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Unifi CEO: Costs Climbing for Recycled Plastic Inputs

Recycled and synthetic yarn maker Unifi reported strong results for its fourth fiscal quarter of 2021, citing the return in demand for sustainable apparel products.

On Wednesday, the company released its earnings for the quarter ending June 27, crediting continued business recovery across the fashion sector as a driver for increases in quarterly net sales. The company said interest in its Repreve product, made from recycled plastics, accounted for much of the quarter’s growth, with revenue from the sustainable fiber representing 38 percent of the company’s consolidated net sales—a 10-percent jump from the previous quarter.

The material was recently assessed and scored by the Higg Materials Sustainability Index (Higg MSI), which as a division of the Sustainable Apparel Coalition confirmed that Repreve reduces global warming potential by 21 percent compared with generic, mechanically recycled polyester. The fiber is 42 percent more effective at reducing climate change than virgin polyester.

“The Higg Sustainability Index is something we’ve worked on for a long time,” Unifi CEO Eddie Ingle said on Wednesday’s call, citing transparency and traceability as factors driving the material’s adoption. “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.”

In a Nutshell: Unifi’s net sales reached $184.4 million in the quarter, an increase of 114 percent from Q4 of 2020 and 3 percent from the third quarter of fiscal 2021. The company’s gross profit totaled $27.4 million, and its gross margin was 14 percent, with focused execution on certain product lines offsetting some of the pressure from higher input costs.

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“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,” Ingle said. “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,” he added.

According to Ingle, “nearly every business” has seen the impact of inflationary pressures like volatility in labor costs, freight and inputs, especially across North America. The challenges are “testing the resolve” of many, Unifi included.

Despite those pressures, “quarterly revenues were up over 100 percent year-over-year and up 3 percent when compared to both fiscal 2019’s fourth quarter or fiscal 2021’s third quarter,” he added, noting that the quarter’s performance was “underpinned by strength across all segments,” particularly Asia and Brazil. The polyester segment showed further signs of recovery in the U.S., fueling a normalization of demand.

Continued logistics delays stand to impact incoming shipments from Asia, compounding pressures on both cost and timelines, he said. “What might have taken four weeks is now taking eight weeks to get across [from Asia],” he said. “And so that builds the working capital constraint for these brands.”

Unifi is seeing client interest in Central American supply chains as alternatives to Asian sourcing. “Specifically in the U.S., we’re not seeing a huge amount, but I do think we’ll see some impact going forward,” Ingle said.

Net income was $13.4 million, amounting to $0.70 in diluted earnings per share, versus a net loss of $20.2 million, or $1.10 loss per share in the comparable 2020 quarter. Adjusted earnings per share hit $0.37, compared to $1.05 loss per share in Q4 of fiscal 2020.

Adjusted EBITDA was $20.4 million—versus the negative $14 million it saw during the same period a year ago. “Our adjusted EBITDA performance was positive and above forecast in Q1, increasing significantly from the fourth quarter of fiscal 2019,” Ingle said.

Meanwhile, operating cash flows in the fiscal fourth quarter amounted to $11 million, falling by $9.6 million from the year-ago quarter. According to Unifi, the drop can be attributed primarily to working capital changes stemming from increased raw material costs.

At the quarter’s end, debt principal reached $86.9 million, while cash and cash equivalents were $78.3 million. The net debt of $8.6 million represented a sizable decrease from the quarter ending June 28, 2020, which saw net debt hit $23.6 million.

In May, the U.S. Department of Commerce announced preliminary duty rates against four countries: Indonesia, Malaysia, Thailand and Vietnam. Investigations should conclude by January 2022 and are expected to provide benefits to sales volumes and resulting cost absorption for the polyester segment for an extended time period thereafter.

CEO’s Take: “Our fourth quarter fiscal 2021 results demonstrated the resilience of our global business model and the value that our innovative solutions bring to our global customer base,” Ingle said Wednesday. “We delivered strong performance across all segments during the period, driven by our team’s commitment to meeting the needs of our customers in what remains a dynamic business environment.

“Following the pandemic, many customers began accelerating their commitment to recycled content products,” he said. “In fact, we have seen Repreve hang tags with our co-branding partners increase 60 percent year-over-year.

“With consumer demand for sustainable product offerings more popular now than ever before, we continue to believe our innovative and sustainable solutions will be the growth engines that will allow us to meet the evolving needs of our customers,” he added. “These fourth quarter results, along with our initiatives in each region of our global model, will serve as a solid foundation to build continued momentum in fiscal 2022 and will help position us for future long-term profitable growth.”