Unifi Inc (UFI) 2010 Q3 法說會逐字稿

Good morning and welcome to the Unifi third-quarter earnings conference call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Ron Smith. Sir, please go ahead.

Thanks, operator and good morning, everyone. Joining me for the 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, unifi.com. The presentation can be accessed by clicking the third-quarter conference call link found on our homepage.

Before we begin, I need to first advise 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 our 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 risk factors that may impact these results.

We will now review our financial results, which begin on slide 3 of the presentation. Net sales for the current quarter were $155 million, an increase of $36 million or 30% over the prior year March quarter. Market conditions improved in each of our key segments as highlighted by the following. Retail sales of apparel were up 2.6% compared to the prior year March quarter, representing the second consecutive quarter of year-over-year increases. Year-over-year retail sales of home furnishings were also up 0.9% in the March quarter, the first such increase in more than two years. And finally, North American light vehicle production increased 63% compared to the prior year quarter.

Net sales were strong both domestically and in Brazil, which reported volume gains, as well as some favorable impact from currency exchange. The Company is reporting net income of $771,000 or $0.01 per share for the quarter compared to a net loss of $33 million or $0.53 per share for the prior year March quarter.

The current quarter was impacted by the following unusual items, which had a cumulative negative impact of $1.1 million. The Company recorded a negative adjustment of $1.1 million to our share of earnings in Parkdale America as a result of certain economic assistance being disqualified by the USDA for which I will provide additional detail in our equity affiliates discussion.

The Company incurred a total of $400,000 in expenses related to the relocation of equipment from the United States and the start-up costs at Unifi Central America. And finally, the Company reported a non-cash loss of $1 million primarily related to the disposal of all remaining assets in our former Kinston, North Carolina facility.

These changes were partially offset by a gain of $1.4 million on a sale of nitrogen credits also related to the Kinston facility. These transactions essentially marked the completion of our operating activities at the Kinston site, as well as all remaining unsold assets at the Kinston facility were conveyed back to DuPont on March 20 under the terms of our March 2008 agreement.

Compared to the prior year March quarter, gross profit increased $16 million resulting in a gross margin of 10.7%. However, gross margin in the current quarter decreased from the trailing quarter as share gain initiatives and raw material cost increases put pressure on conversion margins.

SG&A expenses for the quarter were $11.3 million, an increase of $1.7 million compared to the prior year quarter, primarily as a result of increased year-over-year volume levels and higher incentive-based compensation related to the improved performance of our business.

Turning to slide 4, net sales for the first nine months of fiscal 2010 were $440 million, an increase of $26 million or 6% from the prior year period. Year-to-date revenue in Brazil had been particularly strong, up $14 million on a year-to-date basis due to the combined effect of both volume gains and improvements in the currency exchange rate.

Net income for the first nine months is $5.2 million or $0.09 per share compared to a loss of $42.7 million or $0.69 per share for the prior year period, which also included $23.5 million in charges related to asset impairment and asset consolidation and optimization.

Gross profit improved $37 million in the first nine months of the fiscal year, $12 million of which was from Brazil as a result of improved demand and the related impact on utilization rates and operational cost improvements realized across the Company. Compared to the prior year-to-date period, which was the lowest point for us in the recent recession, gross margins on a consolidated basis improved 820 basis points to 12.1%.

Turning to page 5, quarter over prior year quarter, volume increased 31% on a consolidated basis, while overall pricing declined by less than 1%. We are not only seeing the volume benefit from the recovery in our key market segments, but we are also realizing the positive impact of the share gains we have made.

Quarter over trailing quarter, volume increased 10% on a consolidated basis, while overall pricing declined by approximately 1%. In the nylon business, the 29% volume increase and the 18% pricing decrease from the December quarter were a result of a significant mix shift. During the quarter, we saw increased demand in the sock and performance knit markets, which resulted in higher shipments of textured yarn products that carry a lower overall selling price than the other products offered by the nylon division.

Now we'll turn to the balance sheet highlights, which you can find on slide 6. The Company continues to maintain strong cash flow from operations and cash on hand at the end of the March quarter of $52.5 million, representing a decrease of $1.9 million from December. Some of the key uses for cash in the quarter were $10.7 million invested in working capital, excluding the $5.3 million timing impact related to accrued interest. And $3 million for capital expenditures as we continue to invest in our PVA products and related capabilities.

The increased investment in accounts receivable and inventory during the quarter were primarily the result of higher volume levels and the timing of the holiday shutdown at the end of the December quarter. On a consolidated basis, accounts receivable increased $15.4 million and inventory increased $3.3 million.

It is important to note, however, that despite these increased levels, the health of our accounts receivable and inventory balances actually improved over the quarter. The percentage of our accounts receivable current within 15 days improved to the highest level in over two years and our overaged inventory has been reduced by more than 50% over the last nine months as a direct result of specific continuous process improvement initiatives. The increases in inventory and accounts receivable were partially offset by $6.2 million increase in accounts payable, also the result of the increased volume levels.

Total debt as of the end of March was $181.2 million, a decrease of $2.2 million from the December quarter. Net debt stands at $127 million, representing an improvement of $11 million since the start of the 2010 fiscal year. Under our revolver, we still have no outstanding borrowings as current availability is just over $71 million.

Turning to slide 7, the Company recorded net earnings of $2.2 million from our equity affiliate partners, which is an improvement of $1.4 million compared to the prior year March quarter. On a year-to-date basis, the $5.8 million total reported for the current year also reflects an improvement of $1.4 million from the prior year period.

