Delta Apparel, Inc.

Thank you. Good afternoon, everyone. Good afternoon to everyone participating in Delta Apparel Inc's fiscal year 2023 fourth quarter and full year earnings conference call. Joining us for management are Bob Humphreys, Chairman and Chief Executive Officer, Justin Groh, Executive Vice President and Chief Administrative Officer, and Nancy Bubinich, Vice President and Chief Accounting Officer. Before we begin, I'd like to remind everyone that during the course of this conference call, projections or other forward-looking statements may be made by Delta Apparel's executives. Such projections and statements suggest prediction and involve risk and uncertainty, and actual results may differ materially. Please refer to the periodic reports filed with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q. These documents identify important factors that could cause actual results to differ materially from those contained in the projections or forward-looking statements. Please note that any forward-looking statements are made only as of today and except as required by law, the company does not commit to update or revise any forward-looking statements, even if it becomes apparent that any projected results will not be realized. I'll now turn the call over to Mr. Humphries.

Good afternoon. Thank you for joining us today. As always, we appreciate your interest in Delta Apparel. Before we review our results for the full year and fourth quarter, I want to take a moment to express my gratitude to our teams throughout the various countries in which we operate our business. This has been a very challenging year for our company, with many of these challenges driven by market dynamics outside of our control. I'm proud of the decisive steps we took across our business with respect to things within our control, such as reducing working capital, controlling costs, and above all, maintaining the high service levels that have been key to our growth and success over the years. Our employees remain steadfast in their commitment to meeting our customers' needs each and every day. Thanks to their hard work and flexibility, we were able to navigate what was truly a unique operating environment and enter our 2024 fiscal year better positioned to drive sustainable long-term growth as conditions improve. As you saw in our press release, we registered full fiscal year sales of $415.4 million, a contraction of 14% from our strong performance in the prior year when the apparel industry enjoyed a seller's market full of retailers looking to accumulate inventory in the wake of COVID-related supply chain delays. As I'm sure most everyone on this call knows, this year market conditions presented a much different and more difficult picture for both the apparel industry and our company. These conditions were driven primarily by two distinct and thankfully temporary trends, historically high cotton prices and extremely shallow demand due to high inventory levels across the supply chain. When cotton prices trended above historical averages, we made a strategic decision to purchase less cotton and reduce our production levels to align with what we anticipated to be a challenging demand picture in the first half of our fiscal year, 2023, particularly in the mass retail supply chain. We originally expected customer demand to stabilize and improve in the second half of the year. However, when the softness in the mass retail supply chain spread to other channels and exhibited more depth than anticipated, we decided to further curtail our production levels to maintain balance with the declining demand. The collective impact of the elevated cotton costs and expenses incurred to reduce production throughout this year is hard for us to overstate. If you compare the average price of cotton over the last decade, To what our cost was during the year, the excess amounted to a headwind of approximately $26 million. Additive to that, we incurred roughly $8 million in excess costs associated with our production curtailment activities, with most of that being driven by the lower absorption of our fixed costs due to less volume and the payment of temporary unemployment benefits to idled employees that are offshore locations. That's roughly $34 million in additional costs for the year. During the year, we also embarked on a longer-term initiative designed to optimize our cost structure and better position our company to generate higher returns on the capital we invest in our business. Many of the decisions we made in connection with this initiative were difficult, but they were the right actions to support the business for the long term and will result in meaningful annualized savings as well as a more efficient operating structure. Among the actions we took include transitioning our Mexico sewing operations to our more efficient Central American sewing facilities, absorbing the fabric production we previously had to purchase from a third party in Mexico into our textile facility in Central America, transitioning our Mexico screen print operations into our more efficient Central America screen print operations, which we should finalize this month, and closing our legacy digital print facility in Clearwater, Florida, and absorbing its capacity into our more efficient on-demand DC footprint throughout the United States, combining our DTG2Go and direct Delta business. We expect these actions to generate approximately $6 million in annual run rate savings going forward and better position us to navigate the higher interest rate environment that appears to be here for some time. Our team has also continued to do a good job of strategically managing our working capital and cost across all aspects of the business on a day-to-day basis. We made substantial progress in reducing our inventory position throughout the year, finishing the year down approximately 18% from our recent high in December of 2022. We anticipate further reductions in fiscal year 2024 and to finish the year nearly 30% below December 2022 levels. Let me spend a moment on our Salt Life business. As you likely saw in a press release we issued in October, we received an unsolicited offer to purchase that business, and we are conducting a thorough review of our strategic options. We do not have a specific update on that review process at this time, but I want to reiterate that our board of directors and management team are committed to maximizing value for Delta Apparel shareholders and taking the course of action we believe is in their best interest. We look forward to updating you once our board of directors has completed this process. I would like to recognize all the hard work put in by the Salt Life team to grow the brand into the highly profitable $60 million business it is today. It's amazing to think that Salt Life was basically a Florida brand with a small wholesale business when we acquired it 10 years ago, and now has a growing core of enthusiasts throughout much of the Western Hemisphere, as well as a comprehensive product line over to its over 1,700 wholesale doors across the United States and direct and consumer customers by our e-commerce site shipping to all 50 states and branded retail stores spread across most of the U.S. coastlines. Touching briefly on our fourth quarter performance across Delta Apparel, We saw some indications throughout the quarter that demand in the active wear market is stabilizing and improving in some respects. But our overall business continued to be impacted by the high inventory levels across retail, as well as the higher interest rate environment. Importantly, we continue to operate our manufacturing platform at reduced but more consistent levels during the quarter. And as I mentioned on our last call, the cost environment for active wear is normalizing. While we continue to see cotton in our sales that was higher cost than the historical average, our cost is trending down and we expect to steadily move into a more favorable cotton cost picture in the second half of the new fiscal year. Nancy will now provide more detail on our reported and adjusted results in a moment, but let me now turn the call over to Justin to walk you through our business highlights in more detail. I'll join them at the end of the call to open up for questions. Justin.

