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spk00: Good morning, ladies and gentlemen, and welcome to the second quarter 2021 Unify, Inc. Earnings Conference Call. At this time, all participants are in the listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchstone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. A.J. Ecker, Vice President of Finance. Sir, the floor is yours.
spk01: Thank you, Renz, and good morning, everyone. On the call today is Al Carey, Executive Chairman, Eddie Engel, Chief Executive Officer, and Craig Creatore, Executive Vice President and Chief Financial Officer. During this call, management will be referencing a webcast presentation that can be found at unifi.com and by clicking the conference call link. Management advises you that certain statements included in today's call will be forward-looking statements within the meaning of federal securities laws. Management cautions that these statements are based on current expectations, estimates, and or projections about the markets in which Unifi operates. These statements are not guarantees of future performance and involve certain risks that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted, or implied by these statements. You are directed to the disclosures filed by the SEC on Unified's Forms 10-Q and 10-K regarding various factors that may impact these results. Also, please be advised that certain non-GAAP financial measures, such as adjusted EBITDA, adjusted EPS, adjusted working capital, and net debt, may be discussed on this call. I will now turn the call over to Al Carey.
spk07: Thank you, AJ, and thanks for everyone joining the call this morning. I'll be brief in my remarks, and I'll provide you with, let's say, the broad themes of what we've seen in the first half of the fiscal 2021, and then Eddie and Craig will follow me with the details of the Q2 performance, and then we'll have a Q&A. So, Q2 was a very positive quarter for us, as we saw a nice recovery from the COVID impact. We still have plenty of work to do, but this quarter was a strong step forward. While our revenue was slightly below prior year, it was better than our internal expectations, and then both November and December revenues were above the prior year. Our adjusted EBITDA performance was very strong. It was double versus a year ago. But we had some tailwinds, and we also had some upsides in a few areas, particularly from our Brazil segment. But even after you normalize those items, we still performed significantly better than prior year. Our balance sheet continues to show improvement. Inventory levels, cash, and net debt are all in a good position. And then Craig will take you through the details of that very shortly. So as you look into the second half of 2021, we're optimistic. However, we aren't entirely certain about the most recent spike in COVID cases and how it might impact retail consumption or our people in the plants. But we believe the good news on the vaccine should create some optimism for our future quarters performance. I wanted to comment on two broad positives that are outside the financials. I think both of these strengths will provide a positive impact to our business for the balance of the year and then even beyond that. First, we have the right leadership team in place from top to bottom. Some of you who follow us remember about a year ago that wasn't the case. So from top to bottom, our team brings significant amount of company and industry knowledge. They have really shown resilience during this COVID time. They work well together, and we're now beginning to see the value of leadership continuity in our performance. The second positive trend appears to be an acceleration of momentum on environmentally sustainable products from our customers and also from consumers, especially young consumers, who I think feel that they want to do something positive for our environment coming out of this pandemic. And this shows up on our mix for Reprieve, so our sales mix for Reprieve has maintained an upward trend, and it's moved now to a record level of 37% in Q2. It was 35% in the last quarter and in the high 20s a year ago. Additionally, the requests for our reprieve hang tags have gone up significantly. These hang tags, you may know, are affixed to the product containing reprieve, and they help tell the recycled story. And in the last six months, we shipped 45 million hang tags, and that compares to 33 million a year ago during that same period, so it's up a third. We believe that many of our customers are now taking action on sustainability commitments that they've made for 2025. These environmental goals are things that have to be accomplished for our customers, and the date's getting closer, 2025, closer than we really think. So I think overall, the environmental sustainability is a definite megatrend that's only going to go up from here, whether you're talking about brands or public policy or in society coming out of the pandemic. So in summary, I'd say Q2 was a very solid quarter with some real nice momentum. Now, before I turn it over to Eddie, I'm pleased to announce the addition of Emma Battle to our board of directors. We just announced it yesterday. Emma has extensive marketing background, general management, and strategy experience. And she's had experience with companies like PepsiCo, Hanes Brands, Red Hat, and she's an independent director at Bassett Furniture. And today she's the founder and CEO of MarketVigor, a marketing company. I can tell you that Emma brings a skill set that's very complimentary for our board, and we're delighted to have her on the Unifi team. So with that, let me turn it over to Eddie Engel, our CEO.
