Ladies and gentlemen, thank you for standing by, and welcome to Unifi Third Quarter Fiscal 2022, earnings conference call. At this time, all participants lines are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator instructions]. Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, A.J. Eaker, Vice President of Finance. Thank you. Please go ahead.

Thank you, R.J, and good morning, everyone. On the call today is Albert P. Carey, Executive Chairman Edmund Ingle, Chief Executive Officer, and Craig A. Creaturo, Chief Financial Officer. During this call, management will be referencing a webcast presentation that can be found in the Investor Relations section of our website at unifi.com. 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 Albert P. Carey.

Thanks, A.J. Good morning, everybody, and thanks for joining Unifi's third quarter conference call. After a few comments about the state of the business, I'll then turn it over to Edmund Ingle and Craig A. Creaturo, who will fill you in on the Q3 performance for the company, and then we'll move to our usual Q&A session. I'd say most of us on this call are operating in some of the most turbulent times that I can remember and experiencing some of these macro headwinds such as pandemic, inflation, and labor shortages. And now there's a whole new round of challenges, such as the war in the Ukraine and the COVID lockdown in China. But I would say despite all of this, our team at Unifi remained agile and trying to work around these challenges. That's why I'm happy to see that our Q3 revenue is right on our forecast of $201 million and our adjusted EBITDA of 12.2 million is also a little better than forecasted. And we had to offset some new costs that came in over the course of the quarter. The $201 million on Q3 revenues are going to allow us to deliver the full year of $800 million plus on revenues. And that's a significant milestone for us at Unifi. You'll recall back in Q3 that we were working on two pretty significant challenges that was in North America. One was getting pricing to offset the raw material cost and then the second challenge was the labor shortage that we had in North America. While both I would say still are a challenge, we've seen improvement in Q3, and going forward into Q4, we'll see more improvement as well. These lock downs in China began to be a headwind at the end of third quarter.…

Thanks, Al. And good morning, everyone. Our third quarter results were in line with our expectations, and we are pleased with the strength of our results despite some of the persisting challenges we're facing in today's operating environment. And I'm proud of and encouraged by the way that everyone on the Unifi team continues to show resilience, and I want to thank all of our employees for their ongoing hard work and commitment. During the quarter, we produced strong sales and profitability figures and saw a sequential margin recovery into several pockets of the business. The underlying demand paired with our continuous improvements on the U.S. labor front, gives us confidence going forward and I'm excited for what lies ahead. Moving into the slide presentation. We will begin on Slide 3 with an overview of the quarter. For the second consecutive quarter, we achieved sales of over $200 million, an increase of 12.3% on a year-over-year basis resulting from strong demand and proactive pricing initiatives. This figure could've been another 1% to 2% higher if we were not still somewhat labor constrained in the US. Without mentioned, we are making solid progress on these fronts. While some production inefficiencies remain because our improving labor metrics have not yet been reached. [Indiscernible], our recent actions have generated noticeable improvement in our yields, which is evident in our sequential margin profile. And we will continue to strive towards improving the situation and achieving optimal thresholds in order to continue to satisfy the needs of the market and of course, our customers. We remain optimistic in our ability to do so going forward. And as we communicated in our last earnings call, the inflationary environments impact to domestic margin performance and pricing levels once again. Raw material costs and inflation continue to be…

Thank you, Edmund, and good morning, everyone. To reckon a little bit of the sentiments from Al and Edmund, I'm pleased with our sales and profitability performance consistent with our expectations, especially in an environment with several moving pieces all around the globe. Demand for our products continues to grow, and our management team is keenly focused on achieving a healthy balance of both, short-term and long-term goals. As we look at the quarter from a high level, you can see that we accomplished our short-term sales and profitability goals for the third quarter, and maintain the underlying business momentum as we implemented responsive selling price adjustments and made positive step changes against our recent U.S. labor challenges. Beyond our operating income, and specific to Brazil, you may recall that in the fourth quarter of fiscal 2021, we recognized an estimated benefit from expected recovery of non-income taxes in Brazil and the gross amount of $9.7 million. During the just completed quarter, we reduced the estimate in connection with additional clarity and review of the recovery process during the months following the associated Brazil Supreme Court decision. Accordingly, $815,000 of recovery of non-income taxes net reflects the impact of slightly lowering the estimated benefit of recovery. This amount has been included in our reconciliations of adjusted EBITDA and adjusted EPS within the earnings release, consistent with our treatment of this same matter in the fourth quarter of fiscal 2021. As we look below the pretax income line, the headwinds that Edmund outlined for our Q3 and Q4 have impacted our effective tax rate due to a decrease in overall U.S.-based earnings and we have not been able to fully benefit from certain U.S. tax attributes. This brought our effective tax rate slightly above the expected range for Q3 and will…

