of fiscal 2025, consolidated net sales were $135.7 million, down 7.9%. In the Americas segment, we experienced a decrease year-over-year, mainly due to reduced sales volumes caused by trade uncertainties and some productivity shortfalls as we continued consolidating our U.S. yarn manufacturing operations. These transitional costs are now concluded. In Brazil, we continue to see stable demand for our products, but as mentioned earlier, our results were affected by import pricing pressures and slightly lower sales volumes. Nonetheless, we remain optimistic about the fundamentals of Brazil's textured polyester market, which we believe will enhance our financial performance in the second half of fiscal 2026. In our Asia segment, sales remained weak as trade negotiations continue. As previously noted, our fixed cost structure in the region is low, and our asset-light model can adapt to various countries. We will remain flexible in the short term and ready as global trade conditions evolve. Moving to Slide 5 for an update on REPREVE, during the first quarter, REPREVE Fiber accounted for 29% of sales, down 1 percentage point from the prior year due to trade policy impacts on ordering patterns. Despite this, we are seeing some positive signs for our REPREVE polyester resin, which performed well, and we are cautiously optimistic that this momentum will continue throughout the rest of fiscal 2026. These REPREVE resin sales are part of the growth in our Beyond Apparel business in the U.S. Now onto Slide 6 to highlight some recent innovations. We are building on momentum from recent global product launches. Last quarter, we announced the global launch of our new A.M.Y. platform for sustainable odor control, A.M.Y. Peppermint, along with updated offerings of ThermaLoop insulation and REPREVE Takeback. Both of these circular products are now sourced from 100% textile fabric waste inputs. On Slide 7, you can see our ThermaLoop insulation featured in co-branded offers with outdoor apparel leaders, Marmot and Lafuma. Both brands have introduced jackets that include co-branding hangtags and e-commerce callouts. Additionally, REPREVE Our Ocean was showcased in a co-branded Instagram post created alongside Rain Rebel, effectively engaging audiences in both Europe and the U.S. The post highlighted our REPREVE Our Ocean filament yarn in rain ponchos made from 22 post-consumer recycled plastic bottles that are certified as ocean cycle, ensuring they are sourced from regions lacking proper waste management. Furthermore, these customer endorsements were complemented by recent award recognitions for our sustainable textile solutions, including an Honorable Mention for our ThermaLoop insulation at Fast Company's Innovation by Design Awards and a finalist position for our REPREVE brand platform at the Digiday Greater Goods Awards, which celebrates brands tackling key social and environmental issues. Before I hand it over to A.J., I want to mention that we are seeing positive traction in our Beyond Apparel initiatives targeting carpet, military, and packaging applications. So far, the government shutdown hasn’t significantly affected military sales, but we hope for a quick resolution to maintain our momentum. We believe sales from these initiatives will contribute meaningfully to our financial and revenue growth in the second half of fiscal 2026. Now, I will pass the call to A.J. to discuss our financial results for the quarter.