spk03: Thanks Al and good morning everyone. As Al mentioned, our second quarter fiscal 2021 results outperformed our initial expectations and they are a reflection of our strong global presence and the resilience of both our employees and our business model. Before I speak in the quarter, I want to personally thank our employees for their continued hard work and dedication to the business and especially their dedication to our customers. This strong quarter would not have been possible without their many contributions. And I'm very pleased to report the health and safety protocols that we put in place at the beginning of the pandemic allowed us to maintain normal operations, positioning us well for further recovery. On slide three, we provided an overview of the quarter. The business performed well during the second quarter and is approaching pre-pandemic revenue levels. Q2 revenues were up 15% from Q1 with meaningful improvement across all segments and geographies. The flexibility of our global business model and its innovative components continues to allow us to adapt and quickly capitalize on new efficiencies and market share opportunities. Key drivers to the 670 basis point increase in gross margin year over year are results of continued focus on cost, outperformance by the Brazilian segments, and the expansion of our Apprieve and other innovative products, all as more normal volumes occur. Now, despite a challenging environment, our team's dedication and hard work contributed to Unifi achieving its best quarterly profit since June 2016 and the best second quarter profitability in 10 years. The demand for sustainable solutions continues to grow, and so is interest in our Apprieve branded fibers. This includes multiple new customer adoptions and or new co-branding opportunities, which continue to increase Reprieve's contribution to sales. Reprieve fiber sales now represent a record 37% of consolidated net sales compared to 35% in the previous quarter. Additional details about Reprieve fiber sales are shown on slide four. While these Q2 results will be hard to sustain in the short term, it's clear that the COVID crisis has enabled our organization to find new efficiencies and drive ongoing productivity across our manufacturing platforms while pursuing market share opportunities when they arise. It's certainly an exciting time for everyone in the company, and I'm looking forward to building on our current performance long term as we assume the underlying business momentum will remain intact. Lastly, our work towards strengthening our balance sheet has allowed us to execute on growth-focused capital allocation priorities. Shortly after the second fiscal quarter ended, we made the strategic acquisition of Fiber & Yarn Product Inc's nylon portfolio. While this transaction was of similar size to the texturing service LLC transaction we committed to just three months prior, it's an important step forward in our efforts to strengthen the nylon segment and its capabilities. We're excited about the addition of Fiber & Yarn customers to our portfolio and expect a quick and seamless integration process as this business transitions to our Madison, North Carolina operations. Now, we have several exciting brand highlights to discuss today, starting with our partnership with Disney. For the holiday season, Disney launched T-shirts and fleeces in their Orlando Park stores, prominently displaying Reprieve signage at point of sale. This is a follow-on to their April 2020 online launch of T-shirts made with Reprieve. Disney has the ability to market a consumer-relevant circular economy story since Unifi continues to process plastic bottles collected from Orlando parks into reprieve resin and yarns. Also, we had an expansion of our business into workwear. Aramark has launched a polo shirt made with reprieve to customers looking for durable, sustainable work garments. And another recent success is the towel program at Nordstrom. These towels are available online and at retail and were developed through our Turkish supply chain operations. Another example of how we're able to leverage Reprieve in the home goods space. Then there is Tommy Hilfiger and Hugo Boss, also utilizing the Reprieve brand. Tommy Hilfiger, Reprieve has seen continuous strength in swim and activewear with some international placements. And Hugo Boss has launched athletic inspired footwear with a 100% Reprieve upper. This small sampling is an impressive list of partners and clients, and we're both humbled and excited at the extension opportunity we have to build further and expand these relationships with leading global brands. This activity is driving the increased shipment of PANG tags that Al mentioned in his remarks, representing a sizable growth in on-product co-branding. This sustained increase in co-branded items in the market represents strong momentum among brands and retailers who recognize that the reprieve ingredient brands helps provide a quality, transparent sustainability story for their customers. Now I will provide some high-level comments on our operating segment performance during the second quarter before Craig takes you through more specific details. And you can use slides five and six of the presentation where we discuss the second quarter results compared to the first quarter. The polyester segment benefited from a better production and sales mix, along with raw material and pricing stability. Sales volumes continue to normalize, and we remain optimistic on sales mix going forward for this segment. The Asia segment continued to demonstrate signs of improving business conditions and further recovery to pre-pandemic levels. Volumes were up meaningfully and benefited from pull-through on new and existing customer programs, and margins were aided from supply chain efficiencies and a richer sales mix. Brazil, as you've seen, had a record set in quarter. The strong performance was primarily driven by our unique position in the region and our ability to capitalize on the dynamics of the market, which is dominated by imports. Similar to the first quarter, we were able to capture unfulfilled demands and maintain a strong market position. Looking ahead, we are forecasting some moderation of our profit growth in the region, given how strong it's been recently. The local Brazilian team continues to work to the best of their abilities to maintain and expand the solid market share they have captured. Lastly, the non-segment performance met our expectations for the quarter, affecting a more balanced sales level. Despite being modestly down year over year, the sequential increase in segment sales is an encouraging and positive sign for this business. With that, I'll turn it over to Craig.
