Unifi, Inc.
Q4 2021 Earnings Call Transcript

Published: 7 Aug 2021

[Operator:]

Good day, and thank you for standing by. Welcome to the Unifi's Fourth Quarter Fiscal 2021 Conference Call. . I would now like to hand the conference over to your speaker today, A.J. Eaker. Please go ahead.

[A.J. Eaker:]

Thank you, Dunne, and good morning, everyone. On the call today is Al Carey, Executive Chairman; Eddie Ingle, Chief Executive Officer; and Craig Creaturo, 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 the 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 with the SEC on Unifi'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 it over to Al Carey.

[Albert Carey:]

Thank you, A.J., and good morning, everyone, and thanks for joining our call this morning. Our performance for Q4 of 2021 was very good. It was a good finish to fiscal 2021 for our team at Unifi, and it gives us optimism about our fiscal 2022. Revenues continued the growth momentum that we had at the end of Q3 and when you take a look at Q3 and Q4 combined, we're confident that we have the momentum to give us a strong revenue performance for 2022. And Eddie and Craig will take you through the details on that in a few minutes. EBITDA was strong again in Q4, and we ended the fiscal year of 2021 at almost $65 million, which is quite a bit better than we forecasted for Q4 and for the full year. Interestingly, our debt, cash, inventory levels and our overall balance sheet is probably as good a shape as any time in recent history. So overall, we feel like we're entering this new fiscal year in a very good position. I'd like to provide you with 3 important trends that are emerging for our business for 2022. The first one is environmental sustainability will be a driving force in our business. Our REPREVE sales were up 30% for the quarter. Now that's a bit of a funny comparison with the pandemic, but it's up 16% versus 2019 quarter. And product hang tags are up 60%, and we continue to see our customers taking aggressive actions that are going to allow them to achieve their 2025 sustainability goals for apparel, and this bodes very well for REPREVE. The second thing that's an emerging trend is that our regional focus is working. Our 3 regional businesses, North America, Asia and Brazil are quite different. And we have tactics and strategies that are different in each of those and are beginning to show promise. North America profitability is very definitely improving, and this is going to continue to be a big priority for us going forward. Asia had an all-time record revenue performance in Q4, and they show signs of full recovery from the pandemic and we're forecasting a strong growth for Asia in 2022. And then finally, Brazil had an excellent year. They overdelivered Q4. And they also started selling REPREVE. And while the sales are minimal at this point, we believe that the consumer in Brazil has an appetite for sustainable apparel, and this could be a very big positive for the future of our Brazil business. Now the final item I wanted to mention is that we're increasing our capital investment over the next 3 years so that we can outfit our plants with the first new yarn texturing innovation since the mid-90s. We've mentioned it before, but the equipment is called EvoCooler, and a texturing machine from our supplier, Oerlikon, which has really great potential. We're going to be able to see significant efficiencies in productivity and energy consumption and operator safety, and Eddie is going to tell you more about it in a few minutes. However, this investment will make us more profitable and give us more plant capacity, and it's going to allow us to be more competitive against import prices in our business. So all in all, a very good quarter. I'm proud of the organization as they've managed through the pandemic. I believe they've shown resiliency and also agility. And I'd say that we're a better organization than we were pre-pandemic. So that gives us some optimism as we enter 2022. So now let me turn the meeting over to Eddie Ingle, our CEO, and he'll take you through the highlights of the quarter. Thank you.

[Edmund Ingle:]

