Unifi, Inc. New

Good morning and thank you for attending Unifi's fourth quarter fiscal 2023 earnings conference call. Today's conference is being recorded and 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 followed by the number one on your telephone keypad. Speakers for today's call include Al Carey, Executive Chairman, Eddie Engle, Chief Executive Officer, Craig Creaturo, Chief Financial Officer, and A.J. Ecker, Treasurer. During this call, management will be referencing a webcast presentation that can be found in the Investor Relations section of Unifi.com. Please familiarize yourself with page two of that slide deck for our cautionary statements and non-GAAP measures. I will now turn the call over to Al Carey.

Thank you, and good morning everybody, and thank you for dialing into the Unifi fourth quarter earnings call. I'd like to take a couple of minutes telling you about the environment that we're operating in because I have to say it's one of the most unusual I've ever seen. And then when I'm done doing that, I'll turn it over to Eddie Engel, our CEO. So you've seen the sales and EBITDA numbers for Q4, and you can see that they look very similar to Q3. And that's because volume remains depressed in North America, which drives a low level of EBITDA because we're not getting the throughput we needed to leverage our fixed assets. Now, most of you are probably saying, what is going on with your business? And I fully appreciate that because Q2, Q3, and Q4 have been weak. Let me cut to the answer, and then we'll work backwards into the details. Inventories at retail have been massively high starting last fall on apparel. They're still high today. The retailers are working them down. But until they come down, ordering for yarn has been scarce. So you may ask, when will the inventory be done out? Probably the end of the calendar year. That's what we hear from our retail partners. When will orders begin flowing back into Unify? Probably around the October timeframe. How big will the ordering be and how fast will it come back? I don't know. There's still a fair amount of uncertainty. But listening to retailers, I'd say it'll probably be conservative at first, as they're going to be cautious when they start back ordering, and especially after they just came out of a troubled time of heavy inventories. The other question you may be asking is, what about these sales trends on apparel? They've been off for a whole year, and in the last two quarters, they've been down 7% in units. So what's going on there? My observation is that over the last 12 months, the consumer has spent a great portion of their income. And again, the average consumer who makes probably $55,000 a year, they're spending their money on important basics of food, fuel, housing, all at higher prices. So the discretionary income they have left seems to be allocated to things called experiences and that is primarily travel and entertainment, leaving a lot less money for things like apparel. Now, we feel certain that there'll be a rebalancing between goods and services here soon. We're already seeing some of that begin. At the same time that that's happening, the inventories will rebalance back to a more normal level, and then we can expect to see some steady state in our half to fiscal year and at the beginning of 2024 for the rest. I think you can say that this synopsis that I gave you is probably accurate because it's a compilation of speaking to the majority of our customers, our partners, our mills, and analysts that follow the marketplace. And the majority are saying the same thing. So is there any good news for Unify in all this? And the answer is yes. Since we're at the front of the supply chain, we can feel the pain first, but we typically catch the tailwind first. We began feeling the difficulty of this situation last summer. And now one year later, we're beginning to see some green shoots in terms of improved orders for volume in and around the October timeframe. Also, during the last 12 months, we didn't waste the crisis. Our teams have been working on several initiatives that are going to make our company better in the long run. The first thing I've mentioned to you is that we have begun to get traction on building a business in categories that are outside of apparel, categories such as home, auto, industrial, and packaging. And these categories are incremental to our current sales portfolio, and they also have much higher margins than the apparel categories that we sell today. The second thing our teams have been working on is an activity-based costing capability that allows our sales and operations people to collaborate very closely looking at our inputs, true costs, capacity utilization, so that we can optimize pricing for better profitability and also improve our market share. And I'll mention a third. We've developed several Reprieve product innovations. They offer consumer benefits that allow us to offer a premium on Reprieve, but always use recycled material. So I would say that given this current difficult environment, we can now kind of see where things are going. And I would say that we feel optimistic about what's going on. And I'm very proud of our teams and the way they've worked through all this. And I believe that when we get on the other side of it, our company is going to be a lot stronger than it was when we started the journey back before the pandemic. So with that backdrop, let me turn it over to our CEO, Eddie Engel, who will take you through the details of our performance.