A.J. Eaker, Chief Financial Officer

Thank you, Eddie. As Eddie noted, we are disappointed in our financial results this quarter and thus have continued to take steps to better align and optimize costs across our business, which now includes the recent implementation of another cost restructuring initiative. This recent initiative is expected to result in significant savings on an annual basis as we reduce our headcount, match machine run rates with sales volumes, and strategically reduce operating costs across our business. This new cost reduction plan includes approximately $5 million in SG&A savings on an annualized basis compared to fiscal 2025, and approximately $4 million of those savings should be reflected in this fiscal 2026. These are predominantly cash savings. Next, the new reduction in manufacturing costs are designed to drive a $5 million per quarter savings for the remainder of fiscal 2026. These measures were necessary to realign costs with the lower revenue levels that were not expected immediately following the closure of our Madison facility. Moving on to the financial results on Slide 8. You will see our consolidated financial highlights for the quarter. Consolidated net sales for the quarter were $135.7 million, down 8% year-over-year, primarily driven by trade-related uncertainty and short-term demand volatility across each business segment. Gross profit was lower at $3.4 million and gross margin was 2.5%. On Slide 9, in the Americas, net sales were down 1.3% compared to the prior year fiscal 2025 due to price and sales mix. Gross profit in the region decreased by $300,000, primarily as demand and production volatility mostly offset the savings from consolidation efforts during calendar 2025. Slide 10 displays our Brazil segment, which saw net sales and gross profit decrease versus the prior year. As Eddie noted, this was primarily due to import pricing pressures and lower sales volumes. That said, demand and growth opportunities continue to remain strong in Brazil. Finally, on Slide 11, our Asia segment net sales and gross profit declined by 19% and 16%, respectively, primarily due to lower sales volumes, a less favorable sales mix, and pricing dynamics in the region. Despite these headwinds, our gross margin in the region did improve by 40 basis points, highlighting the benefit of our ability to adjust and flex our asset-light model. Slide 12 outlines our capital structure. From a CapEx perspective, we prioritize critical investments and are forecasting under $10 million in fiscal 2026. We've also continued to do a nice job managing our working capital over the last few years and expect to continue that work throughout fiscal 2026 from a leaner manufacturing base in the U.S. With all of our calendar 2025 cost actions, we have positioned the business to better generate operating cash flows under a strained revenue environment. For example, in monitoring our weekly cash spend in the Americas business, during October, we've seen a significant decrease versus August when we had more volatile customer ordering patterns and higher activity across all operating functions. Therefore, significant progress has been made. With that, I'll pass the call back to Eddie.

Edmund Ingle, President and CEO

Thank you, A.J. Now let's turn to Slide 13 to discuss our forecast for the second quarter of fiscal 2026. For the second quarter, we are expecting to begin to see the full benefits of our proactive efforts to reduce costs, increase machine efficiencies, and facility utilization to improve profitability throughout the remainder of fiscal 2026. We also expect to see adjusted EBITDA improve sequentially from the first quarter of fiscal 2026, primarily driven by cost savings in the Americas segment. Due to the holiday period, the net sales are expected to drop slightly in the Americas and Brazil, and net sales in Asia are expected to increase ahead of the Lunar New Year, which this year is in mid-February 2026. And while it's difficult for us to predict the exact timing of this, we also anticipate that the global trade situation will gain greater clarity by the end of calendar 2025. This as well as significantly reduced inventory levels in the channel after the holiday season should help us see incremental improvement of the top line throughout calendar 2026. Lastly, we do expect to see continued commercialization of our value-added products such as REPREVE Takeback in ThermaLoop in Asia and in the beyond apparel markets such as packaging, military, and carpets in the U.S. To wrap up on Slide 14 with our strategic priorities. While much of our cost actions were completed during the first 10 months of calendar 2025, we recognize that we still have some work ahead of us to position our business to be where we want it to be. As we've highlighted today, we are continuing to make the necessary changes needed to strengthen our business, which will help us capitalize on the investments we have made in new innovations and circular textile solutions. As we have previously noted, achieving our goals will continue to require patience and persistence. However, the cost actions we took will be seen in Q2 and beyond. And while October has not yet been rolled up, we have seen better revenues come through in the Americas. Further, now that we have rightsized our Americas footprint, we will see the cost benefits of this reduction begin to flow through. The tariff uncertainty should subside in the coming months, and the brands will have a clear supply chain strategy that we will adapt to. The focus going forward will be on growing revenues and margins through the commercialization of our value-added technologies and building our business in new markets. When successful, this is expected to create long-term value for our shareholders. With that, we would now like to open the line for questions.

Operator, Operator

And your first question comes from Anthony Lebiedzinski from Sidoti & Company.

Anthony Lebiedzinski, Analyst

So first, I just wanted to see if you could guys take a step back and just maybe just provide a little bit more comment and details about the volatility that you saw in demand and production, particularly in the Americas. And it sounds like things have gotten better there in October, which is encouraging, but if you could just kind of go over the volatility in demand and how that impacted the first quarter, that would be helpful.

