Unifi Inc (UFI) 2010 Q1 法說會逐字稿

Good morning. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Unifi first-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Mr. Smith, you may begin your conference.

Thanks, operator, and good morning, everyone. Joining me for the conference call today is Bill Jasper, our President and CEO. During this call, we will be referencing presentation materials that can be found on our website at unifi.com. The presentation can be accessed by clicking the first quarter conference call link found on the home page. I hope that you have the presentation available, as it will be easier (technical difficulty) the information discussed in this call.

Before we begin, I need to first advise you that certain statements included herein may be forward-looking statements within the meaning of federal securities laws. Management cautions that these statements are based on current expectations, estimates and/or projections about the markets in which the Company operates. Therefore, these statements are not guarantees of future performance and involve certain risks that are difficult to predict. Actual outcomes and events may differ materially from what is experienced, forecasted, or implied by these statements. I direct you to the disclosure in our 10-Qs and 10-Ks regarding various factors that may impact these results.

Also, before we get into the details, I'd like to provide you with a very brief overview of the quarter. Although the revenue for the current quarter declined 15% compared to the prior-year September quarter, the Company is reporting significantly improved operating results. Some of the factors that helped drive the improved performance include the following.

Compared to the prior-year September quarter, gross margin increased $6 million to 13.5%, representing a 570 basis point improvement. This increase was the direct result of fundamental improvements made to our operating costs, coupled with raw material costs well below the historic highs we experienced a year ago.

On a quarter over current quarter basis, our polyester segment recorded its second consecutive quarter of volume growth, while mix enrichment in our nylon segment resulted in improved pricing. And finally, results in Brazil, which continues to grow in terms of importance and contribution to our overall business, were strong due to year-over-year market share growth and cost improvements.

We will provide additional details on the quarter as we review the financial results that begin on slide 3.

Net sales for the current quarter were $143 million, a decrease of $26 million or 15% from the prior-year September quarter. However, as I mentioned earlier, this marks the second consecutive quarter of sales increases (inaudible) in the trailing quarter despite our normal seasonality. Typically our March and June quarters are our highest-revenue quarters, while September and December are normally 5% to 10% lower. This year, sales for the September quarter increased $3 million compared to the June quarter, which was already $21 million ahead of the March quarter.

Although retail sales are still below 2008 levels, at least in our major segments, we've begun to see month over trailing month improvements in apparel and home furnishings. In addition, the government's Cash for Clunkers stimulus program led to increased sales of automobiles for part of the quarter and increased production levels to replenish these inventories.

The Company is reporting net income of $2.5 million or $0.04 per share for the quarter, and posted a net loss of $676,000 or $0.01 per share for the prior-year September quarter.

As mentioned earlier, our conversion margin for the quarter was positively impacted by lower polyester raw material pricing, which was approximately 30% lower than the prior-year September quarter. As you may recall, raw material costs in last year's September quarter were based on oil prices that were in the $116 to $135 per barrel range, and pre-recession demand levels on the petrochemical supply chain. Raw materials for this September quarter were based on oil prices around $70 per barrel and significantly reduced global demand requirements. Going forward, we are working to retain these margin levels, so we do see some negative pressure on the horizon.

In the December 2009 quarter, we expect volume declines related to normal seasonality to negatively affect margins. And longer-term, we see pressure related to a general upward trend in raw material pricing, resulting from the recovery in global demand for petrochemicals.

SG&A expenses for the quarter were $11.2 million, which were up slightly compared to the prior-year quarter and primarily as a result of an increase in non-cash compensation (inaudible) of approximately $0.5 million.

Turning to page four, quarter over prior year quarter volume declined 5% on a consolidated basis, while overall pricing declined about 10%. The volume declines in our domestic polyester business are starting to come in line with the decreases in year over year retail sales, which had been running 5% to 7% in apparel and approximately 10% in home furnishings.

It is also important to note the 22% quarter over prior year quarter volume decline in the nylon business is a bit misleading, as nylon volume for the prior-year September quarter was exceptionally strong, primarily due to the performance of the (inaudible) category during last year's quarter.

