Unifi Inc (UFI) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Unifi first quarter 2004 conference call. At this time all parties have been placed on a listen-only mode and the floor will open for questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host, Mr. Willis C. Moore. Sir, the floor is yours.

Thank you, Autumn. Good afternoon. Thank you for joining mere for Unifi's 2004 Q1 conference call.

As you know, certain statements included herein are forward-looking statements within the meaning of the federal securities laws. Management cautions that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

For the first fiscal quarter of 2004 ended September 28th, 2003, the company announced a net loss of $4.6 million or 9 cents per share, compared to net income of $4.3 million, or 8 cents per share, for the prior year September quarter.

Reported results exceeded expectations provided in early September, when the company advised that it anticipated finishing the September quarter with a net loss in the range of 10 cents per share to 16 cents per share for the quarter. The primary reasons for slightly beating the guidance provided relates to stronger than expected September results of our equity affiliate Parke Dale, and from the DuPont alliance.

Net sales for the September quarter were $180.5 million, which represents an 18.6% reduction compared to the $221.5 million in net sales for the prior year September quarter. Total company volume for the September quarter was 16% lower than the prior year quarter.

Domestic volume was softer than our foreign volume, which was buoyed by the strength of our operations in Brazil. Our Brazilian operations continue to perform Well, and demonstrate a strong mix of value added products.

The decrease in domestic and European sales volumes for over the prior year quarter can be attributed to several factors, including continued increases in imported fabric and apparel; the financial difficulties of certain of our customers; creating tightness in the inventory chain; and the overall erosion of business occurring in the domestic textile and apparel industries.

Net income in the quarter was also negatively impacted by reduced earnings from the company's unconsolidated equity affiliates. The primary contributor to the decline related to Parke Dale America where you Unifi's share of income was $900,000 in the current quarter compared to $4.1 million in the prior year September quarter.

Overall, the company reported income of $257,000 in the current September quarter, compared to $3.6 million for the prior year quarter.

Included in the September operating results is a pre-tax benefit, included as a reduction of cost of goods sold of $9.6 million, generated by the company's manufacturing alliance with DuPont. This benefit is approximately equivalent to the benefit of $9.9 million generated in the prior year quarter.

The company ended the September quarter with cash on hand of $72.3 million. The company also continues to have no amounts outstanding under its bank credit facility. We believe that our ability to generate cash and maintain a strong balance sheet on lower sales revenue validates our decisions and actions over the last few years, and confirms the advances that we've made in many of our strategic initiatives are creating a stronger, healthier Unifi.

Although we operate in an extremely challenging and volatile industry, global consumption of the types of products we produce will continue to increase. Worldwide polyester consumption is expected to grow at approximately 6% per year, and polyester should represent half of all fibers consumed by 2010. Consumers want the convenience, comfort of synthetic fibers. So new products will remain a priority for you Unifi.

Going forward, we will defend our domestic business to the continued development of downstream relationships with US based brands and retailers. We'll also become more involved in the garment sourcing process to help pull our value added products through the supply chain, regardless of whether where the fabric or apparel is ultimately produced.

We will also continue to develop the opportunities that exist in the Americas. The speed to market advantages and favorable and tax legislation offered the region will allow for a sustainable base and we will continue to focus on growing our customer base and expanding our product offerings in this region.

In terms of China, we continue to move forward with our negotiations and due diligence with could you Ka Ping (ph).. Participating in China's growth and becoming a cost-effective supplier to brands and retailers source and apparel programs from China is critical to our long term success, and we are confident that could you Ka Ping will provide us with a high quality base of operations.

During the September quarter, the company repurchased approximately 1.1 million shares of its stock authorized for purchase under the you Unifi share repurchase program for that approximately $7.5 million. Looking forward, our industry will continue to face extremely challenging and volatile conditions, both here and abroad. In light of this, we will continue to evaluate the business environment and take the necessary actions to structure our organization and our operations to reflect the projected demand of the markets that we serve.

Again, thank you for your time and interest, and I would now like to open the floor to any questions or comments.

(Operator’s instructions) Thank you. Our first question comes from Dennis Rosenberg.

Hi, Billy.

Hi Dennis.

Could you elaborate about what sort of steps you might do to right size the business in the United States and in Europe? And could you refresh our memory as to how much costs Unifi taken out to date? The initial numbers were $29 million, and then there was some secondary layoffs. So bring us up to date on that.