Thank you, Craig. Following today's call. I'd like to finish with Slide nine of the presentation and discuss our outlook and expectations for the remainder of the fiscal year. As we have highlighted in this call, our revenue numbers have exceeded our expectations and leading us to increase our previous top line outlook for the fiscal year 2022. Still, we must continue to work through all the global uncertainties, including ongoing labor pool constraints in our U.S. operations, inflation enrollment costs at all locations, and COVID-19 lockdown impacts in Asia. For the full year Fiscal 2022, we expect sales to reach $810 million or more, representing an increase of 21% or more from Fiscal 2021 revenues. We are lowering our outlook on adjusted EBITDA to range between $54 million and $57 million, due to the recent and ongoing COVID related lock-downs in Asia and renewed global volatility. Our CapEx outlook should fall in the range of $40 million to $42 million. Lastly, we issued longer-term targets during our Investor Day in February. I want to highlight that we remain on track to achieve our previously-stated $1.1 billion or more revenue target by 2025 comprised of 6% REPREVE fiber sales. We remain confident about the momentum and growth outlook for the REPREVE brand, enhancing our margins and profitability, and helping us achieve $110 million or more in adjusted EBITDA by fiscal 2025. Sustainability is what separates us from our competitors and is the driver of our growth. Our segments are growing their recycled competition and demand continues to be robust for recycled products. With this growing markets and our current initiatives taken to increase our margins and operations, Unifi is set to close 2022 on a positive note, while setting up the company for long-term success. We will now open the line for questions. Thank you.

As a reminder to ask a question, [Operator Instructions]. Please standby while we compile the Q&A roster. The first question comes from the line of Christopher McGinnis, from Sidoti & Company, LLC. Your line is open.

Good morning. Thanks for taking my question. And just in relation to the impact of Asia, I guess just how much in revenue is there a way to think about how much that impact is going to be just given the stronger trends there. And then also, is there any conversations about shifting maybe supply chains that could benefit your -- if it goes to Central America or another region? Thanks.

Yeah. Thanks, Christopher, for joining us today. There is an uncertainty around how much it's going to impact us. And I think in part, a lot of our business in our Asia segment actually is not in Asia -- it's not in China, it's outside of China. We are expecting a significant shortfall in revenues in April. And we do exceed this -- we do see this improving the store for reducing, as we move through May and June of this fiscal quarter. It's hard to determine exactly how much. Now, on the longer-term, your question is interesting around shifting supply chains. We are having conversations with several big brands around. What is the possibility of moving some of this volume to Central America, which will help us long term in this region. Of course, I'd like to remind you that the volumes of Polyester in China are so large that any small movements towards Central America would make a big difference to our Central America n operations. So I think it's -- I think the world is probably pausing a little bit to see how quickly zero COVID policy will impact supply chains. No doubt, with all of the geopolitical noise that's going on, everybody is rethinking moving products potentially out of committed concentrations of business in China into some other regions. But it will take time. Thank you.

I appreciate that. And then, I guess just thinking about that, is it -- do you need more investment in Central America or just how is that? How are your assets there positioned for what could be some stronger growth?

Yes. So we announced -- we were more clear in our Investor Day in February where we announced we are investing in all regions of the Americas, including Central America. So we are well placed with the investments that are undergoing to capture greater market share and greater volumes in that region.

Great. I appreciate it. Thanks for taking my questions, and good luck in Q4.

Thank you.

Thanks, Christopher.

Your next question comes from the line of Daniel Moore from CJS Securities, Inc. Your line is open.

This is Stefanos Crist, calling in for Daniel. How are you?

Hi, Stefanos.

First, what are the gross margin levels implied in both Asia and Brazil in your revised Q4 guidance? And then, when you expect those to start to improve, particularly in Asia?

Yeah, I would say -- this is Craig, I would say that the gross margin levels implied for Q4 for Brazil are very close to where we are at for the just completed Q3 for Brazil. And that business has had its peak gross margins in Q3 of last year. And the quarter we just completed we think that's a pretty representative amount of gross margin that we should see from that business in Q4. In Asia, definitely our expectations for the gross margin percentage is pretty close, but lower than what we just completed this year. Excuse me, this quarter. So as we finish out the fiscal year, that much slower sales level should generate a little bit lower of a gross margin profile, still profitable for sure. And we're fortunate that our business there where we're not owning manufacturing assets and resources has definitely kept us away from a significant pull down in gross margin. So we do think that the product we'll get out, we'll have a good margin profile. But not quite as good as if we had been at a full level of sales without the COVID lockdown.

Got it. Thanks. And then can you just give us an update on the labor shortages which has impacted margins in the polyester segment in the back half of last year and what steps you've taken to alleviate that. And I guess the expected cadence for margins and poly going forward.

