Delta Apparel, Inc.

Welcome to the Delta Apparel Report's fiscal 2022 third quarter results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on the touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Bob Humphreys. Please go ahead.

Good afternoon, and thank you for your interest in Delta Apparel. We are pleased to be with you today to discuss our third quarter results. I would like to give special thanks to our over 9,100 employees throughout Mexico, Honduras, El Salvador, and the United States who continue to work hard to service our customers in the many operations that we have. As reported in our earnings release, sales for our third quarter ended July 2, 2022, for $126.9 million, up 7% from the prior year June quarter. Our third quarter results reflect continued broad-based demand for our products, with the Delta Group segment delivering 3% growth over the prior year and the Salt Life segment registering 30% growth year-over-year. In our Delta Group segment, we continue to benefit from our broad channels of distribution and saw increased demand for both global brands and on-demand digital print moderated by decline in our Delta Direct business. Global brands continue to expand revenue and unit growth while we provide a high service level to our customers with our expanded array of value-added services. Over time, we will migrate to more production to meet the demand we are seeing in this channel of business. Our value proposition with multiple channels of distribution in our vertically integrated supply chain allows us to cater to our customers' needs. We are also seeing continued revenue growth at DTG2Go. The partnership with Fanatics continues to grow, and we have now installed new digital print equipment in a fourth facility allowing us to be even closer to the end consumer and better serve the important Northeast market. We expect this growth to continue for the fourth quarter as we position ourselves for the holiday season. We further leverage our vertically integrated supply chain by using Delta direct blanks in our DTG2Go production, creating efficiencies within the business and for our customers. We anticipate continued momentum in upcoming quarters as our own demand digital first solution brings on additional production to meet customer demand. In our Delta Direct business, we have seen the market decline for replenishment orders for mass channel activewear at large retailers, although it appears excess inventories are working their way through the channel. The Salt Life segment registered very strong growth over the prior year third quarter, with sales increasing 30%. We have seen strong results on both the retail and wholesale channels of distribution, and with a better inventory position combined with an updated e-commerce site, we have seen a nice increase in web traffic over the previous quarter. During the quarter, we expanded our Salt Life branded retail footprint with four new locations. As we previously discussed in April, we opened stores in Foley, Alabama and Hilton Head, South Carolina. In May, we also opened stores in Boca Raton, Florida and Rehoboth Beach, Delaware. With these openings, we have achieved our initial fiscal 2022 goal, bringing the total number of retail doors to 20 locations across seven states. Our recent Salt Life retail location openings continue to meet our initial sales expectations, validating the strength of the Salt Life brand. We believe our omni-channel strategy is working well for Salt Life and is building overall consumer demand for the brand. While we are achieving positive sales results in our business, we are also actively managing cost pressures across all areas of our company. We are being challenged on inflationary cost pressures, which we expect to continue for the foreseeable future. We are managing capital deployed in our business by balancing additional capital expenditures to support growth while scheduling production to meet market demand. We have completed our plans for the current fiscal year to install new digital print technology in four of our DTG2GO locations. For Salt Life, we continue to explore new retail location opportunities while we have already met our target of 20 retail stores open by the end of fiscal 2022. In the face of macroeconomic headwinds and continued supply chain disruptions, our broad channels of distribution allow us to continue to work together with large retail and global brand partners who seek the value-added services we can uniquely provide. Over the last several months, we have managed our commitment of July-based cotton contracts to reduce the amount of high-priced cotton to eventually flow through our cost of sales. We have already decreased our production output and have reduced our planned operating schedule until late fall when lower-priced cotton will be available in the marketplace. We expect these actions will reduce our units on hand to service the undecorated active wear market. Now let me turn the call over to Simone, who will review our third quarter financial results, and then I will rejoin the call prior to our opening for questions. Simone?

