Unifi, Inc. New

Good morning and thank you for attending Unify's second quarter fiscal 2024 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. Speakers for today's call include Al Kyrie, Executive Chairman, Eddie Engel, Chief Executive Officer, AJ Ecker, Chief Financial Officer. During this call, management will be referencing a webcast presentation that can be found in the investor relations section of Unify.com. Please familiarize yourself with page two of that slide deck for cautionary statements and long gap measures. I will now turn the call over to Al Carey. Al?

Thank you. Good morning, everyone, and thanks for joining our call this morning. I'd like to begin this call by telling you a little bit about some actions that we're taking to improve the long-term performance of the company and allow us to reach the potential that we believe that we've got. I'm not going to speak about the Q2 results as Eddie and AJ are going to take you through those in just a few minutes. The only thing I'd say about this quarter, too, is that it's right about where we told you it would be during our last earnings call. We continue to experience the softness in the apparel category and the high inventory levels in that supply chain. However, there are signs of a gradual pickup in our sales, and that should continue as we go through the balance of fiscal 2024, so for the next six months. The industry has had a solid end-of-the-year apparel sales. Inventories appear to be pretty much back to pre-COVID levels. Now, for the last 12 to 18 months, it's been a very difficult period. We've had to deal with the macro issues that are affecting the apparel category in our volumes. But as you've heard before, don't waste a crisis, and we're not going to. We've found some weaknesses in our business as we've gone through the last 12 months. And we think that we can turn those into opportunities for growth if we take the right actions. And that's exactly what we've done. And it's actually already underway. We did a deep dive with our organizational structure and the processes and the costs that are associated with those. And we are taking out significant costs and improving our operational efficiencies in North America. Now our intention is to take a large portion of those savings from this profitability improvement plan and reallocate some of those to improve the profitability of our North American operations, to invest in product innovation for reprieve, and to become less dependent on the apparel category by further penetrating other end-use markets. More to come on those priorities in both Eddie's and AJ's comments, but we've made good progress on this so far. We began the effort in Q2, probably around November, December. We've taken substantial actions already on the headcount front, and most of these actions that were taken in this productivity and profitability improvement plan should be completed by the end of Q3, a few actions trickling into Q4 most likely. We expect that the results will be reflected mostly in the new fiscal year coming, but even a little bit into Q4 perhaps. One other thing I'd like to add, we've had several young leaders in our organization that will be elevated to key roles in the company as a result of these changes. They were responsible, along with Eddie, for developing these plans, and now they will be responsible for the execution of those plans, which gives us all a lot of confidence in what we're going after. So let me turn it over to Eddie Engel right now, our CEO, who will take you through the details on all of this.