spk04: Thank you, Eddie, and good morning, everyone. Like the rest of the team, I am very pleased with our second quarter fiscal 2021 results and our ability to navigate this recovery with strong cash and liquidity positions. Eddie highlighted the changes from the just completed second quarter to our first quarter of this fiscal year. I will provide our normal commentary on the just completed quarter compared to the same period in the prior year, which for the past few quarters has not been as meaningful due to the impacts of the pandemic. So we are pleased that the business has recovered in such a significant manner that the information shown on slide seven and eight of the presentation are meaningful again. Let's start with the sales comparison on slide seven. Polyester segment volumes were just 1.1 percent lower than the prior year, and raw material costs drove pricing down but were partially offset by a richer sales mix to generate a 7.3 percent decrease in net sales. For the Asia segment, lower volumes negatively impacted net sales by 8.1 percent, while the lower raw material costs impacted pricing, generating an overall 6.7 percent decrease in net sales after considering some favorable foreign currency translation due to the strengthening of the renminbi against the U.S. dollar. Brazil's segment outperformed with 21.7 percent growth from higher volumes, while strong pricing levels helped to nearly offset the significant unfavorability of foreign currency translation due to the weakening of the real against the U.S. dollar. Lastly, the nylon segment showed signs of stability with revenues just 6.3 percent below the prior year following sales mix changes. Moving on to the gross profit overview on slide eight, every segment exhibited an increase. The polyester segment benefited from a more favorable raw material and pricing environment, along with a richer sales mix and manufacturing efficiencies, achieving a gross margin of 14.2 percent. The Asia segment benefited from raw material sourcing improvements and a rich sales mix, driving gross margin to 14.6%. The Brazil segment, again with its sales outperformance, doubled both gross profit dollars and gross profit as a percentage of sales from the prior year by gaining market share and achieving strong pricing during the just-completed quarter. The nylon segment also exhibited year-over-year improvement as operational improvements led to a higher level of gross margin. For Unifi overall, gross profit was $25.9 million and a 670 basis point increase in gross margin as a percentage of sales. As you move down the income statement, our SG&A remained consistent with our expectations, driving strong operating income that further led to significant improvements in pre-tax income, net income, and EPS, generating extensive year-over-year increases. Slides 9 and 10 show the sales and gross profit comparisons for the first half of fiscal 2021 compared to the first half of fiscal 2020. We're not providing specific commentary on those slides during these prepared remarks, but they are available for use in analysis. Moving on to the balance sheet on slide 11, further improvement in our debt and liquidity positions is demonstrated. by maintaining diligence around working capital components and generating cash flows. With great progress on our net debt metric, we continue to have zero borrowings on our ABL Revolver, which had an availability of $56 million as of December 27, 2020. Unify's commitment to financial health has allowed us to leverage our strong balance sheet during the year challenged by the global pandemic. We have had the opportunity closing two acquisitions and will continue to allocate capital for new texturing technology in the Americas. With a balanced capital allocation approach, share repurchases and further debt reduction can occur at appropriate times. I'll now turn the call back to Eddie to take us through the last slides of the presentation and make some final comments.