Thanks, Al, and good morning, everyone. As Al pointed out, we are pleased with our performance during the fourth quarter of fiscal 2021. And as the numbers show, we built on the momentum from Q3 to deliver a better than previously forecasted fourth quarter. Strength across all segments resulted in fourth consecutive sequential increase in quarterly net sales. Right now, COVID-19 continues to be an obstacle that we have to pay attention to. However, our current momentum is setting us up to be able to deliver on our fiscal 2022 targets. Before I speak to the quarter, I want to take a moment to set about Unifi and the great people that represent our company. This year marks our company's 50th year anniversary, and I could not be prouder of what Unifi employees have accomplished throughout those 50 years. I want to thank our employees, past and present for their dedication to the business, and I'm grateful to be surrounded and supported by such a talented team. Now when I rejoined Unifi a year ago, I was clear that the cornerstone of Unifi's future growth was sustainability. Today, I stand by that comment, and our innovative culture will enable us to expand into additional end markets and grow the exposure and leadership position of REPREVE. Unifi remains well positioned to be the partner of choice for global brands seeking to meet their sustainability targets in a transparent, trusted and traceable fashion. Now for the quarter. Slide 3 shows an overview of our performance during the period. The business performed above expectations in the fourth quarter and further reflected the resilience of our global business model. Quarterly revenues were up over 100% year-over-year and up 3% when compared to both fiscal 2019's fourth quarter or fiscal 2021's third quarter. Performance in Q4 was underpinned by strength across all segments, particularly though, Asia and Brazil. Once again, Brazil outperformed with strong pricing, driving its gross margin above 30%, compensating somewhat for the lower volumes due to local lockdowns within their market. Asia also had another strong quarter and achieved its highest quarterly sales volume on record. Lastly, the Polyester segment recovered further as demand in the U.S. continue to normalize. This strong segment performance was against the backdrop of upward pressure from raw material and other cost increases that we reacted to as we move through the quarter. On the subject of costs, nearly every business is seeing the impact of inflationary pressures, especially in North America, where volatility in labor, freight and other inputs is testing resolve on many companies, including ourselves at Unifi. In the U.S., automotive demand has been impacted by global semiconductor shortages, which trickled down to automotive fabric production and, of course, yarn demand. However, this phenomenon has been offset by strong recovery momentum in other end markets. Again, we are pleased with the results of the Polyester segment in light of all the difficult dynamics facing manufacturers today. Our conversations with customers remain positive and forward-looking as we all work together to mitigate the temporary impacts of inflation. Turning to the supply chain and U.S. raw material costs during the quarter, operating efficiencies and focused execution partially offset inflationary pressures, particularly for recycled raw material inputs. For example, from January to June 2021, our input costs to produce recycled plastic bottle flake increased significantly and well above the increases in virgin inputs. While these recent increases are expected to pressure the September 2021 quarter, we are focused on pricing actions to mitigate the impacts on our margins. As we look forward, we remain committed to managing our price cost relationship. We've been actively engaged with customers to ensure the appropriate selling price adjustments are in place to offset rising raw material costs for recycled and other inputs. While we anticipate some short-term margin pressure, we are confident in our underlying business momentum and responsiveness to addressing these cost headwinds. Turning back to review of the consolidated business. Our adjusted EBITDA performance was positive and above forecast in Q1, increasing significantly from the fourth quarter of fiscal 2019, which, as you know, was not impacted by the pandemic, like fiscal 2021. Our financial health remains a top priority, and that emphasis can be seen by the progress we have made to further strengthen what was already a very strong balance sheet. As demonstrated by the 2 bolt-on transactions we completed in fiscal 2021, our balance sheet serves as a catalyst for future growth opportunities that we see as profitable and value adds. During last quarter's conference call, I chaired that our ongoing trade petitions involving textured polyester yarns were continuing to progress. In May 2021, the U.S. Department of Commerce announced preliminary duty rates against four countries

[Operator:]

. We have a question from the line of Dan Moore with CJS Securities.

[Peter Lucas:]

It's Pete Lucas for Dan. You touched on it in your prepared remarks, but if you could just kind of expand on your outlook for growth and margins for '22 -- fiscal '22 by segment, starting with Polyester, International. I know you said in Brazil, you don't expect those margins to continue. But finally, kind of touch on the outlook also for nylon?

[Edmund Ingle:]

Thank you, Pete. This is Eddie. The growth that we do expect -- we expect growth in volume across all of our business units, and it will be growth in revenue and in volume. The revenue growth will be partly as a result of the growing cost of raw materials that we're passing on. But as we said on the call, we do expect the overall global growth rate to be 10% plus over fiscal 2021. From a margin perspective, we do expect to see some pressure. If we take all of the business units together, the global margin will drop primarily because the Brazil margins that we're currently experiencing are not expected to continue. But we are focused on ensuring that the margins in Brazil are as good as they can be, but specifically in Asia and the U.S., we are under pressure, but we do expect to maintain decent margins in those 2 areas.