Thank you, Bob. For our fiscal 2022 third quarter, we delivered sales of $126.9 million, a 7% increase over the prior year third quarter. The performance was driven by growth across both of our business segments, with the Delta Group segment up 3% and the Salt Life Group segment up 30%. During the third quarter, Delta Group net sales grew to $106 million compared to $102.6 million in the prior year third quarter. This growth was driven by global brands achieving an increase in revenue and units sold. At our on-demand digital print business, DTG2Go, Sales and unit growth both increased from the previous quarter as we continue to make progress with our digital first strategy. Average selling prices are increasing due to expanded service levels and more expensive garments. We expect these trends to continue in the fourth quarter and into the next fiscal year. The Salt Life Group third quarter revenue grew 30% to $20.9 million compared to $16.1 million in the third quarter of 2021. The segment's growth was driven by an over 40% increase in wholesale sales, combined with continued Salt Life branded retail store sales growth. Growth margins at Delta Apparel declined from the prior year fiscal third quarter by 130 basis points to 24.2% for the third quarter of fiscal 2022. This decline was driven by inflationary cost pressures including rising prices of cotton, energy and continued labour cost pressures. In the Delta Group, gross margins were 19.1% for the June 2022 quarter, a decline from the prior year June quarter margins of 21.7%. Gross margins were most negatively impacted by higher cost inventory flowing through cost of sales. These costs include the rising cost of cotton, energy, dyes and chemicals, and freight and wages. At DTG2Go, we expect to realise improved gross margins as we complete new digital print equipment installations and build production outputs and efficiencies as we move into subsequent quarters. The Salt Life Group segment's gross margins improved to 50.2% in the third quarter of fiscal 2022, compared to 49.7% in the prior year third quarter, resulting from a favorable mix of sales, including increased Salt Life branded retail store sales. Net sales for Delta Apparel for the first nine months of fiscal 2022 were $369.3 million, an increase of 14.7% over the same period last year. For the Delta Group, net sales for the first nine months of fiscal 2022 with $323.3 million, an overall 14% increase over the same period in the prior year. For Salt Life, in the first nine months of fiscal 2022, net sales were $46 million, up $8.4 million, or 22% from the prior year net sales of $37.6 million in the comparable period. Gross margins in the Delta group for the first nine months of fiscal 2022 declined to 19.6% of sales from 20.2% of sales in the same period for the prior year. In the Salt Life segment for the first nine months of fiscal 2022, gross margins grew 51.6% of sales from 47.9% in the prior year, driven by sales channel mix and higher selling prices. Selling, general and administrative expenses, SG&A, were $22.4 million in the third quarter of fiscal 2022, or 17.7% of sales, compared to $19.9 million, or 16.8% of sales, in the prior year third quarter. Selling expenses increased during the quarter, driven by sales channel mix in our active web business, combined with a rise in travel and trade show cost as compared to the same period last year when travel was still depressed. The addition of new Salt Life retail stores has also increased SG&A costs year over year. Within our distribution centres, there is sustained pressure on wages where we are seeing a double-digit increase in the costs of hourly associate wages and incentive compensation. The timing of issuance of specific stock-based compensation awards this year has also led to equity compensation expenses being elevated over the same period of last year. Other income for the third quarter of 2022 was $1 million. This is substantially made up of valuation changes in our contingent consideration liabilities of $0.8 million associated with the acquisition of DTG2Go. In addition, we also recognise profits related to our Green Valley Industrial Park equity method investment in other income. Interest expense was $2 million in the third quarter of fiscal 2022, up from the prior year third quarter expense of $1.7 million due to high debt levels. In June 2022, we completed the renewal of our seventh amendment to our credit agreement with Wells Fargo. extending the term for five years to expire in June 2027. For the nine months into June 2022, our effective tax rate was 17.2%, down from 23.1% in the third quarter of fiscal 2021. We anticipate our tax rate for the full year to be approximately 18%. Operating profit in the third quarter was $9.3 million, down from the prior year's third quarter $11.9 million of operating profit. We achieved net earnings for the June 2022 quarter of $6.2 million or $0.88 per diluted share as compared to $8.2 million or $1.14 per diluted share in the prior year. At quarter end, inventories were $227.7 million, up $66 million from September 2021 and $75.4 million from the prior year June quarter end. Our increased inventory level is a reflection of increasing input costs including raw materials, transportation labour costs combined with an increase in units on hand. As a reminder, at this time in the third quarter of last year we were continuing to build production and inventory levels were depressed. At SaltLife, with the opening of additional retail doors, combined with supply chain delays on sourced products, we planned for higher levels of inventory. We continue to work across the Delta Group on aligning our manufacturing output to balance with demand and appropriately manage on-hand inventory. Total net debt increased $40.7 million from September 2021 to $162.4 million at June 2022. Cash on hand and availability under our US revolving credit facility totaled $13.8 million at June 2022, a $14.6 million decrease from September 2021. This decrease in availability is principally driven by capital expenditures, share repurchases, and working capital needs. As we continue to grow, we will prioritise investments to support our business strategy. During the third quarter, we invested approximately $5.5 million in capital expenditures. This capital spending has been mainly focused on digital print equipment to support our DTG2Go business, retail store openings and information technology initiatives. We have largely completed our manufacturing expansion projects for our Delta Group for fiscal 2022. We plan to further invest in Salt Life retail location openings and complete focused manufacturing expansion projects during our fourth quarter, and anticipate spending approximately $20 million in capital for fiscal 2022. In the third quarter of fiscal 2022, under the previously announced Share Repurchase Program, the company purchased 33,934 shares for $1 million, bringing the total amount repurchased to $56.4 million over the life of the program. At the end of the third quarter of fiscal 2022, the company had $3.6 million of remaining repurchase capacity under its existing board authorization. I will now turn the call back over to Bob for final remarks.