Unifi Inc (UFI) 2002 Q3 法說會逐字稿

This is an unedited realtime transcript. An edited version with proper case and full speaker names will be available shortly.

Good evening and welcome to the unifi incorporated 3rd quarter results conference call. At this time, all lines have been placed on a listen only mode. At this time, it is my pleasure to turn the floor over to your host, Mr. Billy moore. You may begin.

Thank you. As you know, certain statements included here are forward-looking statements. Management cautions that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied. The company reported a net loss for the quarter ended march 24, 2002 of $3.6 million or 7 cents per share. Marking a significant improvement over the net loss of 13 cents per share reported the prior year march quarter. Of course it also included a charge related to our structure initiatives. We are extremely pleased with the results. We continue to improve the financial position of the company during the quarter through our on going strategic focus on maximizing free cash flow and strengthening our balance sheet. The company reduced debt to $37.1 million as of march 24, 2002 for a reduction of 36% or $21.3 million. The company's currents level of funded bank debt relates a reduction of $22.2 million. The company's ability to reduce debt comes as a result of maximizing cash flows from operations, reducing capital working levels, selling certain non core assets and utilizing the state-of-the-art and information technology to minimize capital expenditures. A strong balance sheet will provide the long-term flexibility that's necessary to grow our portfolio, evaluate products and our customer base. Included in the financial results for the quarter is a net charge of 1 cents per share for the following items: A gain of 3 cents per share included other income stemming from the sale of various machinery and equipment. Offset by a charge of 4 cents per share included sga costs related to the forgiveness of a $1.2 million loan to the ceo. Plus anna justment to cover personal tax consequences. The loan was originally made in 1999 to assist the current ceo and his family to relocating to the united states from ireland and in purchasing a home. The long forgiveness was made by a unanimous decision by the board of directors in recognition of brian parke's superior leadership. I would like to move forward with some specials for the quarter and a look at our future quarter. Net sales were $213.5 million compared to $255 million for the prior year. These figures reflect the develop of reduced demand in the marketplace. And they also reflect a one week holiday shut down in the january month. Perhaps the most important and encouraging item to note is that unifi volumes have improved across the board as we move through the quarter indicating an improved business environment and that inventory levels have been worked down to the point where new orders are returning. Our total sales volume was up 11% in march based -- versus the month of january. And total million monthly volume was up in every one of our foreign operations as well. While the market was soft, unified continued the focus on high quality, value added products, customer partnerships and superior service solutions. We believe we're seeing the results of this commitment to innovation, customer relationships and service as demand returns to our market. We are also very pleased with the overall performance of our foreign operations and affiliates. Unifi texture yarns europe significantly improved and the improvement is expected to continue into the june quarter. Our dyed yarn operations in the uk should be close to break even. Our operations in brazil were extremely strong based on an expanded customer base, the stabilization of currency rates and our ability to increase prices. We're currently in the process of moving an additional four texture machines to bra swrismt -- brazil. Parkdale america worked through most of its cotton in the march quarter and we anticipate seeing the lowest cost of cotton. We believe that parkdale america will generate fairly significant profits in the june quarter. Our joint venture for nylon continues to perform well and we expect increased profits in the june quarter. Our joint venture for high tenacity and industrial yarn is still in the start up mode and experienced -- a loss. We anticipate a smaller loss in the june quarter aspirations ramp up. We are confident that we'll see improved performance as production volumes increase. Our manufacturing alliance with dupont generated a $12 million benefit shared equally in the march quarter which was slightly lower than our original projections. Year to date however, the alliance has contributed $47.4 million of benefits or $27.3 million for each of us which is greatly improved both of our operating results. Although unifi and dupont are seek resolution to certain specific issues, it is largely working as planned and both companies continues to work together. Our legal counsel has advised that all correspondence and communications with respect to the arbitration will be made in the form of a press release or updated through file its with the fcc. As we move into the june quarter, the company will continue the strategic focus on strengthening the balance sheet. We're exploring additional opportunities to reduce inventory levels through the expanded use of production, and planning technology. We're working closely with our customers to share the necessary information and technology. To reduce lead times and inventory levels throughout the entire supply chain. We're also completing an analysis of the impact of polyester price raw prices which are expected to increase by approximately 15% during the 2nd quarter of calendar 2002. We anticipate announcing the details of a price increase in the june quarter that will be passed along to the supply chain going forward. Well also continue to raise awareness for the positive benefits of caribbean base initiative ocbi. We conducted a seminar on the west coast that was well attended and we're seeing an increased interest in the region from downstream customers. We'll also continue to expand on the progress we're make nothing asia to capitalize on the growth opportunities that exist within that region. We are making progress towards implementing our asian strategy. However, we have not produced to the point where we were able to discuss the details. Given the positive trend in sales volume across all business units, the stage situation of currency rates and the -- the company expects per share performance absent unusual and non recuring charn toes fall between break even and net income of 3 cents per share in the june quarter. Carry, at this time, I'd like to open the floor for questions or comments.