[Peter Lucas:]

Helpful. Next one on the tariffs. You touched on that coming to be a benefit starting in January. Do you expect to achieve the full $20 million revenue benefit in fiscal '22? Or is that more of a run rate benefit you expect to reach sometime during the fiscal year?

[Edmund Ingle:]

Yes. That's more of a run rate benefit. And as we said, we're installing new equipment. So we'll be ready from a machine capacity perspective, but we do expect that to ramp up as we move through the second half of our fiscal year.

[Peter Lucas:]

Great. And the last one for me. With a lot of new entrants and emerging companies focused on recycling plastics, do you see the potential for increased demand and competition for Bayer bottles as an input? And what are you doing to ensure that you have enough supply?

[Edmund Ingle:]

Yes. That's a question I'd like to retarget specifically to the U.S. In Asia, we do not have any issues at all. But in the U.S., there is certainly, especially increased competition, especially from the beverage companies who are trying to put more recycled content into their containers. And in some states that they get legal requirements to do that, such as California. So we are seeing increased pressure. We haven't had a shortage of bottles, but we are having to pay a lot more for the bottles than we had just 6 months ago. And we are -- as we go through the next quarter or so, we are passing on those cost increases. So the supply is not an issue, but certainly, the cost of those Bayer bottles has been problematic for us. And of course, it's very easy to pass on price adjustments to customers, but I think they see what's going on right now.

[Peter Lucas:]

Very helpful. And congrats again on the quarter.

[Operator:]

Your next question comes from the line of Gus Richard with Northland.

[Auguste Richard:]

I just wanted to focus on Asia for a second. Vietnam is shut down, and they are a big producer of apparel and footwear. And I was wondering if that was causing any perturbations in your business there?

[Edmund Ingle:]

Thanks for the question. Most of our business in Asia is in China, but we do have some business, as we've talked about in the past, in Vietnam. This is certainly something we're paying attention to as in our script. We know that COVID is not over. We're not sure exactly how it's going to impact Q1 of this new fiscal year. And it's really sort of only -- sort of liquidates head just a few weeks ago. But we're paying attention to it. I don't think it's something that overall is going to impact our Q1 results, however.

[Auguste Richard:]

Okay. And then on the new texturing equipment that you're putting in your facility, is that a productivity or is it enhancing the product or both? Could you give a little color there?

[Edmund Ingle:]

Yes. I guess there's three reasons for doing this one, it's going to give us more capacity, which we will need as we capture some import replacement business due to the anti-dumping initiatives that are going on. But it's also, as Al pointed out in his comments, we know that it's going to be more productive from a speed point of view, but also it reduces the resources from an energy and labor perspective, and it is safer than existing equipment, which we're very pleased about. And then lastly, we are very confident that we'll be able to make some products on this new equipment, new innovative products that we haven't been able to make on the existing equipment that we've had. Our existing equipment is 25-plus years old, and this is a great opportunity for us to develop new products -- new innovative products on this equipment.

[Auguste Richard:]

Got it. And then the last one for me is -- it seems like globalization is moving a bit in reverse. And I was just wondering, are you seeing any brands or new customers starting up businesses in North America that would shift revenue more to North America.

[Edmund Ingle:]

Yes. I mean, I think where we're really seeing growth and a shift in supply chain is in Central America, this has been a -- this pandemic has been a shock to all of us and the logistics coming from Asia, not just a very costly, but it's also very timely -- time-consuming. So what might have taken 4 weeks is now taking 8 weeks to get across. And so that builds the working capital constraint for these brands. And we are hearing from many brands that they want to put more business through the Central America supply chain, particularly in the -- specifically in the U.S., we're not seeing a huge amount, but I do think we'll see some impact going forward, but I can't be as specific as I can to Central America.

[Auguste Richard:]

Okay. And would you service that from Brazil or from your North America plan?