Compared to the June quarter, the 3% increase in consolidated volume was partially offset by a 1% decrease in pricing. The quarter over trailing quarter improvement in the polyester volumes reflects better alignment with demand across the supply chain, market share gains in certain categories and continued improvement in retail trends, especially in apparel and home furnishings.

In addition, the previously noted double-digit increase in North American automotive production in August and September from the Cash for Clunkers program helped improve volumes into the auto segment. In September U.S. car and light truck inventories dropped to a low of 30 days before moving back to more normal levels (inaudible) 50 days in October. Our belief is that the Cash for Clunkers program pulled demand forward and gave auto production a temporary stimulus, but we believe that sales into the automotive segment will continue to lag until we see further economic recovery.

The quarter over trailing quarter improvement in our nylon pricing is mix-related and reflects increased sales of our high-value (inaudible), which are a primary component of (inaudible) knit apparels. The sock and hosiery segments continues to linger behind prior-year levels as demand at retail remains soft.

Now we turn to the balance sheet highlights (inaudible) on slide 5. Cash on hand at the end of the September quarter was $55.7 million, representing an increase of $35 million over the last 12 months and an increase of $13 million from the end of June.

Cash on hand was positively impacted by a $1.9 million benefit from improvements to the exchange rate for the Brazilian real, which has gone from 1.9 real to the US dollar in June to 1.78 in September. The increase in cash on hand was also driven by strong EBITDA for the quarter, which we'll talk about shortly.

Uses of cash for the quarter include the following. $1.3 million was invested in working capital, excluding the effects of accrued interest in currency in Brazil to support the increased sales and production volumes. $2.1 million of capital expenditures was spent on maintenance CapEx and the previously discussed [POY] production upgrades in our polyester business. $2.4 million of cash tax payments were made in Brazil, and we repurchased $500,000 worth of 2014 Senior Secured Notes at market price.

As of the end of September, the Company had assets held for sale related to certain assets remaining at the former (inaudible) site. We expect to close on these assets within the next three to six months, with proceeds being approximately equal to the clearing value of $1.3 million.

Total long-term debt as of the end of September was $185.6 million, a decrease of $1.6 million from June. Net debt stands at $124 million, representing an improvement of over $32 million during the last 12 months. Under the revolver, we still have no outstanding borrowings and our current availability is $66 million.

Turning to slide 6, the Company recorded $2.4 million of earnings and received dividends of $1.6 million during the quarter from its 34% membership interest in Parkdale America. Included in these results, Parkdale America earned cotton rebates of $4 million under the cotton rebate program. Since it is Parkdale America's policy to recognize these rebates into income only after the cotton has been consumed into the spinning process and the proceeds have been utilized to invest in qualifying capital expenditures, as required by the program, only $400,000 of the rebates were recognized in the quarter as reductions to cost of sales. (Inaudible) of these rebates is just under $200,000.

The remaining $3.6 million of credits claimed based on cotton consumed but with qualifying [expenses] have not yet been (technical difficulty) will be deferred until qualifying capital expenditures have been made.

On a related note, Parkdale was notified during the quarter of an up to $8.2 million of CapEx (inaudible) in 2008 had been disqualified from inclusion under the programs due to the commitment date of the expenditures being applied to the (technical difficulty). Parkdale America is appealing the rulings, but even if the appeal is unsuccessful, they expect future capital expenditures will be sufficient to (inaudible) the benefit of these (inaudible).

The Company has also been seeing improvements in our nylon joint venture in Israel, as we have worked with our partners to restructure (inaudible) and further align the assets to meet our nylon POY demand.

Turning to slide 7, the Company is reporting adjusted EBITDA of $15.1 million in the September quarter, which exceeds the revised data of $13 million to $14 million provided on September 17. This EBITDA reflects the improving buying trends in the quarter, the benefits gained from our quality and cost improvement programs and the positive impact of better capacity utilization on our profitability, as we've gained market share within many of our markets.

Now before I turn the call over to Bill, I would like to provide a brief update on some of the key dates for this quarter. We expect the final results for the September quarter to be filed in our 10-Q no later than Friday, November 6, and our quiet period for the December quarter will begin on December 23, extending through our earnings release conference call, which is currently scheduled for February 4, 2010.