Thanks, Bob. Before taking a closer look at our individual business units, I would like to note that in addition to the steady progress across our business during the year and fourth quarter to streamline our cost structure and reduce inventory, the team also made substantial progress in managing down our debt levels. We finished the year with an approximately 17% reduction from our most recent high in February 2023 and expect to finish fiscal 24 nearly 40% below February levels. We recently entered into agreements to sell and lease back several properties within our real estate portfolio, including our campus in Fayetteville, North Carolina, and our distribution center in Clinton, Tennessee. The sale-leaseback of these properties is something we have seriously considered at various times throughout the years, and we believe the time is optimal to monetize these valuable assets and create value for our shareholders. We expect to realize aggregate gross proceeds of approximately $31.5 million from these transactions. assuming they close in or around January 24 as currently expected. We will simultaneously lease back these properties from the respective purchasers and continue our operations there uninterrupted as a tenant going forward. Now turning to our activewear business, which is organized around three key go-to-market channels, Delta Direct, which provides blank garments on demand to a variety of channels, Global Brands, which provides custom decorated activewear to major brands, sportswear players in the U.S. military, and Retail Direct, which provides decorated apparel fully ready for the retail floor to brick-and-mortar and online retailers, bypassing layers of the traditional retail supply chain in the process. The market dynamics and excess cost drivers Bob mentioned earlier have the most direct hit on our activewear business. Similarly, most of the working capital optimization and cost structure enhancements Bob mentioned were executed by our activewear team and will most directly benefit that business. The Activewear team has also been highly instrumental to our success in reducing overall inventory levels and made substantial progress on that front in the fourth quarter. We continue to carefully manage production rates in Activewear's vertical manufacturing platform and expect continued reduction in both inventory units and dollars as we progress through fiscal year 24. Moreover, with our cotton costs trending down and our production volumes becoming more consistent, We believe our activewear business is poised to take advantage of market improvements and steadily level up its operating performance as we move into the spring selling season. The two largest channels in activewear's Delta Direct business, retail license and regional screen print, were the hardest hit by last year's demand destruction, but showed signs of improvement during the fourth quarter and to start the new fiscal year. However, activity in those channels is still generally soft and inconsistent relative to pre-pandemic levels. In contrast, Delta Direct's e-retail and promotional channels continue to strengthen, and we are heavily focused on growing market share in those channels. We see the promotional channel, which is a multi-billion dollar market by itself, as a strategic growth area given our unique ability to offer customers Delta Direct's blank garments and full line of branded headwear, jackets, polos, bags, and other items in combination with DTG2Go's on-demand digital print services. In our SOFI channel, we anticipate growth in a variety of areas in fiscal 24, including growth in the higher margin sales on the sofi.com e-commerce website. In activewear's global brands business, we continue to see lowering demand in the second half of our fiscal year 2023, as expected, following the solid first half performance in this channel. There is still a significant amount of unutilized manufacturing capacity in this channel due to the higher inventory levels at retail. This drove more pricing pressure. particularly from Asia producers as we closed out the year. Nonetheless, our relationships with our core brands remain strong, and our business with much of that key customer base has remained relatively stable. Our business with the U.S. military has been trending favorably, with strengthening sales and a profitability profile that continues to improve as more products are authorized to be made on our lower-cost offshore platforms. We expect the positive top and bottom line momentum we are seeing in our military business continue in fiscal year 2024. The market dynamics in our retail direct channel were similar to those in global brands during the year, but we saw signs of improving inventory replenishment needs during the fourth quarter among the retail customer base served in that channel. Our dollar store off-price and farm and fleet retail customers in this channel continue to be a bright spot and outperform relative to other areas. Looking ahead, we expect both our global brands and retail direct businesses to steadily pick up as we move into the second half of the fiscal year and get past some of the current headwinds from lower demand and excess global manufacturing capacity. The near and long-term prospects for these businesses continue to be solid, and we believe our investments in product development and decoration platforms that leverage our vertical blank garment platform and near-shore speed to the U.S. market will drive higher margin sales growth going forward. There are substantial barriers to entry in these businesses, and only the most qualified suppliers can do business for the world's largest brands and retailers. We have provided full package programs to these highly sophisticated customers for almost two decades now and made the investments required to meet their needs, including adding a retail packaging and readiness platform and systems to facilitate advanced ship notifications and other premium logistics services. Moreover, we always prioritize compliance. and ensure that we offer brands and retailers a solution that lends integrity to their supply chains. Turning to Salt Life, the business continued to generate significant operating profitability during the year, despite some recent softness