[Edmund Ingle:]

North Americas because there -- what's called a yarn forward rule and somebody makes it garments in Central America. If it's made from U.S. components or local components, it comes back into the U.S. Duty free. So there's a real advantage to -- from a tax perspective, duty perspective to make garments in Central America, which offset some of the higher costs that might be otherwise associated. We're making it here versus in Asia.

[Auguste Richard:]

Perfect. Congratulations on the quarter.

[Operator:]

Your next question comes from the line of Ryan Danisavage with Sidoti.

[Ryan Danisavage:]

Congrats on the quarter, first off. Just a couple of questions from me. But in the sales guidance range for the full year, how much pricing considered into that given the raw material environment? And is that embedded? And is there more to come in that?

[Edmund Ingle:]

Ryan, we did anticipate in that initial guidance for '22, yes, we took into consideration the current level of pricing that we're seeing. As we've noted, it has been on the upper rise here, especially as of late. I think we took into consideration what was happening now. We didn't try to project past what we're seeing in the current day, but the current level of pricing and what we're seeing here is reflected in that guidance.

[Ryan Danisavage:]

And just one more on REPREVE. Can you talk about the conversations you guys are having with clients and the ability to expand the raw material environment? Does that change the conversation at all? And also, does that -- with the recent Higg MSI scores, how do you guys compete in the marketplace?

[Edmund Ingle:]

I'll answer the second question first. I mean the Higg Sustainability Index is something we've worked on for a long time. One of the big attractiveness about Unifi is that we're transparent, we're traceable and we're -- because of our fiber print technology. What this does is add another level of comfort to the brand that when they buy from Unifi that we are helping them become more sustainable. So it's easy for us to say we're good, we're better than virgin or we're better than some of the other recycled polyester yarn out there. But when a third-party says that, it just gives them more comfort. And again, as we said before, our job is to help brands become more sustainable, but we also want to help them do it in a very -- in a way that's very trusted, and that gives them a lot of trust. I'm not sure about your first question, but I think it was about the expansion of the raw materials. Are there ways to get other raw materials in the U.S. beyond Bayer bottles. We are working, as we've mentioned some of the other calls before, on increasing our textile takeback program. So as we get more and more interest from the brands and they develop some collection systems, we do believe we'll be able to take textiles and put it back into, say, black yarns, which will help them increase their sustainability story too. The recycling rate in the U.S., we do expect to increase when Bayer bottle pricing goes up significantly as it has done, it's going to attract more people to increase collections. We have a great partnership with Waste Management, and they are very focused in different communities and increasing recycling rates. Nonprofit like the recycling partnership, they are also very focused on increasing the amount of curve side collection available to American communities. Today, we're still around 50% election rates, 50% access to curbside recycling in America and there's a big initiative to increase that. And then you have states like Maine that just passed an EPR ruling that is going to require companies who are putting plastic onto the market to help create the recycling infrastructure to make that happen. So we see a lot of upside in the collection rates over the next few years because as the price point has become more attractive. And as legislation gets put in place, it will put more product onto the marketplace.

[Ryan Danisavage:]

And then just one more for me, a quick one. Can you just provide some color on the texturing machines? And when will we see benefits from this project? If you could give some color on that? So we'll see benefit in 2022. My apologies.

[Edmund Ingle:]

No, that's good question. Yes, as we've mentioned, we're really in the initial stages of getting those first machines into our operations. Really, we'll continue on that during the first half of FY '22. And it won't be really until the back end of FY '22 that we'll start to see some benefit, even though we will continue that machine installation even into that period as well. So really, for the first quarter and second quarter of FY '22 will continue to be an installation ramp-up mode. We'll start to see some additional benefit for that really in the back half of FY '22.

[Ryan Danisavage:]

And congrats on the quarter guys.

[Operator:]

Our next question comes from the line of David Silver with CL King.