Great question, Dennis. Starting in April, we announced or initiated a program within the company to eliminate both domestically and in Europe approximately 15% of our work force.

We got most of the cuts done by the end of June in the United States. The ones in Europe took a little longer and some of those weren't actually made until closer until the end of the September quarter. And the total savings that is expected to come on an annual basis from those head count reduction was initially $29 million.

Unfortunately, since the time we made those cuts, volumes have fallen off approximately 18% in both United States and in Europe. And in the month of September -- I think it was early September -- after we had just cut effectively 800 people in the United States, we made the decision that we, based on the fact that volumes had fallen, needed to do more, and so we effectively reduced approximately another 200 people in September.

Unfortunately, the volumes are still falling slightly. They have not stabilized and the company is still taking a hard look at whether any further actions can and obviously they should be taken. We've got to do something to return to profitability, and I don't think you're going to do it from growing the top line. So the only way we're going to be able to do that is to continue to work and cut costs.

So I would say the company has to take another hard look at head counts if we're going to retain that $29 million of savings, and that's Brian's goal.

The 200 that was taken out in September, how much savings did that generate?

Again, I don't know an exact number, but if you could just do the math. About $20 million of savings came of that 29 when we first announced from the United States when 800 were to be cut. So the 200 would be proportional to that.

Okay. And could you give us some more specific update on what's going on with the due diligence in China and what the timetable looks like now?

Yeah. Another good question, Dennis. We had our Chinese partners here I guess about two to three weeks ago. They came over doing their own due diligence. This is a big investment not only for them or a big partnership not only for them but for us. So they came over with a group of approximately 6 to 7 of their senior or officials within the company and within the Chinese government to make sure Unifi is a company they want to do a deal with.

They left with the same feeling we left there. They do want to do a transaction and we want to do a transaction.

We've been in the middle of due diligence I think since the last time we spoke on this conference call and it continues. Ernst and Young is helping us with the financial side and Fresh Fields (ph) is helping us with the legal side.

And as I said at the last conference call, the due diligence will not be a simple process. It's continuing. We continue to make progress with it. As a matter of fact, our CEO, Brian Parke, Chairman of the Board, Don Orr and Billy Armfield, another of our directors, are on a plane Sunday headed over to China, to visit the facilities that we're hoping to, again, close the transaction by the end of December. That's what's in the letter of intent. As far as I know, legally, there has been no push back in the date.

I would tell you it's conceivable that as long as the due diligence has taken and it may continue to take, that date of December 31st becomes a little bit more doubtful every day. But there has been no change in the date from a legal perspective. We're still committed to the December 31st date.

Okay. I'll come back later. Thanks.

Thank you, Dennis.

Thank you. Our next question comes from Maryann Minbelileo (ph).

Hello. I was wondering Billy if you could comment on your operations in Thailand, what are the economics there and how does that run through your P&L your operations or your numbers?

Sure. When we first did the transaction, it's really not a legal structure. It's not a partnership or joint venture, so there's no consolidation accounting or combination accounting. We entered an agreement that was a technology sharing arrangement, and, for the technology we brought to the table to help net them texture fiber to make it a more value added product, we have received a technology fee, and that fee has been reflected in our financial statements down in other income.

I want to say the fees to date are probably somewhere around $1.75 million, $1.8 million.

Okay.

Going forward and this quarter was really the first quarter that we've actually got inn to the point where we are start to go try to sell the fiber that's produced in that plant, to some of our customers-- both within Thailand and Asia as well as Europe. I'm not aware of any coming back to the US, but there's it is being sold in Europe, or trying to be sold in Europe. And those programs, we would get revenues and profits on a formula base, and it varies product by-product.

Okay. Any kind of idea you can give us as far as what this would amount to in the near firm?

What I've seen so far, it's not material to our financial statements. If it gets up and running and becomes a large program, it could help. But today, it's not a significant contributor, nor do I expect it to be by the end of this fiscal year.

Could you also comment on the DuPont and Coke transaction or the possible transaction and how that would affect you and the facility that you have got in alliance with DuPont?