With that, I'd like to turn the call over to Bill for a few comments. Bill?

Thanks, Ron, and good morning, everyone. I'll be touching on a few market-related topics. Although there have been modest month-over-month improvements in retail sales with apparel, year-over-year sales are still depressed and brands and retailers are cautious and somewhat uncertain about the level of anticipated consumer spending for the holiday season. As a result, retailers are managing apparel inventories at lower levels, [delaying] new product development and ordering replenishment stock carefully.

However, the retail apparel inventory drawdown impacting our business for the last 10 to 12 months appears to be abating, and we see our sales [with the] apparel stabilizing at about 7% to 10% below pre-recession levels in the [quarter current].

Ongoing sales in both automotive and home furnishings segments remain well below historic levels despite recent signs of improvement. That said, we expect our overall North American sales to continue a slow recovery through the next several quarters as the US economy gradually improves from the recession.

In Brazil, our sales have recovered after two slow quarters, driven by significant share gain and a more robust economic recovery. Accordingly, we expect continued year-over-year growth in our revenue (inaudible) over the next several quarters.

Our (inaudible) business (inaudible) is operating on plan and is expected to grow, with several new programs nearing adoption. We recently introduced Repreve polyester staple fiber in China, adding to the most extensive array of recycled fibers in the global textile marketplace.

As retailers have reacted to the global economic downturn by focusing on more basic, lower-value offerings, the adoption cycle of some of our PVA products has also slowed. This has resulted in decreases in our PVA volumes, though at a slightly lower rate than in our overall volumes. We remain committed to our PVA growth strategy and will continue to invest in the development and marketing of our PVA products.

We believe in the principles of sustainability and environmental responsibility, and our portfolio of Repreve 100% recycled products will provide us with a sustained competitive advantage in this important and growing area.

We continue to make progress on finalizing the terms of the Hanesbrands supply agreement. As previously noted, all significant business terms of this agreement have been defined and agreed in principle, and we now expect the supply agreement to be finalized within the December quarter.

There have been some positive changes in our equity affiliates as well. We've recently completed an agreement to shift one-third of the spinning assets of our nylon POY joint venture in Israel to a newly-formed POY joint venture with our partner Nilit here in the US. This new configuration will allow the UNF joint ventures to produce (inaudible) compliant yarn, and shortens our supply chain, resulting in improvements in the working capital, flexibility and financial results of our JV.

Also during the quarter, Hanesbrands and our Parkdale America JV announced they have entered into an agreement for Parkdale America to buy most of Hanes Brands' (inaudible) cotton yarn manufacturing operations, and for Parkdale America to supply a substantial amount of Hanesbrands' Western Hemisphere yarn needs.

Parkdale America is expected to take over operations of three Hanesbrands [cotton plants] and supply Hanesbrands from those facilities (inaudible) with other existing US production plants.

While the financial terms of this agreement have not been made public, the funding required to finance this purchase and the related working capital will likely limit dividends in the short term. We do, however expect, this agreement will substantially improve the financial performance of the JV, and ultimately the value of our own (technical difficulty).

With the elimination of Chinese apparel quotas in January of 2009, (inaudible) of man-made fiber apparel has dropped after several years of growth. This was not unexpected, especially considering the recession-driven trend to lower-cost apparel. However, the fundamental advantages of (inaudible), which are its competitive costs and (inaudible) more flexible supply chain, remain attractive to apparel manufacturers. We believe there will be long-term growth of the region and remain committed to establishing a base of operations in Central America.

After assessing several options, we have decided our entry into Central America will be a greenfield approach, with initial investment well below our original $10 million ceiling. At present, we are looking at the specific commercial structure and asset mix required to properly service the market. Currently, approximately [8%] of our US production is shipped directly to fabric customers in the (inaudible) regions.

Our goal for this greenfield operation is to support and grow these volumes through fast response and quick-turn production. We have already begun transitioning the (inaudible) models by establishing a local warehouse, and we expect the greenfield to be operational within the next six to nine months.

Finally, I'm very pleased with our first-quarter results, including EBITDA significantly better than last year's first quarter, despite 15% less revenue. These results reflect the substantial improvements we have made to our base business through profitable share gains, aggressive cost and working capital improvements, our disciplined and (inaudible) improvement process, and by driving (inaudible) control through our organization. We will maintain focus on our continuous improvement efforts and expect to build upon our success in the future.