[David Silver:]

I had maybe a question about the broader kind of marketing opportunity you have and maybe the current pricing environment. So you mentioned rising costs, I mean, I guess all along the supply chain, I'm thinking more along the lines of petrochemical input prices or the oil price. I mean, I personally think $70 crude is just rest stop on the way to something a little bit higher. But across the cycle, recycled plastics, at some point, have to compete with virgin plastics. And in your experience, I mean, in an elevated plastics price environment, does it -- is it easier for your company to hit those double-digit growth targets you have? Or is it harder? Or is it kind of depends -- it depends kind of answer? So how do you think of your marketing and the demand for your recycled products in a world of elevated prices for the virgin alternatives?

[Edmund Ingle:]

We've got a lot of things in there, David, but I just as on the general broad theme around petrochemicals, recycling traditionally has followed the recycling inputs that followed the virgin inputs. And there's generally a lag sometimes forward leading or not. But what I can say is that there has been a disconnect between those companies who want to use virgin material, and those who want to become more sustainable and using recycled products. So right now, we are in this moment in time where the recycled inputs have gone beyond the increases in virgin materials. So we saw crude go from $45, which was there for quite a while up to $70 or $75, which is a big increase, but the recycling inputs in the U.S. specifically have increased further. So you have to sort of ask the question about the regions. Is there a disconnect in China? No. Is there a disconnect here in the U.S.? Yes. Are the brands that we're working with staying on their sustainability path. I think I can confidently say, yes, they are. And they know this is a temporary situation where the disconnect is so big. But as -- if you go back to just several years ago, crude was at $100, and we were selling a lot of yarn. And when the higher that crude goes, it's easier, it is generally speaking for the recyclers because the delta between the 2 narrows. So we're -- while it is challenging right now because of the delta between the Bayer bottle pricing and resulting flight costs is greater than normal. At some point, there will be an equalization and either virgin will continue to go up or the recycled costs will go down as more collections occur. So from a margin perspective, we're marking to people that want to be sustainable. We're not trying to convince people who are committed to virgin products to move over. We know there's a bunch of big brands out there, big retailers out there, who are really consciously trying to meet the consumer demand, and they're trying to meet those needs of sustainability that their customers are asking for. And the regional focus that we have really helps us because our supply chain, like we talked about earlier, we can make products in Central America, in the U.S. for quick turns, but we can also make products in Asia and recycle content and there's less pressure over there from a recycled inputs point of view. So I think the motivation to buy in apparel, in home goods and shoes is more and more becoming sustainably focused. So these brands are looking forward to that, and we're going to market towards those brands and actually focus on marketing on their customers so that they can get value from the REPREVE marketing that we're putting out there. I hope that helps.

[David Silver:]

Yes. A lot to unpack there. I had a follow-up question maybe on your tax rate. So an effective tax rate of between 35% and 40% is what you're guiding to. And I mean, to me, that's one of the higher rates for the companies in my universe. However, I did notice in the cash flow statement here that there was a deferred income tax kind of benefit for this year. So if I was modeling your company going forward, is there kind of a structural difference, let's say, between your GAAP income tax accrual and a cash tax rate? And do you -- is that something that we should be factoring in, I guess, for the longer term? So maybe just some thoughts on your GAAP tax rate versus your cash tax rate.

[Edmund Ingle:]

Sure. David, that's a good question. Yes. For cash taxes, we do -- we will get the benefit. We will get some continued benefit, specifically, as we mentioned in the call today, some of the changes with the indirect taxes and getting credits that we will utilize over several years. That will continue to push the cash taxes below the overall tax rate. There are some other factors that are in play there as well. But yes, I would say that we feel like if I gave you a specific number, could you be 5 percentage points lower when you're ranging your cash taxes, that's probably realistic. So yes, to broadly answer your question, yes, we do feel like we will continue to have some things that have the effective tax rate actually be a bit higher than the actual cash tax rate.

[Operator:]

And I will now turn the call back over to management for closing remarks.

[Edmund Ingle:]

Thank you, Don, and thank you to everyone for listening and participating today. Our next earnings release for the first fiscal quarter ending September 26, 2021, is tentatively scheduled for Monday, October 25, 2021, after the close of the market. With the conference call to follow the next morning, Tuesday, October 26, 2021, at 8