Unifi Inc (UFI) 2010 Q2 法說會逐字稿

Good morning, and welcome to the Unifi Second Quarter Earnings. All participants will be in a listen-only mode. (Operator instructions)

After today's presentation, there will be an opportunity to ask questions. (Operator Instructions).

Please note, this event is being recorded.

I would now like to turn the conference over to Ron Smith. Please go ahead, sir.

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 at Unifi.com. The presentation link can be accessed by clicking the Second Quarter Conference Call link found on the home page. I hope that you have the presentation available, as it will be easier to track through 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 are 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 results may differ materially from what is expressed, forecasted, or implied by these statements.

I direct you to the disclosures in our 10-Qs and 10-Ks regarding various factors that may impact these results.

With that, I'd like to turn the call over to Bill Jasper, who will provide you with an overview of how the quarter went before I go through the numbers. Bill?

Thanks, Ron, and good morning, everyone.

I'll begin with a brief overview of our domestic markets.

After five consecutive quarters of negative year-over-year performance, retail sales trends for both apparel and home furnishings demonstrated signs of recovery in the December quarter.

In apparel, year-over-year retail sales were up in each of the three months, reversing a trend of 13 consecutive months of negative year-over-year performance.

In home furnishings, the current quarter was the first without double-digit year-over-year retail sales declines since June of 2008.

While retail sales and home furnishings are not yet on a positive quarterly trend, there have been recent month-over-month gains that seem to indicate the overall trend in home furnishings is beginning to improve.

In the automotive segment, the day supply of US car and light truck inventory has remained between 53 and 63 days for four consecutive months, the lowest level since the second half of fiscal 2007.

Although overall North American light vehicle production levels remained below -- I'm sorry -- 30% below 2007, they have risen in each of the past two quarters, and our shipments into that segment have been strong, relatively speaking. We are encouraged by these positive trends and expect continued, though slow, improvement going forward.

The supply chain inventory destocking is essentially complete, and retail inventories are now more in line with the new level of consumer spending, and industry sales have come in line with that demand.

In addition, the Company estimates that it has gained six points of US market share during the economic downturn, and we expect our sales will be better relative to year-over-year industry shipments.

Turning to our financial results, now, I'm pleased with our performance in all regions of our global business.

On a quarter-over-prior quarter -- prior-year-quarter basis, domestic gross margins and EBITDA improved substantially. These results reflect not just the recovering economy but the continuous improvement in our base business through share gain, aggressive cost and working capital improvements, a discipline task-based improvement process, and by driving statistical process control through all of our organizations and product lines.

Turning to our equity affiliates, the Company's share of earnings there improved by $1.4 million as Parkdale continued to perform well and our reconfigured UNF joint venture improved significantly.

One final domestic note -- we have completed and signed the HBI supply agreement this past quarter.

In Brazil, year-over-year financial performance improved significantly as volumes for the first half of the fiscal year increased through share gain and our recovering domestic economy and conversion margins grew.

In China, UTSC reported its first profitable quarter, and we are very pleased with the pace of progress we are making in the region. Several REPREVE programs are now generating considerable volume, and we are producing REPREVE product locally, which is more cost effective. New development programs in China are coming online, and we expect revenue growth there to accelerate over the next several quarters.

Our Central American strategy is progressing. We will be relocating roughly 8% of our regional polyester capacity to El Salvador over the next two quarters and expect to begin shipping locally produced yarn before the end of the June quarter. This operation will produce the majority of yarn that is shipped directly to fabric manufacturers in the CAFTA region, greatly improving cost, flexibility, and responsiveness.

The viability of Central American sourcing of manmade fiber apparel remains key to our America strategy. We believe the advantages of the CAFTA region, which include its competitive cost and a shorter, more flexible supply chain, remain attractive to apparel manufacturers and retailers, and we see split Asia CAFTA sourcing as an ongoing supply chain strategy.

Finally, I'm very pleased with our overall results for the first half of the fiscal year in which we maintained profitability and generated $12 million more in adjusted EBITDA than last year's first half despite a 3% reduction in net sales.