As we look forward, based on modest improvement in consumer demand, generally rising raw material costs and the seasonal impacts of typical holiday shutdowns throughout the industry, we estimate adjusted EBITDA for the December quarter will be in a range of $10 million to $12 million. We are also reaffirming our adjusted EBITDA estimate for the 2010 fiscal year to be near the higher end of the guidance provided in our previous earnings call, which is $50 million.

With that, I will turn the call over to our operator, who will open the floor to questions.

(Operator Instructions). Bryan Hunt.

Good morning. Oh, that's much clearer, thank you. Ron, I was wondering if you could talk about maybe the receptiveness of customers to price increases, one, given the increasing volumes you're seeing sequentially; and, two, I guess the likely cost increase you're going to see as petrochemicals move higher. Thanks. I've got a follow-up.

I think at the end of the day, obviously where raw materials have gone, we saw them tick up during the quarter. We had a price increase in September based on those raw materials going up, and we continue to kind of fight that share versus margin battle. I think it's very important to us strategically in our business. We've said all along that as raw material prices go up, we pass those prices along; as they come back down, we adjust.

So we are constantly in that battle of making sure we're able to pass that along, because it's not fair to anybody in the supply chain not to be able to move those raw materials. So I think that was a big part of the quarter.

I think where we see raw materials in the future going, they've ticked down slightly in October, they will go back up in October/November -- I'm sorry, in November/December. And then with oil where it's going next year, demand is starting to come back, oil prices starting to rise, we kind of expect to see a longer-term -- just a general appreciation in raw material.

So that strategy of continuing to pass along raw material prices as we get them and adjust pricing as raw materials go down, I think is very important to us for going forward.

Yes, Ron, let me answer that, if I could, for a minute. I think in general, if you look at the last 12 months, raw material prices, especially on the polyester side, have been much less volatile than they were the previous three or four years. And the approach we've been taking is to try to do pricing on a longer-term basis. Rather than move pricing every month, we're tending to move pricing every three to six months now.

And it's become a little easier to get the price increase when raw materials are going up, when we're doing longer-term price changes, especially as long as raw materials stay less volatile than they have been in the last several years. And again, in the last 12 months, we've seen much less volatility.

And barring any significant event, either political or weather, we do believe that raw materials are going to stay relatively stable over the next six months, though probably on a drifting upward trend, because oil has gone up.

And Bill, I was wondering if you could comment maybe on inventories throughout the pipeline, as you talk to your customers. Your customers obviously drew down inventories pretty dramatically as the economy fell apart. Where do you think they stand today versus a year ago, and are you seeing much shorter lead times on orders today than you saw call it three to six months ago?

I'll answer your last question first. Yes, we are seeing shorter lead times. Clearly, in our minds, the majority of the inventory destocking that we have been talking about over the last nine months appears to have been completed. And we believe inventories in most retail segments are down to about normal levels, if not a little bit lower than normal levels.

What is now happening is we are getting, in some cases, orders with much shorter lead times, which we are able to react to. In addition to that, we have also drawn down some of our inventories, and, again, we've learned, I think, to react more quickly in some cases.

Overall, the only place I think where we still have some high inventories is probably in the home furnishings business, because that business really has not come back and there is still some inventory destocking going on there, though we appear to be catching up based on the data we've been tracking.

And my last question, I guess, as it relates to your inventories and perhaps your receivables, do you see -- given what we've gone through, do you see any incremental risk from what you've either written down or booked on bad debt over the next quarter or two out of the normal variances?

Well, I mean from my standpoint, our accounts receivable remain relatively healthy, actually as healthy as they were over the last couple years. Now we do have a couple customers we have got concerns about. But for the most part, our inventories -- sorry, our accounts receivable has stayed very, very healthy.

Now, we're very aggressive, obviously, in monitoring this, especially when the economy is such as it is. But we've done very, very good job, frankly, and we don't have a lot of concern in that area right now.

How about the aging of inventories? Do you have any -- ?