Thank you. At this time the floor is open for questions or comment. Please press one followed by four on the touch town telephone at this time. Our first question comes from dennis rosenberg.

Thanks. Could you talk about your capacity utilization in polyester and nylon where it stands currents lee where it stood back in january and where you think it will go in the fourth fiscal quarter?

Sure. During the january period again keep in mind it was a five week month and we only operated four weeks of that. We probably operated the polyester facilities that are approximately 85% of capacity. Today, in march, we were operating the low to the mid 90s and in the june quarter we would expect to be operating close to that same level. On the nylon side again that business we have more excess capacity on the nylon than we do in polyester. We were probably operating at the high 70's to the low 80s. Today we're probably operating in the midmid 80s and that will probably continue into the june quarter as well.

Okay. The 15% price costin crease that you expecting in the raw materials in the current quarter, do you pass that on in gain margin or do you pass that on dollar for dollar and also how does that impact the value or the cost of the -- that you are are's producing and how do you pass that cost on when you sell it as a finished product?

First of all, the price increase -- we have not seen yet in our raw material base. We're expecting those to happen during june quarter. There are several announcements out by u.S. Manufacturers. Our expectation is that unifi would attempt to pass along where it can all price increases. And to the extent it's appropriate for us to increase our margins at that time we would like to take that opportunities. You can see from our financial results and certain of our product areas, we are not making a lot of money and we need to try to improve our profit margins where appropriate. At a minimum, we would like to pass along all price increases. That's primarily on the polyester area. We'll not expecting any significant increases on the nylon area.

And what about the ply facility and how does that impact?

Keep in mind that the ply that is made--hoo is part of the dupont alliance. Due upon is responsible for selling all of that out of the alliance facilities. So any price increase are dupont's responsibility to pass along. Unifi has more of a index pricing mechanism with dupont but there are limitations on the pricing increases that dupont would be able to pass on and long to unifi as purchaseseres. Keep in mind the alliances the -- to sell in the market.

You talked about improvements in the various joint ventures and foreign operations. Could you give us some indication as to the actual profitability currently of each of those and what your expectation are. Let's talk about brazil first. Keep in mind that brazil is an operation that unifi purchased several years ago that was a joint venture. They were losing on average $2.5 million per month. We've owned it approximately two years. This quarter our second quality are running less than 2% and we made a profit of $1.5 million after tax. We're pleased with what our brazilian subsidiary has been able to accomplish. The other operations we have, ireland, eve talked about that in the past. They are still struggling with a commodity base of products. Their limitations on value added is not as had great as it is in the u.S. They made money for the first time in the move march. Okay. They actually turned a profit. The first two months would have had them at a loss net for the quarter. It was not a large loss. And I don't have the number on the top of my head right now but it was not a significant loss. We would expect them to be closer to break even in the june quarter and could possibly turn a profit in the june quarter. Our uk operation which is a relatively small operation has a loss in the range of $50,000 or $60,000 which is getting closer to break even as volume is ramped up. Elite had a profit of around $200,000. In the quarter. Our parkdale joint venture lost about $1.5 million. Our sands joint venture lost about $1.5 million as well.

Thanks.

Thanks, dennis.

Our next question comes from ran.

Good afternoon.

I was trying the get a sense for what next year might look like. Let's assume we might have volume up 3% or something like that. Could you give me a sense for what might happen to margins. In compliance with -- we don't give guidance on projected future earnings other than in the press see lease when we do it for everybody at the same time. It's not appropriate for us to comment on that at this time. Can you give me a sense if you have up volumes, what whether you have to run working capital or do you think you could produce-- On a working capital level our expectation are today we'll take around $12-15 million out of inventories alone as we move through the next two to 3/4 and that's in anticipation of relatively flat volumes with where we are today. If our sales volumes were to increase, at worse, I think we're back to where we are today. If sales were to increase, our level of receivables would go up. But only because you've got more sales into the cycle.

Right. Is there anything that you can give me to understand what the upside leverage would be? If you just looked at our business on an incremental margin basis additional volume across the mix of products is probably an incremental variable margin of 23-25% on average. Volume means a lot of us to. Most of our costs are fixed cost related. So the additional volumes have significant leverage.

Right okay. Thanks.

Our next question comes from john smith.

John, your line is live.

Our next question comes from tom lewis.

Dupont's latest greatest announcement I just sought headline traveling yesterday -- does that have any baring on us?

You're talking about the head count reductions?

Something about shutting down some nylon capacity. Was that news to you and should it matter us to?

