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Unifi CEO: China Lockdowns to Adversely Impact Profitability

Strong pricing initiatives in response to higher input costs pushed Unifi’s third-quarter net sales up 12.3 percent $200.8 million.

In a Nutshell: Unifi Inc., makers of Repreve recycled fibers and other synthetic yarns, updated expectations for fiscal 2022 through June, with overall volume and Repreve fiber sales growth set to drive net sales to at least $810 million, which would represent an increase of 21 percent or more from the level achieved in fiscal 2021.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) is forecast to range between $54 million and $57 million, which reflects the adverse impacts of recent and ongoing Covid-related lockdowns in Asia and renewed global volatility.

Capital expenditures are expected to be approximately $40 million to $42 million, as the company continues investing in new yarn texturing machinery within the U.S., El Salvador and Brazil. Such capital expenditure levels will be funded by cash on-hand and available financing arrangements and are inclusive of about $10 million to $12 million of routine annual maintenance.

In connection with anticipated investments in new yarn texturing innovation and working capital to support future growth, cash and cash equivalents decreased to $53 million on March 27 from $78.3 million on June 27, 2021. Accordingly, net debt was $44.3 million on March 27 compared to $8.6 million on June 27, 2021.

Sales: Net sales in the fiscal third quarter ended March 27 increased 12.3 percent from the year-earlier period to $200.8 million, primarily driven by strong pricing initiatives for each segment in response to higher input costs, Unifi reported.

The polyester and nylon segments generated double-digit percentage increases in revenue due to robust product demand, despite minor labor challenges that dampened performance. The Asia and Brazil segments also increased revenue under softer market conditions than the prior-year period when localized lockdowns and logistics issues were not as prevalent.

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Revenues from Repreve fiber products represented 36 percent of net sales, compared to 34 percent in the third quarter of fiscal 2021, and continue to meet the growing demand for sustainable textiles. Similarly, Repreve fiber products comprised 38 percent of year-to-date net sales, compared to 36 percent for the same year-to-date period of fiscal 2021.

Earnings: Net income in the quarter fell 56.3 percent to $2.1 million, or 11 cents diluted earnings per share (EPS), from net income of $4.8 million, or 25 cents diluted EPS for the third quarter of fiscal 2021. Net income was impacted by a higher effective tax rate in connection with a U.S. net operating loss, for which the full benefit is currently unrealizable.

Gross profit declined to $19.1 million from $25.6 million year over year. Gross margin was 9.5 percent compared to 14.3 percent for the third quarter of fiscal 2021. Polyester segment gross profit decreased $3.3 million as a result of rising input costs and less efficient production. Brazil segment gross profit declined $4.6 million, which was consistent with the company’s prior expectations as the local market dynamics have exhibited some normalization from the exceptionally strong environment in the prior-year period.

Operating income was $5.8 million compared to $8.6 million for the 2021 period, primarily due to the decrease in gross profit and partially offset by $900,000 of foreign currency gains in fiscal 2022 and a $2.6 million non-cash loss on asset disposals in fiscal 2021. Operating income for the third quarter of fiscal 2021 included $4 million of higher incentive compensation expense.

CEO’s Take: Eddie Ingle, CEO of Unifi, said: “Our third quarter fiscal 2022 results were consistent with our expectations…This marks our second consecutive quarter of over $200 million in sales. We implemented further selling price adjustments and demonstrated solid progress against the difficult U.S. labor environment, exhibiting a definitive improvement in our polyester and nylon segments’ gross margins since the December 2021 quarter. We are pleased with the gross margin improvement and we expect to continue making progress in the quarters ahead.”

“Although we are carrying significant momentum into the fourth quarter, the lockdowns in China will adversely impact our overall profitability,” Ingle added. “Fortunately, we expect our constant pursuit of innovation and sustainability, combined with our regional competitive advantages, to help offset the temporary shortfall in China and continue to drive long-term growth for Unifi. While renewed global volatility amid lockdowns in Asia mutes our expectations for the fourth quarter, we remain optimistic about our momentum towards the strategic initiatives that we outlined in pursuit of our fiscal 2025 targets.”