Thanks Al and good morning everyone. As Al mentioned, I'm going to talk about the second quarter fiscal results which were in line with our expectations but were negatively impacted by the ongoing inventory destocking challenges that we continue to see in the apparel industry and its supply chains. However, we remain optimistic that we will begin to see demand normalization in calendar year 2024. As Al mentioned, we are continuing to take proactive actions to control costs and improve efficiency of our operations in order to strengthen the company's position and improve results. The initial impacts of these actions are beginning to show in the underlying performance of the business as we delivered meaningful improvement in gross profit performance in the second quarter. If you turn to slide three for an overview of the period, we recorded $136.9 million in net sales during the second quarter really essentially flat compared to $136.2 million in the second quarter of fiscal 2023. Higher sales volumes were largely offset by lower average prices due primarily to lower raw material costs. Our underlying performance has stabilized as the global apparel inventory destocking should be nearing its end, allowing us to make more strategic decisions in how we position the business for optimal performance, while at the same time maintaining the ability to meet the needs of our customers. In the America segment, we saw modest improvements in volume, though sales levels remain below our historical averages, and this can be mainly attributed to continued weakness in apparel demand. In the Americas, we expect to continue to take share in calendar 2024 and benefit from the exit of one of our primary competitors in the region that we've mentioned in prior calls. In Brazil, we continue to see improved performance though our strong sales volumes and increased gross profit were partially upset by the continued unfavorable pricing dynamics from competitive imports. In Asia, while we continue to face challenges with the apparel demand, our results were positively impacted by a rich and diverse sales mix. Going to operations, we continue to evaluate our expense structure and have been proactive in identifying opportunities to generate efficiencies and improve performance across the business. We spent the last year taking proactive, strategic actions aimed at reducing ongoing costs and optimizing operations to enhance profitability. In recognition of the current environment, we further bolstered those initiatives through the new profitability improvement plan we announced last night. This plan is expected to provide over $20 million in accumulative profitability benefit moving forward. which will put us in a stronger position to leverage the anticipated recovery in apparel demand in calendar 2024. The first part of this plan focused on realigning our resources, reducing our headcounts, and resetting costs, primarily in the U.S. This has allowed us to significantly lower our variable operating expense across both production and administrative functions. These actions will be completed in this quarter ending March 2024, And as a result, we anticipate a reduction in expenses by approximately $2.5 million per quarter on a run rate basis beginning in fiscal 2025. While the execution of this plan came with very difficult decisions, we are confident that these changes will lead to a substantial improvement in profitability and operating profile of the business going forward. We believe Unify is a robust foundation for future growth and innovation. And the second part of our plan is aimed at expanding our gross margins through the transformation of our sales process. And the approach we've taken includes streamlining processes, enhancing inventory management, and realigning resources to boost efficiencies. Once completed, we expect to see a $6 million annual improvement in our gross profits, which will phase in throughout the rest of the calendar year. We plan to strategically invest these cost savings as Al had mentioned, and increase profits into the areas of our business that promise additional revenue and margin-enhancing opportunities. This reinvestment will not just bolster our traditional apparel market penetration, but will also enable us to explore and capitalize on new market segments. Innovation remains at the core of our strategy, and leveraging our innovation capabilities in new markets is essential to unlocking our growth potential. We will continue to allocate resources and make investments to develop new and innovative products that expand our brand in new categories, particularly in the areas of our established Reprieve platform, as well as our emerging Beyond Apparel initiatives, both of which we believe have significant growth opportunities. In tandem with our operating realignment, we have made a number of strategic appointments across our leadership team to drive further growth and focus and innovation at Unify. And I'm very proud to make these announcements, as leadership development has been a priority for our team and the promotion of these leaders onto our executive team is well deserved. So these series of important decisions to streamline operations and realign leadership team to maximize our growth and profitability profile going forward, we are fortunate to have AJ's financial expertise and sophisticated accounting and business acumen. He brings a robust knowledge of our operation on financial processes and has been a critical driver of our strategy over the last few years. These skill sets Coupled with his abilities as a leader of our finance team, separated him throughout the search process as clearly the best candidate. Next, Meredith Boyd has been appointed the Executive Vice President and Chief Product Officer. Meredith joined Unify in 2007 and has held progressively senior roles throughout our organization, including our manufacturing operations, brand sales, and business development, where she had direct customer and industry interactions, and in product development, where she was integral to our innovation initiatives. For the last three years, Meredith has served as our Senior Vice President of Sustainability Technology and Innovation. Her contributions in that capacity has been pivotal to our international growth and the expansion of the Reprieve brand and value-added product technologies. We will leverage Meredith's proven success and international impact by having her lead all innovation, plant technology, marketing, and business development. We expect this organizational change to be critical to promote our global growth initiatives. Brian Moore will take on the role of Executive Vice President and President of Manufacturing Inc. Brian started his career at Unifi back in 1993 and moved to Asia for Unifi in the early 2000s. For about 15 years, Brian gained additional experience in the private equity world, returning to Unifi at the beginning of 2020. Most recently, he has served as the Senior Vice President of Direct Sales and Operations. Brian's extensive experience and successful leadership in sales and operations are invaluable to our America's footprint. Greg Sigman, our General Counsel and Corporate Secretary, has also been promoted to Executive Vice President and will continue to consume more and strategic leadership responsibilities, including the management of our government affairs and sustainability functions. This refreshed leadership team is central to our growth strategy. and each has exemplified a commitment to innovation and market leadership over their tenures with the company. On behalf of the board, I'd like to congratulate each leader. Turning to slide four to discuss reprieve and marketing. During the second quarter, reprieve represented 33% of sales, marking a sequential quarter and year-over-year increase as a percentage of net sales. Sales of reprieve have been adversely affected by the current economic challenges in China and a general downturn in apparel production. We expect a rebound in Reprieve sales once China sees improvement in economic conditions and apparel demands. We remain fully confident in the demand for sustainable fibers and Reprieve's brand's position as a leader in the industry. Now, on the marketing front, our focus remains on elevating our flagship brand, Reprieve. We're thrilled to announce that this week, Reprieve will once again have a presence at the WM Phoenix Open. The brand teamed up with WM and Peter Millar to convert water bottles like those collected at last year's event into a special edition Peter Millar 2024 WM Phoenix Open Apparel Collection that will debut at the upcoming event. We are honored to be part of such an exciting collaboration at a nationally covered event. I will now pass the call over to AJ to discuss the financial results.