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spk05: Good morning. My name is Devin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2023 Unify, Inc. earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, again, press star, and then the number one, on your telephone keypad. Thank you. A.J. Eaker, Vice President of Finance, you may begin your conference.
spk03: Thank you, Devin, and good morning, everyone. On the call today is Al Carey, Executive Chairman, Eddie Engel, Chief Executive Officer, and Craig Creatore, Chief Financial Officer. During this call, management will be referencing a webcast presentation that can be found in the investor relations section of our website at unifi.com. Please turn to page two of that slide deck for our cautionary statement. Management advises you that certain statements included in today's call will be forward-looking statements within the meaning of the federal securities laws. Management cautions that these statements are based on current expectations, estimates, and or projections about the markets in which Unify 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 with 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'll now turn it over to Al Carey.
spk02: Thank you, AJ. Good morning, everybody. I apologize for my voice. I lost it, so... I'll tell you, quarter one has been a tough quarter, and it's been due to one big contributing factor, and that is the slowdown of retail orders for apparel, and that's affecting our volume pretty significantly. This began in the summer, and it continues today. Retail is reporting retail inventories on apparel being anywhere from 30% to 80% above a year ago. and therefore many of them are going to be discounting heavily during Black Friday and the holiday season and hopefully clear out some of this inventory. But it's uncertain exactly when normal ordering patterns will return. We've been affected, just like all of those who were involved with the barrel industry. Our North American volume in July, August, September was down 20%, and Asia 40%. As you know, Asia does a tremendous amount of business in U.S. retail, but also those COVID shutdowns are still affecting our business. So it's going to be kind of difficult to have any kind of reasonable forecast or guiding with this uncertainty. However, I think it's logical to assume that the volume trend improves after the holidays and we'll be prepared to move rapidly. Well, while this has been going on, we're not sitting here waiting. We're working on four very important initiatives that will strengthen our long-term business and will shore up our profitability, even in the short term. First one is we've already begun a series of actions to reduce our costs in North America. These actions are going to have a big impact on our long-term future, but even in the short term. The first half of this year is going to be very tough on volumes and EBITDA. The second half will show improving volumes but strong EBITDA, and that's because of the cost actions we're taking and also because of the benefit of raw material costs that are going down. The second thing we're spending our time on is the Reprieve brand. We're seeing continued interest from our customers on Reprieve because they feel it helps them attain their 2025 sustainability goals, which by the way is only two years away. We have actions that will build Reprieve consumer brand awareness. We have information now that says our brand awareness on Reprieve is 22% unaided. I'm sorry, 22% aided, 15% unaided. And that's pretty impressive for a brand that doesn't receive very much A&M spend. But in the next few months, you'll see some significant improvement in the Reprieve brand awareness through some of the programs we've put together. The third thing we're spending our time on is we completed a market study with an outside firm to identify new segments of business that would improve our long-term sales and profits, and it's called Beyond Apparel. The sub-segments that look like they'll have the most fruit to bear is auto, industrial, and home. And while this is a long-term initiative, there are several opportunities that are very likely to manifest in this fiscal year. And then the final item we've been working on is the renewal for our credit facility. This summer, Craig Creatore and his team began work on that as they saw some of the business trends occurring, and it led to an effort that he'll take you through in the next few minutes, but our credit facility amendment has been complete, and we feel very good about it. So all in all, volume is a dilemma. It's a bit beyond our control, However, we think it'll be temporary and we'll be ready to get back to servicing customers immediately. But I believe in the saying, don't let a crisis go to waste. The programs I spoke about just a minute ago are definitely going to make us a stronger company in the near future. So I'll turn it over to Eddie at this point.