Given these results, we are projecting adjusted EBITDA for the 2010 fiscal year will be approximately $55 million, which is an increase over our previous guidance. Ron will provide details for adjusted EBITDA in his comments, and we'll discuss some of the factors that could impact this estimate both positively and negatively during the second half of this fiscal year.

With that, I'll turn the call back over to Ron, who will take you through the details of the quarter and the first half.

Thanks, Bill.

We'll now begin the review of our financial results, which begin on slide three of the presentation.

Net sales for the current quarter were $142 million, an increase of $17 million, or 13%, over the prior-year December quarter as a result of share gains, both domestically and in Brazil, and improved market conditions.

As you may recall, we experienced a more dramatic decline in our prior-year December quarter than most as a result of the rapidly deteriorating market conditions, compounded by the effects of the inventory buildup across the supply chain.

Although it took almost a year, we believe the inventory destocking has essentially worked through the supply chain, and our volumes are now consistent with retail demand.

The Company is reporting net income of $2 million, or $0.03 per share, for the quarter, compared to a loss of $9.1 million, or $0.15 per share, for the prior-year December quarter. Compared to the prior-year quarter, gross profit increased by $15 million to 12.2% and represents the benefits of our continuous improvement efforts and the positive impact on cost from running higher utilization levels in our plants.

Gross margins in the current quarter decreased 140 basis points compared to the trailing quarter based on slightly lower margins in Brazil and the increase in domestic raw material pricing during the months of August and September, which ran through our inventories in the December quarter.

Looking forward, although we aren't expecting significant changes in oil prices over the next six months, we do see an upward trend in raw material pricing through the third and fourth fiscal quarters based on production issues at one of the world's major producers of MEG, coupled with normal price pressure on raw materials, caused by the summer driving season.

SG&A expense for the quarter were $12.2 million, an increase of $2.8 million compared to the prior-year quarter. The changes are a result of currency impact and other SG&A increases in Brazil, which were related to higher sales there, and higher incentive-based compensation expense, including stock-based compensation from options granted in the first quarter and higher variable compensation accruals in the current year related to the Company's much-improved performance over the prior-year quarter.

Turning to slide four, net sales for the first half of the fiscal 2010 were $285 million, an increase of 10 -- I'm sorry, a decrease of $10 million, or 3%, from the prior year due to strong pre-recession volumes in the September 2008 quarter and the sales impact of higher polyester raw material prices in the September 2008 quarter, as well.

Net income for the first six months is $4.4 million, or $0.07 per share, compared to a net loss of $9.7 million, or $0.16 per share, for the prior-year period, which included at that time a net pretax gain of $5.2 million related to the sale of certain real property and related assets at our Yadkinville facility in December of 2008.

Despite the lower year-over-year sales, gross profit increased [to] $21 million in the first half of the fiscal year as a result of improving conversion margins related mostly to raw material price declines and operational improvements realized across the Company.

In addition, Brazil continues to deliver improved year-over-year results as the impact of the global recession was shorter and less severe in the Brazilian market than in the US market.

Compared to a year ago, consolidated gross margin improved 760 basis points to 12.9% for the first half of the fiscal year.

The Company's provision for bad debt was reduced by $1 million during the quarter as the Company removed an accounts receivable reserve held for a certain customer that successfully refinanced its debt in the December quarter. The reduction also reflects a decline in the Company's general provision for bad debt due to the improvement in the overall health of the Company's accounts receivable.

Turning to slide five, quarter-over-prior-year-quarter volume increased 17% on a consolidated basis, while overall pricing declined 4%. The improvement in volume is a result of the year-over-year increases in retail sales that Bill mentioned earlier, as well as the fact that the Company's year-ago volumes in November and December declined sharply as we began to feel the full effects of the inventory backlog caused by the recession.

The pricing declines in the polyester were primarily a result of the lower raw material prices in the -- I'm sorry -- the lower raw material price levels in the quarter and year-to-date periods, as last year's periods were still feeling the effects of $140-per-barrel oil cost and record-high polyester prices from the fall of 2008.