spk03: Thank you, Craig. I'll now turn to slide 12 of the presentation to provide a brief update on the recent trade developments. In short, After normalization began taking effect for China and India imports, imports of polyester textured yarn surged from Indonesia, Malaysia, Thailand, and Vietnam. We petitioned for an investigation into this activity, and the respective US agencies have thus far determined there's a reasonable indication of material injury. Consistent with the first round of anti-dumping investigations that spanned calendar 2019, We expect these investigations to occur over the majority of calendar 2021, and we will provide relevant updates as they occur. I'll turn to slide 13 of the presentation to provide some context around our expectations for the back half of fiscal 2021. You will note from the outlook section of the earnings release that we were able to include more specific information than we have been able to provide for the past couple of quarters, as our business visibility is returning to more normal levels. However, we are still not able to offer the specificity of outlook that we gave before the pandemic, but we are looking forward to returning to an outlook similar to our past disclosures in the near future. We expect global demand uncertainty and risk associated with the COVID-19 pandemic to persist into the second half of the fiscal year. The second quarter's strong performance supports our expectation of incremental progress during the fiscal 2021, and as such, we anticipate net sales trends will continue to improve on a sequential basis, returning to pre-pandemic levels in the March quarter. We are encouraged by the recent trends in our Apprieve and other value-added products and expect recent strength to continue long-term. With this sustained business momentum, adjusted EBITDA is expected to improve by a low double-digit percentage over the pre-pandemic third quarter of fiscal 2020. That expectation includes a few factors. continued strong performance by the Brazil segment, albeit tempered from the record-setting December 2020 quarter, unfavorable seasonal domestic shutdown impacts to gross profit for the polyester and nylon segments, unfavorable impact of the Chinese New Year holiday for the Asia segment, and raw material cost pressures due to the recent increases in petroleum prices. Lastly, Given the momentum from the second quarter, our annual CapEx spend remains consistent with our expectation from the first quarter and should fall in the range of $22 to $24 million, excluding amounts related to the acquisitions. To conclude, I believe our strong performance during the second quarter reflects our unique business model and the upside potential it has during normal economic conditions. Going forward, we will continue to focus on Partnering with global brand leaders that want to position themselves using sustainable products. Innovating and repositioning the business to drive long-term organic growth. Diligent cost management initiatives to drive gross margin improvement and maintaining our strong financial position and strong balance sheets to expand our growth opportunities through strategic M&A. We will now open up the line for questions. Thank you.
spk00: Thank you, sir. At this time, we would like to take any questions you might have for us today. If you have a question at this time, please press star, then the number one on your touchstone telephone. Again, that would be star, then the number one on your touchstone telephone. You have your first question from the line of Daniel Moore from CJS Securities. Please go ahead.
spk05: Thank you. Good morning, gentlemen. Thanks for taking the questions.
spk02: Good morning, Dan. Good morning, Dan.
spk05: I wanted to start with kind of a macro and then maybe dig into the numbers a little bit. Do you, you know, from your perspective, do you see COVID and maybe perhaps aided by the recent change in administration as being a kind of tipping point for on-product co-branding opportunities for reprieve? Maybe just talk about the rate of change and what you've seen over the last nine months and heading into 2021.
spk03: Yeah, as we said on the call, we do believe that the COVID pandemic has affected the consumer mindsets and how the brands are approaching how they communicate to their consumers. Certainly, there is a megatrend of sustainability out there, and it helps that there's also a megatrend of people moving to e-commerce to acquire goods, as we said in the last call. As far as the administration, I don't think it makes a difference, but I do think the general consumer is trying to do what they can for the environment, and they see COVID being an indication of the climate situation we're in today. So it's good for us. It's good that people are moving towards sustainable products, and reprieve shipments are definitely a reflection of that environment.
spk07: Dan, I'd add to that and say that... When COVID first hit, it appeared that maybe environmental sustainable products would go backwards a little bit because there was so much chaos and crisis in the market. And I would say around August, a very definite change in the trajectory of environmental sustainability from our customers. And if you talk to some of the big brands and the big customers that we have today, their buyers and their merchants are all heavily focused on doing this. I think because they believe it's right but also they're coming up on this 2025 timeframe where most big companies have some commitments that they have to hit, and I think the speed is going to continue going up.
spk05: Super helpful. Okay. And then maybe dig into the gross margin a little bit, which is obviously exceptional. I'll start with international and specifically Brazil. Just maybe walk us through the factors that were – I wouldn't say maybe less permanent in nature. Was there maybe a lack of import competition due to the pandemic? The timing of raw material changes. How much of that improvement is really sustainable as we look out beyond maybe the next quarter or two?