spk01: Thanks, Al. And good morning, everyone. Our first quarter fiscal 2023 results While disappointing, we're generally consistent with the expectations we outlined for you last quarter and reflect the difficult operating anticipated as we entered fiscal 2023. Despite the challenging environment, our global business model remains robust and we are well positioned to capitalize when the industry receives a return to normalized demand levels. As you can imagine, it's quite a stressful time for our employees and I want to thank them in advance for keeping their heads down and not getting distracted as we move through this environment. Turning to slide three for an overview of the quarter, our net sales for the quarter were $179.5 million, down 8% compared to the first quarter of fiscal 2022. This decline was driven by lower volumes, which stem from a stressed demand environment and volatility across the global markets, but especially in the apparel market. As a reminder, many of the world's largest brands and retailers built up historic inventory levels in calendar 2022, given the supply chain issues that they had experienced in 2020. And we've seen deep discounting at retail and online now to right-size that issue. These actions led to cancellations and push-outs as retailers attempted to destock those excess inventories and global apparel production fell. As Al noted, and as we cautioned last quarter, this impacted our start to fiscal 2023 and we are expecting it to negatively impact our second quarter also. Offsetting some of this volume pressure was stronger pricing in the US. The pricing adjustments we made in July and August proved effective in mitigating the cost pressures we experienced during the June quarter, resulting in an improved pricing environment during the September quarter. We are encouraged by our pricing position despite the benefits being muted by what we see as temporary lower demand levels and we will continue to navigate the fluid macro environment with agility, taking action to protect our margin profile when necessary. From a cost perspective, we saw a decline in both virgin raw materials and recycled bottles, which occurred during the first quarter. Specifically, bale bottle costs have normalized to much more reasonable levels. Our expectation is that both energy prices and the geopolitical situation will remain volatile However, we hope that it will not be necessary to take pricing actions during this December quarter. We've worked hard to establish our strength in the U.S., and now we are working hard to alleviate temporary cost and volume challenges. Some of our proactive measures include reducing overall labor hours, labor incentives, and retention programs, curtailing non-critical travel and expense activity, decreasing discretionary spending for advertising, marketing, and recruiting efforts, prioritizing growth and high capital return capital expenditures and lowering lower material purchases while continuing to take advantage of opportunities. And we are continuing to push hard in each area of cost savings. These measures will help offset the profitability pressures we are experiencing today while not sacrificing the underlying strength of the business for future recovery and growth. Now turning more specifically to Brazil and Asia. Brazil has continued to perform well, but we expect that segment will be battling competitive imports over the next few months. Entities in China and India have begun pricing their exports much more aggressively, placing downward pressure on selling prices in the Brazil market. For our Asia segment, the demand snapshot is very similar to the US. Product demand is weakened following high inventories in the supply chain, and the market is awaiting signals from brands and retailers for renewed ordering patterns. We are still seeing selected impacts from continued COVID-related lockdowns in China. Turning to slide four, which offers a long-term view of Reprieve Fiber, we believe our long-term positive momentum with the Reprieve brand remains intact, with strong customer adoptions and co-branding, and 23.5 million Reprieve hang tags sent to brand customers during the first quarter. Reprieve Fiber products comprise 27% of net sales for first quarter, and were negatively impacted by the demand disruptions I mentioned earlier. In particular, our Asia segment, which sells mostly reprieved fiber products, was adversely impacted by pandemic-related lockdowns, followed by demand disruptions from brands and retailers. Once the commercial environment normalizes in Asia and the global supply chain stabilizes, We fully expect Reprieve sales to bounce back to the prior levels of sales mix fairly quickly. Slide 5 demonstrates our expectations for the quick recovery of Reprieve. We continue to see Reprieve momentum build with the launch of new co-branded products from Quicksilver, J.Crew, All Saints, Cotton On, and J.Jill during the quarter. Brands recognize that consumers, and Gen Z in particular, now expect sustainable options from their favorite brands. This is also evidenced by the growing popularity of our green bottle hang tags as we ship more hang tags in the Americas in Q1 FY23 than in any previous quarter. Capri's brand partners are an essential component of our brand story. During the quarter, we executed social media partnerships with Guy Harvey, Igloo and Teva, Manduka, Tom's Shoes, and Zulu and Zebra. We have several exciting partnerships planned for the upcoming months. On the activation front, we remain excited about our partnership with Bowl Season. We are working closely with executive directors from six college football games to promote sustainability initiatives. We are also gearing up for our Bowl Bound social media campaign that kicks off later this calendar year as collegiate football teams secure the six wins required to play in a bowl game. The partnership will accumulate at the end of the season with a mobile tour activation at a leading college football game. Our mobile tour continues to educate consumers and partners alike about the benefits of Reprieve through a diverse mix of events. On the B2B fronts, the mobile tour attended Lovesac's annual store manager conference, Manager Fest in