Edmund Ingle, President and CEO

Thank you for joining us today and for your question. We experienced significant volatility in demand, which we previously mentioned. In the first five or six weeks of Q1, we built inventory in anticipation of revenue coming in. When that did not happen, we quickly reduced our production levels, which led to some cost-cutting measures. We responded swiftly to the drop in demand. October was positive, but we expect a slowdown as we enter the Christmas holiday season in the Americas, followed by an uptick in Q3 after the holiday.

Anthony Lebiedzinski, Analyst

And then just curious if you guys could provide more details as to what are you hearing from your customers about the operating environment and the upcoming holiday season. There seem to be a lot of mixed signals with the overall economy. So just wondering if you guys could talk about that.

Edmund Ingle, President and CEO

Yes. What we're seeing is that everybody is very cautious with their inventories, and they're starting to do what we started 2 months ago, which is manage their inventory levels down by reducing their production levels and really being very reactionary to any demand. Everybody is telling us that this is really in preparation for managing their year-end inventories, which we understand. But they are also saying at the same time, like I said earlier, Q3 should be better. And it should be better for us in the Americas because Central America is expected to pick up, and it's expected to pick up because of natural seasonality, but also because the brands are moving some of the programs back here. While there is still that 10% tariff for Central America, CAFTA-DR goods, there is an opportunity for some of the brands to claim back some of that 10% reciprocal tariff if there is a U.S. supply chain. So we're excited about the fact that the brands are learning about how to capture some of that money back to make it a more level playing field with some of the Asia tariffs.

Albert Carey, Executive Chairman

Anthony, this is Al. I'll add something that was reported in the trade press in April. If I were a buyer for a chain, I would have done the same thing. When the tariffs were announced, orders were placed immediately for products to arrive in time for Christmas. Reports indicated that the ports in Los Angeles experienced the highest delivery levels recorded in 17 years. However, in July, August, and September, deliveries decreased significantly, and the inventories for the Christmas holidays were ready a month earlier than ever before. They are currently managing some excess inventory as the holiday season approaches. It's impressive that many are taking similar actions, which makes sense given the tariffs; they effectively anticipated a price increase. Additionally, regarding your last question, I want to emphasize the performance of our plants. While the exact figures may not convey much, they demonstrate progress. In the summer, we were operating at around 85 pounds per man hour, and now we’ve increased that to 107, with the capacity to go even higher. Our training, hiring, production improvements, and the benchmarks we've set for our staff are starting to yield results. This has been one of the most significant developments in the past three months, and we believe our cases per man hour will exceed the current rate as our team members become more experienced.

Anthony Lebiedzinski, Analyst

And then, Eddie, I think you said earlier that you're seeing some green shoots with REPREVE. Can you expand on that? What are you expecting going forward?

Edmund Ingle, President and CEO

Yes. Much of our REPREVE is in Asia. And I mentioned that there's 2 brands, Marmot that were and Lafuma who have adopted ThermaLoop in their products, but we're also seeing some action on the REPREVE Takeback, which is also the 100% circular solution. So as we move through the year, we're expecting the Asia business to grow simply because REPREVE plus technologies and plus the circular solutions are going to grow. And we can see this in some of the ordering patterns that we have visibility to in the December, January period. In the U.S., there is still renewed interest in keeping a lot of the performance apparel with REPREVE. And that is what that business is generally run through the Central America supply chain. So as we get into Q3, we should see the growth in Q3 of REPREVE also in the Americas business.

Anthony Lebiedzinski, Analyst

And then in terms of the price increases that you referenced, can you give us more details as far as like what's the extent of the price increases? And also, are these price increases in certain markets? How should we think about that?

A.J. Eaker, Chief Financial Officer

Yes. I'll add a little bit of color there, Anthony. Certainly, we work closely with the customers to make sure we're delivering the right value. So we're not in a position to disclose the specific price increases or the overall amount, but know that these are responsive to costs and tariffs. And so we're doing our best to work closely with the customers to make sure everything is fair as we get through the supply chain and that we're delivering the same value we have.