On a year-to-date basis, total volume increased by only 5% on a consolidated basis compared to the prior year due to the strong pre-recession volumes from the September 2008 quarter.

In addition to the pricing impact of decreased raw material cost, we're also seeing some softness in pricing related to the current desire of branded retailers to hit more value-oriented price points to stimulate sales. This desire also slowed the adoption of new PVA programs over the last 12 months, but we're now starting to see a return of development activity within the premium value-added yarn segments.

As the economy continues its gradual improvement and consumer confidence improves, we expect more of these PVA programs to make their way out of development and onto store shelves.

A 2% decline in consolidated volume in the December quarter compared to the September quarter is primarily timing related as the Company was shut down for the last four days of the December quarter, which ended on December 27 for a holiday shutdown.

Now, we'll turn to the balance sheet highlights, which you can find on slide six.

Cash on hand at the end of the December quarter was $54.4 million, representing an increase of $42 million over the last 12 months. From September, cash declined only $1.3 million as a result of strong cash flow from operations and working capital improvements.

Positive factors almost entirely offset the following uses of cash during the quarter -- during the quarter, we spent $2.9 million in capital expenditures; we paid $2.3 million of cash taxes in Brazil; we utilized $5 million for the repurchase of 1.9 million shares of the Company's common stock at $2.65; and we paid our semi-annual bond interest payment of $10.3 million.

Other smaller factors affecting cash were the currency exchange rate in Brazil, which positively impacted us by $500,000 as the real strengthened slightly, and an asset sale of $1.3 million.

Total long-term debt at the end of the December quarter was $183 million, a decrease of $2.2 million from September.

Net debt stands at $125 million, also representing an improvement of $42 million since December 2008.

Under our revolver, we still have no outstanding borrowings, and our current availability is $62.9 million.

Now, before we move on to equity affiliates, I want to make a couple of forward-looking cash flow-type comments.

On the days receivable and days payable, the numbers you see for each are artificially low for the December quarter as a result of the industry-wide holiday shutdown. We expect both days in receivable and days in payables to be closer to those in September as we move through the second half of the fiscal year.

And in the area of capital expenditures, for the second half of the year, we expect CapEx to be in the range of 10 to $11 million for the six-month period as we make the expenditures required for the previously noted Central America initiative and make further strategic investments in our specialty and PVA production capabilities.

Turning to slide seven, the Company recorded net earnings of $1.6 million from our equity affiliates, an improvement of $1.4 million compared to the prior-year December quarter. On a year-to-date basis, the $3.7 million total reported for the current year is slightly higher than the $3.6 million of earnings from the prior-year period.

The Company reported $1.7 million of earnings during the quarter from its 34% membership interest in Parkdale America, an increase of $1.1 million compared to the prior-year quarter.

During the quarter, Parkdale's volumes were positively impacted by the improved retail apparel market dynamics and the initial effects of their recent purchase of Hanes brand's spun cotton operations.

As a part of that transaction, the Hanes brand retained its finished inventory on hand at the time of the deal and has been working through such inventory over the last couple of months. As this inventory is depleted, Parkdale will begin to see the full effects of the agreement, which we expect to occur during this March quarter.

Beginning this quarter, we will also be breaking out the results of our new nylon POI joint venture with [Nalete] to reflect the structure of our new agreement. This agreement began in November and will allow us to shift one-third of the spinning capacity from our joint venture in Israel to a newly formed POI joint venture based here in the US. This shift is an improvement because the US production capability allows us to produce Berry Amendment and NAFTA-compliant yarns, which the assets in Israel could not.

To effect the transaction, each partner funded $550,000 during the current quarter to support the additional working capital needs of the transition.

For the quarter, the Company recorded earnings of 147 -- I'm sorry, $141,000 from the two joint ventures, less $256,000 of intercompany eliminations. The intercompany eliminations are timing related and serve to defer the recognition of gains or losses on related party purchases until the ultimate sale transaction to a third party has been completed.