Las Vegas, and the Surf Expo Trades Show in Orlando. From a consumer perspective, the mobile tour appeared at college football games on both U.S. coasts. Increasing awareness remains a key focus. We renovated our Reprieve website in early October, and the new clean look of the site is designed to resonate with both B2B and B2B audiences. This refined style is also evident across our social media platforms. Additionally, we have retained a new PR firm and are actively focused on securing both trade and consumer media coverage for both Unify and Reprieve. This investment will pay dividends in the upcoming months and quarters. Q2 is already off to a strong start from a marketing perspective with several social media partnerships in October, including Quicksilver, Vitamin A, and Manduka, in addition to product launches from both Brooks and Calvin Klein. We are especially excited about our new women's activewear collaboration with ASICS that launched in early October with a comprehensive campaign that included digital, social, in-store, and public relations. And just last week, we announced a strategic relationship with material science leader, Hologenix, creators of Celliant, to introduce Celliant with Reprieve. Celliant with Reprieve has the infrared properties of science-backed Celliant infrared technology and the sustainability footprint of Reprieve, from apparel and sportswear to upholstery fabric and more. With that, I will now turn the call over to Craig. Craig?
spk00: Thank you, Eddie, and good morning, everyone. The quarter we just completed was full of challenges that stemmed from reduced demand by retailers and brands that had pushed out orders and delayed programs. This unexpected development led to volume weakness in the Americas, driving significant margin pressure and lower than expected profitability. Outside of the short-term disruption, we believe the underlying demand for our products remains strong. And our management team is focused on controlling costs and remaining nimble as we continue to pursue our long-term goals. Let's turn to slide six of the webcast presentation. Here we will begin the review of our reportable segment performance. For the Americas segment, a 2.9% decrease in revenues demonstrates the positive impact of robust pricing efforts we highlighted throughout the last several quarters. offset by lower volumes and connections with brand and retailer demand flow through. In Brazil, we're facing fewer market demand headwinds, and the just completed quarter demonstrated a more normalized level of strong revenue performance. The double-digit volume growth of 16.6% is indicative of our strong presence in the region and the demand for our innovative products. In Asia, sales volumes were challenged by recent COVID lockdowns and the overall market demand pressures, while pricing and mix remain strong. We still expect that the continued interest in sustainable yarns and our ability to support the local customer demand will allow for robust underlying revenue performance when the short-term disruptions subside. Turning to slide seven for the quarterly gross profit overview. Consolidated gross profit decreased from $26.1 million to $6.6 million, with gross margin declining from 13.3% to 3.7%. The America segment's decline in gross profit and weaker gross margin percentage were attributable to the shortfall in product demand and the associated impact on fixed cost absorption. We have maintained a strong workforce during these difficult times as we believe that demand will return in the near future, and that drove some cost inefficiencies in our facilities. However, we expect that the additional training and investments in our people will pay future dividends when volume returns. In Brazil, the gross profit and margin rate demonstrated the expected normalization that we have discussed in prior quarters. And the gross margin of 17.5% is more indicative of the historical rate for this segment. The Asia segment maintained a strong gross margin profile with a high proportion of reprieved products, albeit at a lower sales level due to the constrained demand. Our asset-light model continues to prove to be a good choice for the Asia region. Moving on to slide eight, which provides a brief update on our balance sheet and capital allocation priorities. We ended the first quarter of fiscal year 2023 with $54.5 million borrowed against our and $62.5 million borrowed against our term loan. As we described in our earnings release, we completed the refinancing of our asset-based lending facility on October 28, 2022. As presented on slide nine, among other benefits, this new facility increases our borrowing capacity from $200 million to $230 million, moves the significant majority of our short-term outstanding borrowings into the expanded term loan, continues the favorable borrowing rate structure and overall loan flexibility that has been in place for several years, extends the maturity date to October 2027, and provides helpful liquidity during the current period of demand softness. I would like to say thank you to our banking partners, Wells Fargo Bank, Bank of America, and First National Bank of Pennsylvania for their support of Unifi with the new credit facility. And I would like to thank the Unifi finance and legal groups for their efforts on this activity. Under our balanced approach to capital allocation, we expect to continue to invest in the business to drive innovation and organic growth, maintain a strong balance sheet, and remain opportunistic with share repurchases and or M&A prospects. As a reminder, $38.9 million remains available for repurchases under the current shared repurchase program. Lastly, I'll spend a moment reviewing the tax rate. As the demand pressures drove weakness in the America segment gross profit, our U.S. earnings declined. Our lower profitability levels create greater sensitivity in the effective tax rate calculation, and the negative tax rate for the quarter reflects expense incurred for profitable foreign operations while evaluation allowance fully offsets the assumed benefit on U.S. losses. Now I'll pass the call back to Eddie to take us through the last slides of the presentation and make some final comments. Eddie?