Anthony Lebiedzinski, Analyst

That sounds good, A.J. And then I just want to follow up as far as the cost savings that you talked about; are these on a gross basis or a net basis in terms of the numbers that you provided?

A.J. Eaker, Chief Financial Officer

So for SG&A, we are expecting a strong decline year-over-year in the annual consolidated SG&A amount. So in fiscal '25, you saw approximately $49 million of SG&A, and we expect that to be under $45 million for fiscal 2026. So that would be the overall impact to the SG&A line. From a COGS basis, at these revenue levels, we are expecting that $5 million per quarter to come through as compared to the quarter that we just completed. So improvement throughout the year beyond this Q1.

Anthony Lebiedzinski, Analyst

And then just also thinking about the Beyond Apparel initiatives. You've referenced the military and carpet, not just on this call, but on previous calls as well. Just wondering if you guys could comment as far as how much revenue are you currently deriving from these? And what's the opportunity going forward?

Edmund Ingle, President and CEO

Yes, we still believe that in 2026, we should see improvements in the market. I anticipate a range of around $20 million, with the lower end represented by the third fiscal quarter or the first calendar quarter. As we progress through the 12 months of fiscal 2026, we expect a significant increase to a run rate of about $20 million by the end of the calendar year. We're already noticing a positive trend in our resin business, specifically in our flake, chip, and recycled polyester segments, and we expect this momentum to continue throughout 2026.

Anthony Lebiedzinski, Analyst

Overall, aside from military and carpet, are there any other key initiatives beyond apparel that we should consider? In the past, you've mentioned automotive. Could you provide any further details on that?

Edmund Ingle, President and CEO

Yes, we occasionally discuss automotive specifically, and it has been quite beneficial for us in recent months. However, we have hesitated to emphasize it due to some concerns about the automotive industry amidst the ongoing changes. Nevertheless, we still view it as strong and supportive of our Beyond Apparel initiative. The challenge is to transition it to the value-added products we offer, and we are putting significant effort into that. It remains a crucial aspect of our business.

Operator, Operator

And your next question comes from Chris Reynolds from Neuberger Berman.

Chris Reynolds, Analyst

I have 2 questions. The first relates to Brazil and sort of Latin America in general. That's an area where you have some strength. But if I recall, you have a balance sheet there that's fairly significant with cash that sort of stays in region. Can you provide an update on what those general numbers look like and then the trends because I think one of your competitors went bankrupt, and that's helped you.

A.J. Eaker, Chief Financial Officer

Thanks, Chris. Two good questions there. A.J. here. I'll start with the first. Certainly, we've been proud of what the Brazil operation has been able to achieve over the last several years. Certainly, last year was stronger with the pricing environment there and a little bit more pressure in this current quarter. Fortunately, their operation has run quite well, especially from a working capital and margin perspective. Despite these pressures, they have been able to generate cash, both the quarter that we just completed and the quarter that we're in now. So that balance sheet remains healthy and their cash levels remain in excess right now of their absolute needs for the next few quarters.

Edmund Ingle, President and CEO

We're excited about the recent changes regarding the de minimis. At the end of August, an executive order was signed that prevents importing goods duty-free and regulation-free. This shift is positively affecting many brands since the very low-cost imports that previously entered under the de minimis are no longer coming in. We anticipate this will lead to improved revenues for larger domestic brands. Some brands were caught off guard as they had been relying on the de minimis to bring in goods, so now they face additional costs, duties, and transportation expenses like the other brands that did not utilize that ruling. We expect to see benefits in the region over the next few quarters, although it’s currently challenging to gauge the exact impact on us due to the lack of normal data caused by the government shutdown. We're somewhat operating without complete visibility on the import situation, but we'll provide more updates in the coming quarters. Thank you for the question.

Operator, Operator

All right. There are no further questions at this time. And ladies and gentlemen, thank you all for joining, and that concludes today's conference call. All participants may now disconnect. Thank you, everyone.