spk03: This is Eddie. I'll jump in and start answering the question. Brazil Brazil has been preparing for the last 20 years. They've got a great team down there. They were prepared to react to the pandemic. If you go back to Q4 of last year, they lost 70% of their revenues, but they didn't panic. And they kept their raw material inventory in place. And so when the business came back and the imports from Asia dropped, they were able to supply the markets. So when we run full down there, we are also able to make sure that we manage the price points effectively. So the great thing is the market needs the product. We were there. We didn't panic. We had the materials available. And that team was able to optimize the inventory levels that we had and translate that into growth in both revenue and in gross margin. There is, you know, because it was a record quarter from a gross profit profitability point of view, both in margin and total gross profit, we do expect that to taper off in the coming quarters. But it's certainly, we have grown market share. We expect that market share to maintain as we go through the next few quarters.
spk04: And Dan, I can just add that, again, really excellent operational performance, excellent ability by the Brazil team to manage the opportunities that were in front of them and gain market share. We do think that in some ways we caught some of the competition a bit flat-footed, and as they recover, that's why I think our expectations for Q3 are that we will go down a little bit from the gross margin in the high 30s. You'll recall that our gross margin in Q1 was about 20-ish percent, So we think it will trend back toward Q1, but definitely we've got some nice gains there, and that is something that we're, again, very proud of how they performed in this just completed quarter.
spk05: Excellent. And a similar question for polyester. Again, looking at the gross margins that are in excess of anything we've seen for multiple years, you know, recognizing it's just one quarter, but maybe talk about the puts and takes and what – more sustainable margin level looks like.
spk03: Yeah, I think we took a lot of cost out over the last 18 months, and the pandemic, the downturn in our business, in the polyester business during the pandemic, the first few months, April, May, June, allowed us to, forced us really to take out costs that we might not have had the courage to do before that. We've maintained consistently since then a lower level of cost, and our business has come back. So we've been able to expand our margin because we've been doing a better job managing costs. And at the same time, we've also increased our mix of products. So we've got a much healthier, much more attractive product mix. And that's in line with the fact that we've managed our costs and the fact that the raw materials have been stable for roughly six months. has allowed us to really maximize the gross profit relative to what we've been doing over the last few years in the polyester segment.
spk05: Excellent. Maybe last one for me, just on the acquisition. Obviously, it's small, as you alluded to in your prepared remarks. Is that just opportunistic? Do we expect more in the nylon space? And maybe talk about just kind of the pipeline of M&A more generally. Thank you.
spk03: Well, the two acquisitions that we did, they are small, as we said. We expect to get somewhere by the fourth quarter, $3 to $4 million increase in revenue. They're slightly higher EBIT margins that we've seen in our current business. So we do expect that to help us in the coming quarters. But as far as new mergers and acquisitions, if there are small opportunities out there that fit in with our capabilities that are easy to integrate that can dock on to our existing infrastructure we're certainly looking out for those opportunities we do see some opportunities out there but nothing specific to talk on at this present time alright well thank you for your time and congrats on a great quarter and look forward to hearing a lot more thanks thank you thank you
spk00: You have your next question from the line of Chris McGuinness from Sedotian Company. Please go ahead.
spk08: Good morning. Thanks for taking my questions and congrats on a great quarter. Really impressive. Can we just touch on the sustainability that seems to be picking up? Can you just talk about maybe the competitive landscape? You're obviously very early in on this, strong customer relationships. Can you just maybe talk a little bit about how that's developing as it appears you get closer to that 2025 goals and just how maybe that landscape's changing a little bit?
spk03: Yeah, so as Al mentioned, many of these companies like Adidas, for example, have declared that they want to achieve 100% recycled content for their apparel by 2025. reprieve brand that we've been building over the last 10 plus years. There's something unique about that. It's traceable. It's transparent. We're a publicly traded company. People know they're not going to get in trouble when they buy our products. And the fact that we're global, so the product can be developed here in the U.S. and then moved globally to wherever the sourcing team is. from a particular company wants to get the product from. So I think we're unique in that we do offer this trust and traceability and transparency that is not as open as certain competitors have. So I think we're in a very special place. We are seeing the growth in Asia, significant growth in Asia, and we expect that to continue through 2025 because these brands, have declared what they want to do, now they have to find really solid opportunities to get those inputs. And we're the right brand and the right company to deliver those inputs to them.
spk08: Great. And just in a similar vein, just with your capacity for Appreve now and I guess just your thoughts around expansion as this begins to grow from here, Can you just talk about whether does that change the supply chain? As that continues to pick up, how are you built out and in position to execute on that growth?