Yes. And as I was saying on this call earlier, we are still experiencing labor challenges, but not to the same extent that we had in Q2. We've got a lot of things. We've hired more trainers, we've changed our onboarding process, we have moved to a team approach to change how we really focus on more the group work and the efficiency at the machines rather than the individual contributors, we have done some sitting around labor to really understand what are their needs, and we're listening to them loud and clear. So We did see an impact in productivity in Q3, but we didn't see the impact that we had in Q2 around our efficiencies and year losses. So we definitely saw improvements as we move to Q3. We are seeing improvements in April, just better than the March. So it's a long journey for us. We see it as something we're going to have to continue invest time and money in. But certainly not in the situation we were back on our fiscal Q2. Thank you.

I think we lost 10 points of volume growth in North America in Q2. It looks like about 5% in Q3. So it improved.

Yes.

I appreciate the color. Thank you.

You're welcome.

Your next question comes from the line of Marco Rodriguez from Stonegate Capital Markets. Your line is open.

Yes. Good morning, everybody. Thank you for taking my questions. I was wondering if I could follow up on a couple of those questions that were just previously asked here, mainly on Asia. If you can maybe help us understand a little bit more, perhaps, maybe from a percentage standpoint, how much of that business over there is China? And if you can help us understand if the revenue or the volumes that are being impacted in China, are they completely shutdown, is there some shipments that are going out, any sort of additional color there so we can kind of think through the revenue impact in Q4?

I'll take this call. Thank you, Marco. The whole country of China is not shut down, although there are many restrictions beyond Shanghai. Shanghai is where the real problem is. The challenge for us in Shanghai is actually getting some of our export [Indiscernible] out. But most of the textile production facilities are in other regions like Suzhou where our commercial operations are. So the challenge we've had is that when Shanghai, late March and early April, really started locking down, some of the other provinces around Shanghai started creating more restrictions so they didn't get into the same situation that Shanghai did. At this time, it's pretty hard for us to determine exactly how much the quarter's going to be impacted. So that's why we're reticent to give you the exact number, but it will be significant. And as Craig said, we're not expecting the margin to change, but we are expecting volumes to be much lower than what we had forecasted. We've been growing the China revenues by 15% a year for the last several years. This is a pause and growth. So we're not going to see growth, and we're going to see some decline. Q4 was expected to be a really fantastic quarter for us, and it's not going to be, but the exact margin of impact projects volume reduction market determined right now.

And Marco, this is Craig. I will just add on in the typical or a syllable Q4. We would see for Asia; we would see a nice growth because that Q3 is impacted by the Chinese New Year. So just to put it in perspective, usually we would see Q4 increase over Q3 somewhere between 10% to 15%, somewhere in that range. But now as Edmund is saying, we're definitely expecting a reduction. And again, I think we can say it's going to be 20% to 30% or maybe more. We don't really know. And that's why we did have to range out not only as revenue guidance was not as specific as we otherwise would have been able to give. It's also one of the reasons we had to range out the EBITDA guidance a little bit more than we normally would.

Understood, very helpful. And is there any sort of thinking through perhaps trying to shift the supply that you do have access to. Sounds like at least in China, to different ports that may not be as impacted such in Shanghai?

Yeah, we are. So Ningbo is a port that's -- it's not fully locked down. And we're doing some things like putting containers on the river to float down to Ningbo to get our products out the door. I will tell you. I'm just -- if they're listening, our team in China are doing an amazing job working around all these restrictions. Whether it'd be local, very, very localized restrictions. Our customers already, they are screaming for yarn. And we're doing everything we can to get it out there. So we don't have a supply issue right now, determined in China. We do have an issue around certainly getting some of the products to the customers. That helps.

Very helpful. And then in terms of the labor issues that you've seen, some pretty nice improvements here sequentially. And I understand that this is a longer process, a longer focus for you guys to get to see those improvements there. But can you maybe talk a little bit about your expectations as far as what sort of sequential improvement you might be thinking about next quarter and then how you sort of see that playing out into FY'23

Yeah, I don't have a crystal ball, obviously, but the work that we're doing around onboarding, around engaging with our employees, around -- putting in different types of training programs around our focus on [Indiscernible] efficiency and not the individual drip contribution. All of that is helping and we're seeing that actually bear fruit. What we also are doing, as you know, is putting in our new Evo technology, which is improving our productivity because it has -- it's less labor-intensive. We're expecting really another two quarters probably of improvements. Our productivity -- we're hoping by the end of our second Q2, fiscal '23, by the end of December to see really meaningful impact on our productivity and on our retention rates with our employees. That's our expectation. We will have to wait and see.

Great. Thank you guys for your time, I really appreciate it.

Thank you.

Thanks, Marco.

And there are no further questions at this time. I would now like to turn the call back to our speakers for their closing remarks.

Thanks, [Indiscernible] And thank you, everyone for participating today. Our next earnings release for the fourth fiscal quarter ending July 3, 2022 is tentatively scheduled for Wednesday August 10th. After the close of the market, with the conference call to follow the next morning, Thursday, August 11th, at 8:30 a.m. Eastern Time. Thanks again for joining the call.

Ladies and gentlemen, this concludes today's conference call. We thank you all for participating. You may now disconnect.