at wholesale stemming from higher inventory levels. We see this softness as temporary and expect sales growth at Salt Life in fiscal year 24, including more direct-to-consumer growth in both the branded retail and e-commerce channels. Salt Life continues to expand its branded retail footprint with the recent opening of two new retail doors in Florida and the brand's first location in Virginia expected to open in our second fiscal quarter. Salt Life will finish the calendar year with six new retail stores and a total owned retail footprint comprising 27 stores, including 15 full-price stores and 12 outlet stores across the country and over 55,000 square feet of retail floor space. The new location in Pompano Beach, Florida, will also house a multimedia content studio and broadcast platform for the Saltwater Sport Fishing Championship as part of Salt Life's new agreement to serve as the official apparel and sunglasses provider. Same-store sales among Salt Life stores for the fourth quarter were about flat with the prior year quarter and for the year decreased approximately 4%, with the drop due to the choppy retail traffic in the destination locales where our stores are located. As we discussed on our prior call, the less than ideal spring and summer weather conditions in these areas, including hurricanes making landfall on the west coast of Florida, were a key driver in the choppiness. Looking deeper into the numbers, we continue to see consistent gains in key performance metrics, such as conversion rate and transaction value, which tells us that SaltLabs products and retail presentation are on point, and same-store sales will pick up, commensurate with traffic returning to more normalized levels. Salt Life e-commerce website sales continue to outperform, and year over year grew 41% for the quarter and 54% for the year. We feel very good about our direct-to-consumer channels at Salt Life, and we'll continue to invest in building them out for long-term growth. We believe there is a lot of near-term white space for the e-commerce channel to grow as we develop more data analytics sophistication and build more targeted marketing strategies. We have experienced a similar dynamic in our retail strategy where we continue to utilize more refined data points to make decisions regarding new markets and locations. Finally, on Salt Life, we were pleased to see the initial market interest in Salt Life's newly licensed home furnishings line exceed expectations. We expect Salt Life's licensed royalty revenue stream to more than double this fiscal year as the new line sells through. Turning to our DTG2Go business, The fourth quarter capped off what can best be described as a foundational year during which we completed a variety of key initiatives that set the stage for profitable growth for years to come. We completed the planned upgrade and recalibration of our entire Polaris fleet that drives the higher print quality products offered in our digital first business. This initiative resulted in some downtime and reduced capacity in the back half of the year. that we now have all of our Digital First facilities recertified, and we are already seeing the consistency and quality gains we expected coming out of this effort. We continue to remain keenly focused on driving uptime and output rate improvements in our Digital First channel. Our Digital First capacity was essentially sold out going into the critical holiday season, and our relationships with our key partners in that channel continue to grow and solidify. In addition, we recently enhanced the profitability profile of our digital-first business through revised pricing structures and increasing usage rates for Delta Direct manufactured garments. We see significant potential opportunities to expand that business through additional silhouettes and areas outside of e-commerce. On the traditional side of the DTG2Go business, where we serve e-commerce, retail, promotional brands, content companies, and a variety of other channels, We recently implemented price increases across most of that customer base, and our on-quality performance remains at an all-time high. Sales in the traditional e-commerce platform channel remain dynamic, and we see some significant new business development opportunities there, as well as in other channels. Several of these new opportunities will utilize Delta Direct Blank Garments, which increases both our profitability profile and our customers due to price point and manufacturing consistency. We also advanced several foundational R&D initiatives on the product development side at DTG2Go in fiscal year 23. The team developed a proprietary fabric optimized for ink reception and other aspects of digital printing that should accelerate customer usage of Delta Direct blank garments at DTG2Go beyond the approximately 55% usage rate in fiscal year 23. We currently expect that internal blank garment usage rate to increase to as much as 70% in fiscal year 24. The team also developed a proprietary textile manufacturing process designed to solve well-known quality challenges in the digital print process. We believe that these are potential game changers from both quality and profitability perspectives and should result in a higher quality product for the end consumer and a greater competitive advantage for us in the market. Looking ahead, we believe that our DTG2Go business is poised for a return to top line growth in fiscal year 24. With the foundational pieces put in place this year and our digital first offering uniquely able to meet even the highest customer quality requirements, DTG2Go is well positioned to increase its share of the overall decorated apparel market. The digital disruption in decorated apparel is well underway and it's hallmarks of speed to the consumer, skew customization, inventory de-risking, and sustainability are things we believe more and more apparel players will want to leverage and move some or all of their business away from traditional screen print. DTG2Go is right there to capitalize on that market shift with its leading print capacity, nationwide network, and proprietary innovations, as well as Delta Direct's Blank Garment platform. Let me now pass it over to Nancy for a detailed review of our financial results.