Certainly. Again, that's an excellent question. You know, again, I'm not privy to the negotiations that are going on between DuPont and Coke, but from reading the papers and just like everybody else does, it looks like Coke is in negotiations with DuPont to buy their DTI business, or in vista as they call it today. They're in the middle of due diligence.

Whether that transaction is completed or completed at a price that's been negotiated out, I don't know, but at some point, if that transaction is completed, Coke would be you Unifi's partner in the alliance.

It should not change the way the alliance is run or any of the economics of the alliance. There's nothing in the agreement that prevents DuPont from being able to sell it to Coke, as far as I'm aware. So it would just continue with Unifi having a partner in Coke as opposed to partner in DuPont.

The only thing I would add to that from Billy Moore's perspective and not necessarily from the perspective of the company, I would think that would be advantageous to Unifi. Whenever you have a partner that wants to be in the business, it's a better opportunity. DuPont's made the assertion that they want out of the business and I think trying to Sell it to Coke is an indication. I think our alliance would be benefited by having Coke as a partner with a focus on growing the business long-term both here and in the Americas.

Okay. Also the $9.6 million from that from that alliance, is that cash.

It is cash.

One more. The debt balance is it approximately 266 million?

The long-term debt on the balance sheet is $258 million and there's a current (inaudible) long term debt of $7 million. The major components is there's $250 million worth of bonds that come due in 2008, approximately $3 million to $4 million of a sale and lease back transaction that was entered back in 1998 and is very small payments, like a 20-year amortization. And the other piece is a loan in Brazil, and on the other side of the balance sheet, on the other side of that loan, there's cash sitting in an account to service that debt. From a net debt basis, that's not outstanding.

Okay. And capex was approximately what?

Capex in the quarter was $2,354,000.

Thank you.

Certainly.

Our next question comes from Robert Crawford

I'm sorry. My question has been answered.

Okay. Thank you. One moment, please. And our next question is from Dennis Rosenberg.

Hi again. In the past Parke Dale has not been as affected by the import situation because I guess most nits, most cotton knits are produced in the western hemisphere. So what happened now that the competitive situation seems to have gotten worse or is there something else there ?

You know, as far as Parke Dale is concerned, they have an extremely poor -- and typically we have a quarterly board of directors' meeting with Parke Dale before I have this conference call. For reasons, mostly Unifi reasons, we weren't able to do that this quarter. So I'm not as totally conversant on their issues as I typically would be.

But just from looking at the financials of Parke Dale, they have an extremely difficult July and August period, primarily just because of slow volume, Dennis, and I think consumer demand and just excess inventories in the chain probably affected that to a great extent. They had an extremely strong September month . One of the reasons we actually -- we provided the guidance of 10 to 16 cents a share was off was because the Parke Dale numbers came in extremely strong for September month.

Their business I think is relatively stable. I doubt if you see as strong an earnings performance as you had last year, just because of the fact that cotton is up to 78 cents a pound today. So Unifi got a much higher raw material price in that area now than you had this time last year. So I think you can see some pressure on maybe volumes a little bit, because of that raw material pricing.

Okay. You identified the problems, I guess publicly, a month ago, and yet your inventories look like they swelled in the quarter.

They have, and -- we had a board of directors meeting today and one of my comments to our board of directors and to the management group sitting in there is we need to refocus our attentions on inventories . There's easily $6 million to $8 million of inventories that we need to take out of that and turn it back into cash. That's an extremely valid comment.

Okay. Do you care to give any thoughts as to what the second quarter might look like?

No, I do not.

Okay. Thank you.

Thanks, Dennis.

Thank you. Our next question is from Ran Jessing

Hello.

Good afternoon, Ran.

This 1.5 million shares you did in the quarter. Can you talk about pace going forward. Does it look like -- did you guys have a board meeting today?

We did.

Does it look like we are owe going to sort of be at this level or what's going on?

We actually purchased one point -- 1.1 million shares in the quarter.

I thought that was 1.5.

It was actually 1.1 and I think it was (inaudible) million.

Okay. But just directionally?

Directionally, there's been no change in at the board level. They've left it at the discretion of management. I'm not aware of any changes in direction that the company plans to take. It's clear it's not coming from the board to change direction.

So my expectation should be that we'll sort of see this million shares a quarter type of thing?

The only thing that I would say that would change it, management is focused on making sure we have enough cash if cash is needed to do the Chinese transaction, and as the company gets closer to maybe pulling the trigger on that Chinese transaction, you could see it slow.