Yes, I think (inaudible) inventory standpoint. We've got probably -- we do have a little bit of impact still hanging up on our balance sheet, where, like we said, raw material prices in October are going to tick down a little bit, before coming back up in November/December. So we do -- last year, we were talking about overhangs of $4 million or $5 million. It's nothing like that. But it's more along the lines of $1 million worth of overhang.

So we do have a little bit of issue around as prices have come down a little bit. And before they start ticking back up here during this quarter, we will have some negative impact of that.

From the overaged inventory standpoint, I think we did a real good job, especially coming out of the June quarter, of cleaning out the overaged inventory we have. We still have quite a bit -- not quite a bit -- that's probably not the right word -- but we still have enough in there where it's significant to us and we will continue to try to work that number down. But it's in better shape today than it was 12 months or 24 months ago, as far as the level of overaged inventory, just because of how aggressive we've been on the working capital side.

And Ron, the one thing I'd add to that is certainly overaged inventory is one of the things that I have put a lot of focus on, and we have put processes in place which, over time I believe, is going to significantly reduce the product going into overaged inventory in the future. We've become very aggressive on that. I expect to see continuing improvement there over the next six to 12 months.

I appreciate your time, and I will get back in the queue.

Thanks, Bryan.

(Operator Instructions).

Operator, are there any questions in the queue?

[Allen Ziegler.]

And I apologize if you may be repeating this, but there was -- at least on my end -- a little problem with static. You were talking about doing some -- I think you were saying some buildout in Latin America or Brazil in terms of either new facilities or more business. Could you maybe talk about that again? And I apologize, because I know you said something about it, but I just did not hear it.

Sure. Over the last few quarters, we've been talking about putting a facility in Central America, and spending potentially up to $10 million in either a joint venture or a greenfield facility in Central America.

In the last few months, we have made a decision that we are going to go the greenfield route. And initially anyway, we will be spending substantially less than the $10 million we had originally set as a ceiling. And we would expect to have inventory there actually within the next month or two, and then potentially some production down there within the next three to six months.

You mean you're going to build a facility and have production in three to six months -- that's pretty amazing. Or you have an existing -- there is an existing --?

It would most likely be a leased facility; we're not going to build a building down there. We're going to lease a facility and --

Oh, okay. Because you used the word greenfield. That to me usually indicates a new building.

Yes, and I think what we've said in the comments -- and I apologize for it not being clear -- was that we are still going through exactly what the commercial structure and our specific asset mix needs to look like. We do have some warehousing capability in the region now. We are definitely going to augment that, we think that's very important to us.

But as far as the exact mix of what machine or which machine we put down there, we're still kind of working through all that.

Okay. And that wouldn't impact at all your current business in Brazil?

That one's in Central America instead of South America. Most of that business today is being shipped directly here from the US to (multiple speakers).

I see.

What our whole model is there in Central America is we have some large, high-volume programs down there that can continue to be made effectively from here. But we do have -- there is a need. The whole value proposition of the region is quick-turn replenishment manufacturing. Well, if you can get closer to that, either through warehousing goods down there or through actually producing some of the smaller runs down there, if you can get closer to that market from a logistics standpoint, that only makes the supply chain that much more effective.

And so that's kind of the balance we're trying to figure out right now is what products we need to have warehoused down there versus if we need to make -- actually produce some of the smaller runs down there --.

And are the products that you're producing down there proprietary, meaning higher gross margin than just commodity products, that really don't give you a lot of bang for your buck?

It's both. I mean, some of our most profitable PVA products get sold through the region, as well as some of our most commodity products, going into, say, sewing thread. So it's a mixture of both -- just like up here, it's a mixture of both with us on what we ship -- we sell here domestically --.

(Multiple speakers) that just we will inventory all products that we sell down there in our warehouse. We've not yet decided which products will be produced down there, but it's more than likely going to be, at least initially, some of our commodity products.

Okay, so they don't have an appetite for that fancy Repreve stuff, is that what you're saying?

No, they do have an appetite for the fancy Repreve stuff. We're just going to continue to produce that here in the US (multiple speakers).

Oh, I see. I say. Okay.