Thanks, Al. And good morning, everyone. Our fourth quarter results reflect the pressures of continued demand weakness, as Al mentioned, across the apparel and textile supply chains as brands and retailers continue their efforts to normalize their inventory levels. Now, while it's been a challenging fiscal year, I'm very grateful for everyone on the Unified team across the globe. And once again, I want to thank them for their unwavering commitment and hard work. While we recognize that Globally, our business is suffering alongside others in the textile space and retail environment. We presently see opportunities for capturing market share in each of the regions as we continue to move through the destocking of the supply chain and then charge towards normalcy. While you look at slide three of the presentation, I'll make some comments on our overall performance at a high level. In Q4, we recorded $151 million in net sales, which was A modest decline when compared to the third quarter and not unexpected, I might add. We believe our underlying performance has stabilized through a difficult market and challenging operating environment, which is a byproduct of a few external factors and strategic actions we've taken. One of these factors is that for the last two quarters, we did not see any of the erratic increases in input costs that we've seen in the prior calendar year and are currently experiencing a period of low volatility in raw material pricing. As a result, we're in a solid position from a pricing standpoint, and this stability will serve as a catalyst for a quick rebound in performance when demand recovers. Bail bottle prices, which have been really challenging in calendar of 2022 for us, have also been stabilizing to seasonally normal levels. As a reminder, the price we pay for bail bottles in the U.S. and the yields associated with the recycling process are the most important input costs to our America's business segments reprieve products. This reduction has been a welcome relief and will play to our advantage as the reprieve demand opens up in the coming quarters in the US and Central America. From an operations perspective, we have taken several actions to maximize productivity and drive efficiencies across the business, including diligently managing our costs through several cost containment measures. We have also reoriented our capital spend to preserve cash and bolster our liquidity position to further solidify our balance sheet, and we will highlight a few of these actions in a few minutes. I should also mention that we are not backing off on developing new innovative products during this period, which I hope to be able to talk about as we move through the fiscal year. Our focus on innovative technologies with reprieve at the core is now much more driven by the pairing of commercial opportunities with performance attributes that are responsive to the consumer demand that we're seeing. Turning to slide four to discuss reprieve and marketing. During the fourth quarter, reprieve sales were $44.5 million or 29% of all sales compared to 49.6 million and 32% of sales in the preceding quarter. This reduction is primarily driven by an economic slowdown in China's textile exports and we do not view it as a rebuke of sustainability based on our ongoing commercial conversations. Any improvement at all in China sales will drive a commensurate rebound of reprieve sales. Moving to marketing, we continue to drive reprieve awareness globally. Ongoing media outreach, including plant tours and an influencer event in Los Angeles has resulted in a meaningful increase in media coverage based on our internal metrics. Beyond the U.S., we continue to execute marketing initiatives tailored for specific markets, and this ranges from the launch of reprieve in Brazil, to partnerships with local brands in China. During Q4, we exhibited at a variety of trade shows globally, and interest in sustainability was high across all shows, and particularly textile take-back, our innovative solution for tackling textile material waste, was particularly well received. Now, as we close out fiscal 23, We are happy with the progress made on the marketing front and look forward to building on that momentum in 2024. Both the industry and consumers are actively focused on sustainability and Reprieve is now very well positioned to capitalize on this opportunity. So before I pass the call to Craig for his financial review, I want to take a moment to thank Craig for his service to Unify. This will be his last earnings call. And as we noted in our SEC filing on July 26, 2023, he is moving to pursue another CFO opportunity. Craig has been a great partner for me and has helped us build a well-rounded finance team. So, Craig, thank you for that and for all the work you put in. Beginning next week, A.J. Ecker will serve as our interim CFO. We are fortunate to have a strong industry veteran like A.J. who has had almost 10 years of service at Unify. in addition to his public company audit experience with a big four firm. And we have a great financial team to support us and AJ as well. I'll now pass the call over to Craig. Thank you.