spk03: In Asia, we do have an asset-light model, so we don't expect to run into any issues around being able to meet the increased demand. Here in the U.S., The growth of the reprieve is driven a lot by the Central American market, and while it might not be as aggressively paced as in Asia, we have enough assets in place and enough capabilities to where we'll be able to meet the growth that we're forecasting in the coming years. Now, we do expect to have potentially some capex next fiscal year to meet some of this increasing demand, but right now we have enough capability to meet demand in this region And then lastly, in Brazil, you know, that market is still very much a virgin market, although we are seeing indications now that there is an interest in the consumers in sustainability, and we'll be using our Asian supply chain to meet that supply chain.
spk08: Great. Thanks for that, Kohler. Just a last question just on the trade issue. I was wondering if you could put a size on the impact. You know, is it similar to China and India and the impact that had on 19th? Is there any way you can kind of touch on that or provide a little bit more color on what you think the impact is? And, you know, I'd appreciate it.
spk03: Well, you know, the imports from China and India after those duties were put in place, I think the duties for India were about 18% and for China about 100% roughly. And the imports from those two countries dropped to practically zero. We did pick up some volume from that event, but not as much as we had hoped because of these four countries that we talked about, Malaysia, Indonesia, Vietnam, and Thailand. The question now is not whether they will get anti-dumping, but it's about how much the anti-dumping duties will be, and we'll know that in April. So I think it's hard to predict exactly how much volume we're going to pick up because of that, but certainly we're optimistic that it's going to be quite meaningful for the company in the U.S.
spk08: Great. Great. Thanks for taking my questions. Again, congrats on the quarter, and good luck in Q3.
spk03: Thank you. Thanks, Chris.
spk00: Thank you. You have another question from the line of Marco Rodriguez from Stonegate Capital. Your line is open.
spk02: Good morning, everybody. Thank you for taking my questions. Hi, Marco. Hi, Marco. I was wondering if I could follow up on a prior question in terms of the gross margins, the operating efficiencies. I was wondering if you can maybe talk a little bit more about that, kind of drill into a little bit more detail about any specifics surrounding that, and if you can quantify perhaps the dollar amounts that might have been taken out and sustainability of that.
spk04: I think, Marco, throughout the just completed quarter, We feel like we did the right things to protect the integrity of our manufacturing operations. We're very, as Eddie mentioned, very proud of kind of the safety and protocol things that we did to keep all of those manufacturing locations up and running. We feel like we were able to accomplish a higher level of manufacturing throughput and volume, and at the same time during the quarter, We still felt like we could be adding a few more people. So really, we caught a fair amount of efficiencies, productivity, and really, again, it's a credit to our skilled and trained workforce. To try to quantify it, a little bit hard for us to do that. I think the other thing that we had going on that we touched on a little bit in the prepared remarks was the sales mix was a bit more favorable, especially here in the U.S. as well. So generating a little bit higher profitability from just just because of the types of products that were run through the plants during Q2. So really, those are the main items. And I think we feel like we are being very careful in the costs that have been taken out of the business. As we start to catch some of the higher sales levels, we believe, especially maybe in SG&A, we'll add a little bit of cost into that area. But overall, we're being pretty prudent in trying to not let those costs kind of leap back into the organization the best we can. But we will need to add some additional costs as the volumes increase, and that is really our projection for the remainder of the fiscal year. So, Eddie, do you want to add to that?
spk02: No, I think you can. Okay, thank you. Great. That's very helpful. So maybe if I can ask another question surrounding that. In terms of the items that you brought out that positively impacted gross margins in the quarter, you know, the operating efficiency, the mix, pricing stability, maybe if you can kind of rank them from the most impact that you saw in the quarter to the least impact.
spk04: It's a good question. I'll maybe give you a bit of a broader answer. I think we're continuing to see not only the sustainability pull, and you see that through the reprieve, percentage going up each quarter and reaching to the 37% that we noted. I think we're also seeing the reprieve plus additional features, and I think that continues to be really an area of emphasis for our customers, not only wanting the nature of the sustainable products, but also the enhanced features, whether it be moisture management, whether it be UV protection, whether a lot of other features that we can add on there. I think the reprieve and something else, those types of products and the value that's adding to our customers, I think the content of that continues to grow. And again, we expect that to be that way into the foreseeable future as well.