spk01: Thank you, Craig. Before we turn the call over to our Q&A session, let's turn to slide 10 of the presentation to discuss our outlook and expectations for the second fiscal quarter. The operating environment and demand trends we're seeing both domestically and internationally within the apparel markets are expected to remain fluid for the rest of the calendar year, as major apparel brands and retailers continue to deal with the inventory destocking measures and the timing of apparel production with demand recovery remaining uncertain. Our visibility remains constrained, but we expect to see a similar operating environment in the second quarter. Then we expect to see a recovery take hold in the second half of fiscal 2023. This is in line with prior trends during sharp macro environmental disruptions where we have historically seen two quarters of demand impact and then have bounced back strongly as inventories need to be rebuilt. Given these short-term challenges, we believe it's prudent to temporarily shift our guidance to a quarterly basis until we regain some visibility and can make better predictions under an annual approach. For the second quarter of fiscal 2023, we expect next sales to be 10% to 15% lower than what we reported in Q1 of fiscal 2023. Additionally, our expectation is that pressures on fixed cost absorption will drive lower profitability in the Americas, leading to another quarter of unfavorable EBITDA. While the current operating environment is challenging, the long-term growth potential of Unifi has not changed, and we remain optimistic about our future and our position as a global sustainable fiber leader. Again, As inventory levels diminish and demand stabilizes, we expect to see our revenue and profitability accelerate in the second half of the fiscal year. We are pleased to have the additional liquidity afforded by our amended credit facility, and we will maintain our strong balance sheet to act opportunistically on growth initiatives as we remain well-positioned and focused on being the sustainability partner of choice to brands across the globe. We will now open the line for questions.
spk05: At this time, I would like to remind everyone in order to ask a question, press star and then the number one on your telephone keypad. Our first question comes from Daniel Moore with CJS Securities.
spk04: Thank you. Good morning. Thanks for taking the questions. Let me start with some of the cost reduction actions. Can you maybe give a little bit more color and quantify the cost savings from some of those actions? and whether those are temporary or some are more permanent in nature. Thanks for the question.
spk01: Yes, the cost reduction actions are predominantly temporary because we do see this business bounce back. We are taking, for example, we're taking extended shutdowns at our Christmas period and we're also going to take some plant shutdowns during Thanksgiving holiday. We have pushed out quite a number of activities to later on in the year or perhaps into 2024. So while much of these cost savings will be implemented in Q2 and some into Q3, we do expect the impact to predominantly benefit us in Q3. Thank you.
spk04: Got it. Helpful. On reprieve, you mentioned obviously some of the momentum with new partners, the hang tags. Revenue did decline About 33% or so. Understand the inventory challenges, obviously. Just kind of reassure what gives you confidence that you're maintaining, if not continuing to grow, share in the Asia region.
spk01: Yeah, it's a great question. What started out as a slowdown in the market because of COVID lockdowns back in the middle of March of last year that extended really through the middle of May and into June turned also into a slowdown in the orders from the U.S. brands and the European brands. And as we went through the quarter, it seemed that there was a really Strong initiative by these brands to just cut back on all of their orders and push out orders this we know this to be true that They can't these cutbacks can't go on forever at some point the brands have to start restocking their inventories as we said on their call there is a high expectation that during the holiday season there'll be a lot of discounting and And as they move through their inventory, we will be seeing orders return in Asia either before the Chinese New Year or shortly thereafter. Got it.