Turning to slide eight, the Company is reporting adjusted EBITDA of $13.3 million for the December quarter and $28.4 million for the first six months of fiscal 2010. These quarterly results are better than guidance of 10 to $12 million from our October earnings conference call due to the previously noted volume and margin improvements.

Looking forward, the Company has traditionally reported higher adjusted EBITDA in the second half of the fiscal year; however, we now see adjusted EBITDA more evenly split based on the increased contribution of our Brazilian operation.

As a result of the recession impact on the US business, Brazil now represents a larger portion of our overall business than in the past, and although we expect Brazil's strong performance to continue, the Brazilian market is counterseasonal to our domestic market, with the September quarter representing the high point of the year and March representing its seasonal low point.

Accordingly, we expect adjusted EBITDA for the March quarter to be similar to the results of the December 2009 quarter. Over the quarter, we expect the results for Brazil to be down slightly from the September and December quarters as noted; however, we expect to see an improvement in our domestic business to offset these declines.

For the 2010 fiscal year, as Bill noted, we're estimated adjusted EBITDA to come in near $55 million. This estimate could be affected by a few million dollars -- sorry, this estimate could be a few million dollars too high if raw material prices increased higher or faster than anticipated, and this estimate could be a few million dollars too low if volumes continued to strengthen without undue increases in raw material prices.

Finally, I'd like to provide an update on some key dates for this quarter. We expect final results for the December quarter to be filed on our 10-Q no later than tomorrow, February 5, and our quiet period for the March quarter will begin on March 26, extending through our earnings release conference call, which is currently scheduled for April 29.

With that, I'd like to now turn the floor back over to the Operator for questions. Operator?

We will now begin the question-and-answer session. (Operator instructions)

And our first question is from Bryant Hunt of Wells Fargo. Please go ahead.

Good morning, Bill and Ron.

Hey, Bryan. How are you?

Morning.

I'm doing great. Thanks for asking. Could you talk about relative sizes of China and Brazil on a revenue basis at this point in time?

Yes, we don't break those out separately anywhere, Bryan. The one thing we do is back in our financial statements, we have a guarantor/non-guarantor section, where we break out Unifi, Inc. -- I think it's guarantors and then non-guarantors.

In that non-guarantors is where UTC and Brazil hang out. What we've said about UTC is that's a 20 to $30 million operation, so we don't give -- we haven't given any other guidance other than that.

So from a relative order of magnitude, we said previously that that's about the size of where UTC is at, and then Brazil is the majority of the rest of that.

The only other thing in there is -- the only operating entity in there is Columbia, which is a very small operation for us.

Okay. And then, next, looking at your CapEx, what is it year to date? And could you talk about what the actual investment is going to be in Central America?

Yes, the year-to-date number is somewhere around $6 million. While I'm talking, I'll try to pull up that exact number. But, let's see, here one second.

I've got it. You did two, one in Q1, so...

One in two, two one in two eight or two nine, it looks like. So, yes, we're -- the investment in Central America is going to be -- we said it's going to be something less than $10 million. The fixed asset or the CapEx piece of that is going to be substantially less than that, somewhere in the 5 to $6 million range.

The rest of what's going to make up that 10 to $11 million for the next six months is going to be, one, the normal maintenance CapEx we already had budgeted, but, two, we have a capability improvement that we're going to make in our ability to make some specialty yarns that we're spending dollars on here in the rest of this half of the year.

And how much will that be? I guess you've spent about $4 million in maintenance CapEx over a half?

Yes, we're going to -- yes, I think the guidance we gave you guys was 8 to 9, so just -- for the full year, so call that 4.5, and we're going to spend 10 to 11. So of that 10 to 11, about 5 of it is from Central America, and then the other million or so is what we're going to spend this quarter in addition to what we normally spend on CapEx, and some of that project will bleed over into the next quarter. But it's a few million-dollar project, not a $10 million project.

And regarding Central America, you described it as 8% of...

[Ex sales], yes. One thing we wanted to kind of get you guys a box or at least get you to understand kind of what we're talking about.