spk02: Got it. And then if I could bring up another question here, just surrounding kind of the trend in the movement to more sustainability of clothing, if you will. You have brought out these comments before in the last call as well as today, just the sort of the mind shift change by the consumer, which seems to have kind of coincided with the pandemic, with an ability to more easily search for sustainable clothing online and online shopping. I was wondering if maybe you can talk a little bit about your expectations, how you're thinking about when when the world, if you will, starts to become a little bit more normalized, I would assume that some of the online shopping perhaps may come down quite a bit in comparison to where it is currently. But just kind of if you can walk us through some of your thoughts surrounding that. And if you've had any sort of conversations with your customers that have really kind of indicated this mind shift, that's something more of a permanent nature, if you will, it would be very helpful. Thanks.
spk03: This is Eddie. There's certainly a mega trend around sustainability as we talked about, but also on e-commerce. When we first experienced the pandemic in April, May, June, the biggest impact to our business was the lockdowns of the retail environment. As that opened up and as people accelerated their purchases onto online, this is where we saw an increase in our business. I don't think The mega trend of people buying online, I don't think that's going to change. I think people will, yes, continue to shop at retail, but we believe whether it's at retail or online, the move towards buying sustainable products, people wanting to make that extra step and pay maybe a little bit more money to do the right thing for themselves and for the environment, I think it's not going to change. So this is why we're seeing the growth in hang tags. It's a way for the retailers and the brands to sort of co-brands with their brand and a sustainable story like Reprieve. So I think the future macro trends are bode well for us and the commitments that the brands or retailers have, especially big retailers like Target and Walmart, they really fit in our sweet spot and we're there to help them meet their sustainable goals in a way that's, like I said earlier, transparent and traceable and trusted. Marco, this is Al.
spk07: I just wanted to add to Eddie's comments. From the retail experience I have, I think the pandemic accelerated e-commerce by five or more years. And from the retailers I'm speaking to, they expect e-commerce maybe to go backwards a small amount, but I think the e-commerce mix is here to stay. We're pretty close to where it is today. And what's happened to us in our business, at least for apparel and especially athleisure, normally we'll sell product in the store and a consumer will look at that hang tag that has our story on recyclable materials. But how much time do you really get with the consumer? A couple of seconds if you're lucky. However, when they call up an online order, they get a chance to read about our sustainability story, and we see a very positive trend. So I see e-commerce being an ad for us, a positive.
spk02: Got it. And then just a last quick question here, just talking about the balance sheet. You have basically some excess levels here of cash just kind of versus your historical norm. Obviously, you kept that on the balance sheet to be prudent, just given the environment. But just maybe if you can walk us through your thinking about the balance sheet levels there from a debt and cash perspective as things start to normalize, and maybe if you can discuss that in terms of capital allocation decisions would be helpful.
spk04: Yeah, I think we're in a good spot, Marco. Again, we have nothing borrowed on a revolver. We're doing our quarterly term debt payments. We have deployed some of that capital for the acquisitions that we did in the last two quarters, I guess technically Q2 and the beginning of Q3 here. We feel like we still have an open share repurchase program that gets consideration from the board. And I think we're ready to embark upon a noticeably higher level of capital spending. So in our guidance today, we noted that the range for capital spending for the full fiscal year will be 22 to 24 million. And you'll note from our cash flow, we've only done 6 million for the first half of the year. So we know that that's an area where we are going to strategically invest in really all regions. but most specifically in the U.S. and also in Brazil for some very important equipment and next-generation equipment, texturing equipment that we touched on before in prior calls. So we do think that that's going to get a little bit more attention, and we will be spending a little bit more dollars there. But I think we're taking this overall kind of balanced approach to capital allocation, and I think we've done some good things in certain areas, but I think we're ready to ramp up Again, capital spending, and we'll continue to be thoughtful on future M&A activities as well.
spk02: Understood. Thank you guys very much. I appreciate your time. Thank you, Marco. Thanks, Marco.
spk00: Thank you. You have your next question from the line of Gus Richard from Northland. Please go ahead.
spk06: Yes, thanks for taking the question, and congratulations on a great quarter. I just want to talk about your customer's mix a little bit. You know, given we're all locked down and wearing our jammies during the day, as the world returns to something approaching normal and we start going out again, does that have any impact on your mix? Or do you expect the positive mix shifts that you've been seeing during the pandemic to continue on? You know, any help there would be appreciated.