Right. Can you just give us any sort of range on that? I mean, ten to 25, 25 to 50, 50 plus?

On the Chinese transaction?

Yeah. Can you frame it at all?

I can't. I'd love to do it for you, ran, but anything I told you would be purely a guess and either lead you in maybe the right way but also could lead you in the wrong way. I just don't know. And quite frankly, I'm not close enough to give a good guess.

Okay. Any sense for how Parke Dale is doing in October, is still sort of strong with the September?

I have not seen any financial results for the month of October for Parke Dale.

Okay.

The only thing I know is cotton is still, it's at pretty high prices, although I would tell you Parke Dale does an excellent job of hedging their raw materials, so they probably are in a much better position than most of their competition, just knowing how they operate. Extremely good operators.

Okay. On the China situation, I guess my sense is that the Chinese government is going to be sort of important in terms of blessing the transaction. I sort of was under the belief that there were very few, if any, like transactions where an American company or western company has taken a large stake.

Any sense for whether on their side of it would be interested in blessing the transaction or--?

When they came over, one of the guys that came was the head of the Chinese government.

Right.

And he was extremely impressed with what he saw here.

: Right.

I mean, when he left, his comment was, we will complete this transaction. And so he is he's going to do everything he can do to help get it done.

Right.

What goes on behind the scenes in China, I'm sure neat one of us knows the answer to that. But I think the expectation is the Chinese want to do this transaction as badly as we would like to do it.

Okay. What should be our expectation as it relates to how working capital will impact the cash flow this year? I know you just mentioned on the inventory side, but is the business slowing, I guess my expectation would be that we would be able to generate some cash from here.

That would clearly be the appropriate expectation. From a management standpoint, with business going down, we have all intentions of driving down inventories. Unfortunately receivables will go down on their own. But we've done a good job managing payables and accruals, probably a much better job doing that than we have managing the inventory levels and we've got some worked to there.

Going back to the question on share repurchase, I mean, I think a large part of the share repurchase is going to have to deal with -- if you look at this current quarter, and let me just walk you through the numbers so you understand why it's an issue.

I mean, the cash from operations, if you take the -- and again, you need to take the pre-tax -- when you kind of look at cash flow from our business this year, you need to kind of take the pre-tax number as opposed to the net income number to add depreciation back to. Because the tax benefit that we're realizing or recognizing in our financials is purely just an accounting adjustment. We have no tax losses or have not paid taxes in the past we carried these losses back to free it up.

So it's purely accounting. So if you look at the pre-tax number and add about $16 million for depreciation for the quarter, and we use -- unfortunately we tied up about $3.5 million dollars in working capital in the quarter, so that our net was only $7.6 million (ph). We used $2.5 million dollars for capex and we used $7.5 million dollars for share repurchase.

We ate into cash to the extent of $4 million for the quarter. And that got the board's attention, it's got management's attention. We've got to management our working capital better not to tied up $3 million dollars—we can’t afford to do that. And to the extent we do that, we should have some money available to buy shares.

And management is very focused on getting the Chinese transaction done. That's the most important thing. And we're not going repurchase shares if we think that will impinge on our ability to get the Chinese transaction done. But that's our number 1 priority today.

)) Ran Jessing: Yeah, I know. You don't happen to have the working capital items from last year?

I sure do. Last year this quarter, we started with net income of $4.3 million.

No, no, on the asset side, like receivables last year.

Last year we freed up $17 million of working capital in this quarter, big number. And what I was going to say, this year we threw off $7.6 million of cash for operations. When you adjust it, last year it was $42.5 (ph)

Right. Okay.

And so we need to get back to where we're freeing up that working capital every quarter now.

And quickly, what should be the capex expectation for the year?

I would the number of around $12 million for the year.

Thanks.

Sure.

Thank you. Our next question is from Tom Lewis.

First question, could you talk about how your dyed yarn (ph) operations are doing now as -- as compared with over the course of the quarter?

Our dyed yarn business now is much better than it was in the July and August time frame. It's pretty much improved as we've gone through the quarter. Some of our issues that we've had in the dyed business are not -- I hate to say this say, are not always directly Unifi issues. We've got some customers in that business that have had some financial issues.

I wanted to ask you about one of those.