And secondly, unrelated, and again I apologize -- how would you categorize your business in China these days relative to the switch that you've correctly made over to being your own company there and sales reps and reception to the products, etc.? Could you just -- and certainly profitability, if you want to break that out.

Well, sure. Certainly, our profitability is much better, since we were losing $500,000 to $700,000 a month.

Yes, well I would hope so. Okay. That was an easy one.

Right. But on the other hand, being in China and having the ability to sell in China, especially our PVA products and high-value products, is still critical to our core strategy of growing these products globally. So our business there has been relatively flat over the last six to eight months as the entire Chinese textile industry has really been down quite a bit.

We have several new adoptions that we expect to have in the next six to 12 months, and I think realistically, we would expect 10% to 20% growth of our PVA business there over the long term, on an annual basis.

And just if one were to look at the customer base without mentioning names, which I know is not an easy thing to do, the customers that you had in the prior joint venture, whether they be Chinese or US big clothing manufacturers, what has been your experience with the changeover, i.e. have these customers followed you or have you had some changes?

Actually, they have followed us. The main difference between our two businesses is back in the joint venture, the majority of our business was in low-end commodity. Basically, the high-end specialty and brand business that we had in the joint venture, that has transferred over to our new sales and marketing company.

And some of those products are still being produced in China; some we're exporting from the US to China until we can get production set up there, again, on a commission basis. We're not planning to do any production in China anytime in the near future.

But to answer your original question, all of the business we had at the high end has transferred over to our new entity.

Okay, and if I could slip in one more, relative to repurchasing your bonds in the open market, just refresh my memory. The fact that -- I think you said you bought about $0.5 million worth. What is your capacity to do that, given the current balance sheet? I mean was $500,000 the most you could have bought or that is what was available? Or what is your appetite, if it were available, just for argument's sake?

Yes, I think the only limitation we have is in our ability -- if we were to use proceeds under the revolver, there is a $15 million basket there where we could use up to $15 million under the revolver to buy back bonds.

Other than that, the cash we have on hand here in the US, which is about $16 million or $17 million as of the end of the quarter, plus that availability under the revolver, we don't have any limits on what we could buy back.

So from a historical perspective, we bought back in June -- I think we said we bought back $2 million face back in June, and then we bought another $0.5 million of face in September. Those were more market limits than they were us limiting ourselves from a cash flow standpoint. We could have taken down significantly more.

And isn't there also a part of the basket if you divest assets, or are you pretty much done with that?

Yes, that basket -- it's our domestic restricted cash. If we sell collateral, that goes into a restricted cash basket here domestically. You have 360 days to use that basket on replacing collateral, basically. And if you don't replace collateral, then you have to -- it becomes excess collateral proceeds.

And if that basket ever gets above $10 million, you're required to buy back at par. But we are obviously -- we don't have anything in that -- we didn't have anything in that basket as of September, so we're a long ways away from that event happening.

Okay. And there isn't at this point any divestitures planned? And the reason I ask that is given that you are moving what sounds like some capacity down to Latin America, does that kind of imply that there is going to be more closings in the US, or is it just a true capacity addition?

Well, first of all, our business down in Central America is roughly 8% of our revenue, and any assets that we would move down there would be substantially less than that 8% of our revenue. So certainly, if we put production down there, it's not going to be a large amount of our production here in the US, but basically a small percentage of our production.

So no, based on that, there are no additional plant closures or asset rationalization planned.

Two more points on that. We had an asset rationalization where we shut P4 back in June '08, and we sold that building in December '08. That was part of the proceeds we actually offered back through that restricted cash basket you were talking about.

When we did that, that consolidated our production really below what our sell rate was at that point in time. So I think the consolidation that you would expect to be coming has already happened around that, point one.

Point two, the only assets we have held for sale on our balance sheet today is that the remaining -- or I'm sorry, the remaining assets down in Kinston, which we're underway with the transaction to be able to sell those here over the next three to six months. And we said in the script it was right about the amount that we have on our balance sheet at $1.3 million, is what we expect to net back from that.

That's great. Thank you very much.

Thank you.

(Operator Instructions). And there are no further questions at this time.

Okay, we thank you a lot for joining us for the call and look forward to talking you guys in January.

Thanks.

This concludes today's conference. You may now disconnect.