spk03: Yeah, there's a few things that we think will be positive in the coming quarters, and one of them is back to school. A lot of the kids that have been at home, homeschooling, they haven't had to worry about their clothing, and so we expect, and how they look, we expect that to see a pop sometime in the summer as kids go back to school. So as far as the general workwear, I think the general society, especially in the U.S., is becoming more casual. I think like some of these other things that happened, there's a megatrend towards becoming more casual at leisure wear, being more acceptable in the workplace. Casual Fridays has become casual every day, and I think when people go back to the office, while they will be more formal, they'll still be wearing the kind of material that is suited towards polyester and nylon. So I don't We think as people go back to office and as the world returns to the new normal, as we say, we think it's just going to continue to benefit us as the world becomes more casual in their attire.
spk06: Got it. And then just, you know, sustainable versus non-sustainable. Clearly, sustainable materials are growing faster. What is the... you know, relative growth rates of the two, you know, how much quicker will sustainable products grow versus non-sustainable?
spk03: Well, just at a very macro level, polyester grows at the rate of, polyester production at the rate of 2% to 4% a year, depending on GDP and population growth. So that's the version. The recycled materials will grow at a faster rate than that, and it's such a small part of the entire ecosystem right now, there's a huge upside. So it's hard to put a number on it exactly, but it's certainly going to be much higher than the normal version growth rate. I think the other thing that I'd like to bring up is that we have Reprieve, but we also, as Craig had mentioned earlier, we have Reprieve Plus, and that's the innovation. So we're giving people the sustainability and these performance attributes that I think really resonates with the brands and helps them sell through more product. So if we're selling sustainability, we're also selling sustainability with moisture management or sustainability with antimicrobial, sustainability with no water being used to make the yarn, what we call our water-wise brand. So I think there's lots of other opportunities beyond just the sustainability
spk04: And Gus, I would just add to Eddie's comments. You know, for us, for Unify specifically, you know, the trade actions kind of speak to or shout to why maybe in the recent past our non-sustainable or if you want to say our virgin products versus reprieve have been a bit limited. So those actions we really feel have leveled the playing field and will give us a chance to participate more in that market than we had been able to over the past several years. So I would say that's just kind of a complimentary thing to what we're doing on sustainability is leveling the playing field for the virgin material. I think those two kind of go together.
spk06: Got it. Thank you. Very helpful.
spk00: Thank you. As a reminder, if you would like to ask a question, please press start and the number one on your touchstone telephone. Again, if you would like to ask a question, please press start, then the number one on your touch-tone telephone. You have a follow-up question from Daniel Moore. Please go ahead.
spk05: Thank you again. A little bit of a crystal ball question, but just digging into your outlook for the remainder of the year, As we think about Q4, just maybe talk about typical seasonality as we emerge from Chinese New Year and some of these other things. Do we expect the expectation be continued sequential improvement into Q4, or is it just a little early, both top line and EBITDA, or is it just a little early at this point to give that kind of visibility? Thanks.
spk04: Yeah. Dan, good question. I think we got to the visibility and were able to give a bit more specifics on Q3, and so I'm glad your question started with Q4 because I'm assuming that you kind of caught what we were saying relative to Q3. Indeed. For Q4, that usually is a good, strong quarter for us. I think you're catching a couple of the items that we expect will happen on the absence of Chinese New Year, and we are expecting... our Asia business to grow in that Q4, but I would say that we're probably still a little bit cautious to give you a lot more specifics than that. I do feel like we have very good things going on in all segments and all geographies, but I think we probably needed to stop and not give you too much more specifics for Q4 other than to remind you, which I know you know of, is Q4 usually is a pretty strong quarter for Unify.
spk05: That's indeed why I asked it. I just want to make sure there isn't anything on the horizon that we should be thinking of that perhaps we're not. Thank you for the color again.
spk06: Sure.
spk00: Thank you. I am showing no further questions at this time. I would now like to turn the conference back to the management team.
spk01: Thanks, Rins. With no further questions, we would like to thank everyone for participating today. We have a great platform here to drive long-term growth, and we have a focus on the growing wave of sustainability. We're looking forward to partnering with all of you to create a more sustainable future. Our next earnings release for the third fiscal quarter ending March 28, 2021, is tentatively scheduled for Wednesday, April 28, 2021, after the close of the market, with a conference call to follow the next morning, Thursday, April 29, 2021, at 8.30 a.m. Eastern Time. Thank you all for joining today's call.
spk00: Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.
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