And again, I'd prefer not to talk about individual customers, but I'd rather do it in general. We've had some customers in that segment that have had some financial difficulties that obviously have had to manage their cash flow and their working capital extremely tightly.

Right.

And it's caused some short term pains for us in the July/August period. I think some of those issues are behind that company, and we've seen more normal purchasing patterns as we've gone through September and October.

Okay. Is it any difference this improvement any different on the automotive side as opposed to the fashion side?

Actually, it's on both sides, both the automotive and the furniture upholstery business have picked up as we go through September and October.

I guess the only other thing I would ask, we've been talking about getting into the garment sourcing business, it seems for a year and a half, two years. Do you have anticipate that being a source of operating income to you or is it just going to just be something you do to help drive business?

You know, I would say initially for the first year or two, it would not be a big source of income for us. Long-term, I think it could be a fairly significant contributor to our earnings.

Okay.

I think we have some unique opportunities through the relationship we have down-stream with retailers and branded manufacturers, and the sourcing concept seems to be going extremely well. There is a guy that works for us here named Ron Smith who has been given that responsibility. He's extremely bright, young guy who is going to do a hell of a job with that business.

Already. Thanks.

Okay. No problem. The next question is from Dave Richards.

Hi Billy, how are you?

Fine, David. I hope you are.

Fine. I wanted to talk to you a little bit and find out more, you talked about customer attrition in terms of volume. Did you see just like an across-the-board type of number? Or was it more focused in some areas maybe significantly more than the 18% volume loss or how did that work out?

It was pretty much across-the-board that we had volume declines in the US. Certain areas were impacted more heavily than others. A good example would be the sheeting business, where certain of our customers had historically been producing their sheeting in the United States. We're seeing maybe in this quarter more of a move to sourcing that sheeting product off shore as opposed to the US.

Okay.

And so we probably saw a bigger decline in that than the 18% that was felt overall. But pretty much every segment of our business was down during this quarter.

Okay. The other thing, I understand your hesitancy to give an estimate on the cash for this Chinese JV. But is there a thought that, looking at the revolver and the cash, at this point is the thought that if you did need to have more than just cash used for the JV, would you then use the revolver? Or would there be some other form of financing that might come into play or how do you see that happening?

I will tell you today that Unifi will look at every opportunity it has to obtain financing without using its revolver or using its available cash to get this transaction going.

Okay.

And to the extent there's any debt, we also would try to have it non-recourse back to the US parent.

Okay.

We're going to look at everything from a creative standpoint that we can to try to get this transaction done in the most economic means and preserving as much cash as we can.

You talk about non-recourse. What are the opportunities for any type of financing in terms of the Chinese government maybe not so much issuing debt but working with them in terms of winding up -- lining up financial partners in Asia? Is that part of the process then?

There's not so much finding financial partners in Asia, but Unifi will actually do that itself. We won't ask the Chinese government to do that. That's something we will do ourselves.

Fair enough. The last thing, if you don't mind, DuPont took a pretty substantial write down in their assets in the vista business. How do you see that playing out relating to, one, the assets in the alliance on DuPont or Coke side, depending on how this turns out. And then two, how do you see that playing out for any revision to your own balance sheet in light of the write down of assets?

You know, I wasn't aware DuPont took a write down of assets, but --

I think the number outside of good will looked something like a billion and change before tax.

Okay.

I think a lot of it was they took a couple hundred million in good will, but I think there was some asset write down as well.

The alliance we have with DuPont is not a legal structure to where we share legal assets.

Right.

So they're write down really has nothing to do with our alliance. Our alliance, we share cash savings from manufacturing, effectively.

Would there be any thought that in terms of some of the things in '05 that are part of the alliance agreement, is there any thought that DuPont may change the valuation of the assets that are in the alliance, that might be come into play in the renegotiation of what pricing and that sort of thing?

With respect to put price in 2005, I really don't know enough to comment on that.

Okay. Fair enough.

Okay.

Mr. Moore, we appear to have no further questions.

Again, Autumn, thank you very much. And again I'd like to thank each and every one of our shareholders at Unifi. Look forward to a conference call at the end of our second quarter and hopefully we'll have much better financial results to discuss at that time. Again, thank you and have a nice evening.

Thank you. At this time the Unifi conference call has ended. You may disconnect or lines. Have a great day.