spk04: Go ahead.
spk01: I'm sorry. We don't expect the demand for reprieve to change as that bounce back happens. Okay.
spk04: And then on the credit facility, obviously proactive, it just – Tell us what covenants are there, if any, in terms of leverage ratios or any other things we might be thinking about on the amended facility. Thank you.
spk00: Dan, the covenants are the same as the facility expired, which is there is one fixed charge coverage ratio covenant, but it's a springing covenant, so as long as our excess availability exceeds the trigger level, which we have plenty of headroom on that now, there's really no issues compliance-wise. really very similar to the facility we just replaced.
spk04: Got it. Thank you for the color. I'll jump back with any follow-ups.
spk05: Thanks, Dan. Our next question comes from Anthony Lebedzinski with Sidoti and Company.
spk06: Good morning, and thank you for taking the questions. So just wondering, you know, given the current week, week at the manned environment, are you able to, are you confident that you will be able to hold your pricing or are you seeing perhaps your customer asking you for any discounts or just wondering about your confidence level and your ability to hold pricing steady?
spk01: That's a great question. We've spent a lot of time and effort getting to the price point we need to over the last really 12 months. we are under pressure to manage prices down, but we are doing our very best to make sure that we stay strong and maintain the margins that are appropriate to the raw materials cost that we have in place.
spk06: Okay, gotcha. Okay. And then, you know, in terms of your CathX funding plans, I know you gave guidance for your quarter, the current quarter. As far as just thinking about the rest of the year and next year, are you still, I assume you're still on target to finish the completion of the rollout of the EVO texturing machines and just kind of, you know, just wondering if, you know, CapEx should come down next year because of that?
spk01: Thank you for the question. We've certainly cut back on all of the CapEx programs that we can move out, with the exception of some issues that we have, maybe potentially from a maintenance point of view, or certainly on any safety initiatives we have, any CapEx centered around safety, we have not pushed out. The EVO spending currently is ongoing, but as you can imagine, we are evaluating, as we move forward, the timing of that, but Right now, no decisions have been made about that.
spk06: Got it. Okay. And then I think last quarter you guys talked about that there would be some inventory write downs in the quarter. Did I miss that or was that something that was, was that meaningful here in the quarter that you just reported?
spk00: Yeah, so Anthony, those write-downs and that did have an impact on the business. The bigger impact for us really was the lack of volume, especially here in Americas. And we have been pulling back quite a bit on the amount of raw material we have been purchasing. So as our demand has gone down, we have been pretty quick to react and reduce those purchases. So yes, we're now buying at lower prices, But those that impact will really not help us didn't help us much in this Just completed quarter will help us a little bit as we head into December and and beyond so yeah, it was a Definitely we had been purchasing Inventory at higher levels we had to adjust that we are we have adjusted that unfortunately though that inventory is flowing out slower than we expected and slower than we historically have because of this demand softness. So yes, that did have an impact on our financials this past quarter, will do so. That was factored into our guidance for the December quarter as well.
spk06: Gotcha. And then my last question, you mentioned at the beginning of your prepared remarks about having a market study done with some segments beyond apparel. So in terms of, you know, whether looking at auto industrial home, I mean, which one do you think out of the ones that you cited, which ones do you think will have the closest impact in terms of the impact on your business? I mean, out of these, you know, which one you think we'll have, we'll see the impacts sooner rather than later.
spk01: Yeah, as we looked at those three different segments, we think home is the one that will give us the quickest jump. We are eyeing some programs right now, and a lot of the reason for that is because of the quick decision-making that that market can take place, whereas automotive, it takes a long time to get those programs in place and set. But home, as I said, is the one we're focusing on right now. Thank you.
spk06: Got it. Thank you, and best of luck.
spk05: Thanks.
spk06: Thanks, Anthony.
spk05: There are no further questions at this time. With that said, concludes the Q1 2023 Unify, Inc.' 's earnings conference call. Thank you for attending today's presentation. You may now disconnect.
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