If you look at our business, we talk about 55 and 65% of our business requires compliant yarn. It's yarn that has to be made here in the region. Well, of that business, though, the vast -- or a large majority of that goes directly to a US customer, who turns it into fabric and then ships it into the region to be cut, sewn, and come back as a garment.

What we're saying is of our total domestic business -- we showed you guys in our last presentation -- 8% of our business goes directly into Central America. That 8% that we're making directly -- that we're today shipping directly into Central America is where we can get the freight savings and logistics savings from, so that's the 8% that we're relocating down there.

Some of it we'll keep up here, some of the more specialty stuff, some of the full container loads, but a large part of that is what we're moving down into Central America.

Is that all polyester, or does that include some nylon, as well?

Ron, let me just add to your comment. That 8% is 8% of our polyester production capacity, and we're not planning at this time to produce any nylon there, though that -- certainly a nylon-textured yarn is a possibility in the future.

In addition to that, we will have expansion capability down there to go beyond where we are now should the direct sales in Central America continue to grow.

And we are going to --

And we will be keeping -- we'll certainly be keeping nylon inventory down there, both covered yarns and textured yarns, to improve our flexibility in that business, as well as polyester.

And, lastly, it sounds like you're expecting higher raw materials, given your comments, on a go-forward basis. Have you all announced any price increases for Q3? And what are your thoughts about announced price increases over that second half of the fiscal year?

Well, certainly, as always, raw material pricing is a little bit uncertain and variable. Frankly, right now, it appears that we had a small increase in raw materials in January. We think we're going to be relatively flat in February and could go down in March. So we've got no pricing action planned at this time.

Should we see the normal April/May/June increases because of the domestic driving season, we would certainly consider a price increase at that time to cover those increases, but right now, again, they're going to be relatively flat this quarter when you look at the entire quarter, and we have nothing planned right now.

All right. Thank you.

(Operator instructions)

Our next question is from [William Martindale] of Conestoga. I'm sorry if I mispronounced that company name. Please go ahead.

Hi, fellas.

Hey, Bill. How are you?

Good. Question on the plans for debt reduction. Could you give us some clarity as to what might be unfolding in the May period?

I think you're referring to -- there's a -- we were [inaudible] on our 2008 notes, so coming up this May, we have the ability to call it in at 105 and three-quarters, I think's the number. We haven't announced any plans for how we're going to move forward with that.

Right now, if you look at our cash breakdown, about $8 million of it is here domestically. The rest of it is either in Brazil or in other foreign operations. So we don't have a whole lot of cash that we would be able to be utilized for that without bringing it back. But right now, we haven't announced any plans.

I think historically what we've said was that we would be -- really probably for the last year, we would be opportunistic purchasers of notes to the extent there was some available in the marketplace, but we haven't made any announcements around would we do any kind of calls or anything like that.

And, secondly, have you provided any breakdown as to where your premium and value-added yarns are relative to the overall production?

On a -- you're talking about...

What percentage of the business is away from what would be considered commoditized and--?

Yes, we've-- about half of our business was what we would call commodity. Then there a second set that we break out in specialty. I don't remember -- it was broken out in that September presentation we did. Actually, I'm getting it right now. 47% was commodity, 42% is what we call specialty or differentiated, and then there's another 11% of what we call PVA.

And I noted -- I can't remember if it was me or Bill in our comments -- PVA for us, although we're getting a lot of strong commentary, especially around REPREVE, it really slowed down -- the development cycle slowed down over the last 12 months as we went through that recession. It held up, but the retailers -- you know, the cardinal sin at retail became having stuff that you couldn't sell, not having empty shelf space. So I think they dumbed down the product offering in order to be more -- to manage their risk.

And I think one of the important points in the quarter that we saw is that development activity really has started to pick back up. So although we're having a -- we'll have a flat PVA even year this year, we're expecting that to improve, get back on that path going forward.

Great. Thank you very much.

Thanks, Bill.

(Operator instructions)

Showing no other questions, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.