No. It doesn't affect our operations at all or our business with dupont. Most of the shutdowns that they have are nylon related. Not alliance related. The head count reductions, my understanding is little if any of those are related to the ken stone facility and most of those are related drikly to like ra..

And I would under our strategy to be that elite would be taking up that slack anyway.

The lycra is not something that they would make for us.

Okay. Could you give us a sense and in looking at revenue run rate here where pricing is generally compared with a year ago?

I can give you an estimate here. A little bit lower. On the average across the polly pound. Not a significant decrease but it is agents lower.

And okay the improvement that you noted in your uk operation, is that coming primarily from growth or you had mentioned right sizing it down -- coming from cutting?

We improved the cost structure of our uk operation last march. We realizing some of those benefits so those cost reductions. Most of the improvements that we're seeing in the uk operation are from growing sales volume and taking on new customers in that area.

Okay. Thanks a lot.

Our next question comes from john smith.

Good afternoon. Just a couple of quick things. Do you have projection that you put together on where our revolver is going to go over the next 3-6 months? Based on the cash flow we would expect that the revolver at the end of the june quarter be close to $20 million. At the end of the september quarter, it would be close to zero. Absent from a anything else from a cap x standpoint or any other type of cash expenditure. But we're throwing off approximately $20 million of cash per quarter and our cap x for the year to date is a little over $6 million for the first nine months. We're not spending a lot of money on cap x. We think we're spending the appropriate amount of money today.

Where do you put that on the balance sheet? The consolidated balance sheet you've got here, where is the revolver? It's in long-term debt.

I thought maybe it was. One other thing, could you speak just for a moment to that potential impairment charge that you talk bchl the nylon impairment charge.

The accounting standard was released last year's fast 142 and it required that all companies look at any goodwill they have on their books for him pairment and the way it described that you look at impairment is just like if you were looking at it as a business combination and you have to allocate the purchase price of the fair value of the business. You have to establish what the fair value of the nylon business is going forward. This is a business that has been significant affected by the trend -- movement to kaub casual day where hosiery sales have fallen off significantly. By the end of the june quarter, these accounting standards require that we look at that goodwill to determine whether it's impaired and in looking at the allocation of a purchase price at that time. Again, the write off would be a non cash write off. It has no affect on cash whatsoever. We have not determined yet the measurement of the amount of that loss that would be taken in the june quarter. But my expectations are based on the calculations we've made to date that it be could be all of the goodwill that could be written off.

Okay. Thank you very much. The floor is open for questions and comments. If you have a question or comment, please press one followed by the four on your touch tone telephone at this time. The next question comes from karen more lee..

It's karen morely from meryl lynch. I was wondering on the fas 142, did it have a positive impact on your earnings this quarter?

That was eliminated at the beginning of the year.

Okay. Thanks.

Our next question from steve.

Good afternoon, gentlemen. Just a question about brazil. You stated you were going to move four machines there and I'm curious what the opportunities and the risks are associated with that and if there are any sort of non recuring costs associated with doing that and when they would be recognized?

There is very insignificant cost of moving machinery. This machinery is being created and moving as we speak. It should be up and running hopefully all of it by the end of december. There is no downside risk to moving those. They were not being utilized in the location where they came from so it's a only an up size to it.

How big is the opportunity?

Hold on. One second. Probably the potential of producing 10 million pounds per year with four machines.

Terrific. Thank you, gentlemen.

Thank you.

Our next question comes from steven corn. Please state your question.

Hi, bile. Can you give a little bit more grand larry as to the hosiery side. Is it improving as well or are the industrial pieces of nylon growing faster than hosiery is declining and can you talk about progress in shifting capacity from hosiery to other uses?

I would tell you that our nylon area has remained relatively stable throughout the year. We've seen very little volatility in it. We were actually pleasantly surprised with what's happened in nylon for the year. We were actually expecting our volumes to fall off a little bit. They have stayed very stable. The hosiery business has deare continued to decline. What has helped is that improvement in our sales of sock yarn. Which is nylon related so you can imagine women are wearing less hosiery so the other side of it is that the socks have improved a little bit. We've also made some improvements into the seamless apparel area. That area has never gotten to where we think it can but we're making progress. The basic nylon area does not have a big use on the industrial side. We've got a joint venture that we started with sans that is now being put in place and erected and the machinery is being ramped up. That should be up and running and producing a profit we would expect by the september quarter. That's focused on the industry area.

Okay. And when you look out into the future, do you expect to continue decline in the pure nylon business as you were expecting for this year?

Based on where we are today, I would expect it to stay relatively stable and if it does decline, it's a small amount.

Thank you very much.

There appear to be no further questions at this time.

Again, I would like to thank y'all for joining us for this conference call. Should you have any further questions, call me directly. I would like to conclude our call at this time thank you.

Thank you very much. This does conclude today's call.