The Company reported $2 million of earnings during the March quarter from its 34% interest in Parkdale America, an increase of $700,000 compared to the year-ago quarter. As you may know, Parkdale receives benefits under the Food Conservation and Energy Act of 2008, better known as the Farm Bill, which extended the economic adjustment assistance provision for upland cotton for 10 years.

Beginning August 1, 2008, the program provided textile mills a subsidy of $0.04 per pound on eligible upland cotton consumed during the first four years and $0.03 per pound for the last six years. The economic assistance received under this program must be used to acquire, construct, install, modernize, develop, convert or expand land, buildings, plant, equipment or machinery.

On October 2009, Parkdale was notified that approximately $8 million of the capital expenditures recognized for fiscal year 2009 had been disqualified by the USDA. Parkdale appealed the decision twice with the USDA, ultimately resulting in the USDA allowing $3.7 million to be counted qualified under the economic assistance program. During the March quarter, the remaining $4.1 million was denied by the USDA and accordingly, the Company made a $1.5 million negative adjustment for our share of the disqualified economic assistance benefit, reducing our 34% share of earnings in Parkdale to $2 million for the quarter.

Turning to slide 8, the Company is reporting adjusted EBITDA of $12.7 million for the March quarter and $41.4 million for the first nine months of fiscal 2010. We are pleased with the progress we have made over the last 12 months and Bill will provide an update on our projections for the remainder of the 2010 fiscal year at the end of his comments.

Now before I turn the call over to Bill, I would like to provide a brief update on some key dates. We expect final results for the March quarter to be filed in our 10-Q no later than Friday, May 7 and our quiet period for the June quarter to begin on Friday, June 25 and extending through our earnings release conference call, which is currently scheduled for July 29. With that, I will turn the call back over to Bill. Bill?

Thanks, Ron. Good morning, everyone. I am pleased with our results both for the March quarter and for our fiscal year-to-date. We have maintained profitability in each of the first three quarters and expect a profitable fiscal year for the first time since 2000. We have achieved these results despite the lingering effects of the recession and continued high unemployment.

Although we are seeing year-over-year improvement, retail sales in our core markets still remain well below pre-recession levels with apparel off 4%, automotive 29% and furnishings off 13%. We are seeing slow but steady improvement in all categories and expect this trend to continue. That said, our financial results are comparable to pre-recession levels and we expect to improve upon that as our markets recover with an improving economy.

Comparing 2010 year-to-date results with those from our 2008 fiscal year, net sales for the first nine months of the current year are $84 million lower, but we have generated $2.2 million more in adjusted EBITDA. This substantial improvement reflects the continuous improvement of our base business through share gain, aggressive cost control, a disciplined task-based improvement process and by driving statistical process control and lean manufacturing through all our organizations and productlines.

These efforts are still in the formative stage in many of our processes and I anticipate continued improvement in both working capital and the capacity, cost and efficiency of all of our operations over the next several quarters.

Turning to margins, our aggressive and successful share gain efforts during a period of rising raw material costs squeezed margins somewhat in this quarter. However, we expect to regain those margins over the next few months with necessary price increases.

Our global business continues to improve. Our volume in Brazil has grown by more than 10% on a year over prior year basis through continued share gain and overall recovery in the Brazilian economy. We have reduced costs there through efficiency improvements and conversion margins increased as we have grown high value in PVA product sales there. Because of these improvements, combined with gains from our favorable exchange rate, our operation in Brazil contributed substantially to our results both this quarter and fiscal year-to-date.

In CAFTA, textbook production in that region slowed through the economic downturn and its share of US shipments dropped by about 2% in calendar year 2009 due both to the removal of China safeguards and as US consumers turn to lower cost apparel typically produced in Asia as the recession and high unemployment persisted. We have, however, seen improvement over the past several months in global economic factors such as rising operational costs and the potential currency appreciation in China, a narrowing raw material cost gap between the US and Asia and substantially higher transpacific freight rates are pointing to improved competitiveness in the CAFTA region during the coming quarters.

While the Asia region, especially China, will continue to have highly competitive costs, we feel these recent economic trends will help facilitate a more balanced global supply strategy for many retailers and brands. Overall, US textile exports to CAFTA, including our business in the region, have grown over the last several months and we expect this trend will continue given the economic considerations previously discussed.

Unifi Central America has been well-received by our customers and it is poised to capture growth in some key market segments. Although all texturing and twisting machines in our Central American plant are not expected to be fully installed and operational until the December quarter, UCA is already servicing the market from our US production and will begin producing and shipping product in the current quarter from our initial installations.

UCA, once fully operational, will provide us with approximately 10% additional polyester textured yarn capacity in this region, which will allow us to capitalize on future improvement in the economy and future share gain opportunities.

Finally, our operations in China continued to perform well and we reported our second consecutive profitable quarter from UTSC. US and European brands and retailers continue to focus on environmentally-friendly apparel and this focus is resulting in increased interest and demand for green woven and knit fabrics in Asia.

Through increased vertical integration and cost efficiencies afforded by our move to local production, we have become more cost-competitive in recycled products in Asia. And I do want to note that local production is commission production and not production owned by Unifi. As a result, our pre-volume in the region has been increasing. The number of development programs in China continues to grow and we expect revenue growth to accelerate over the next several quarters as these programs come online.

Driven primarily by REPREVE whose sales will nearly double this fiscal year, our global PVA sales have continued to grow through the economic downturn and we expect that to continue as the economy improves.

Also, we are announcing plans, which enhance our commitment to our value-added products with a specific focus on sustainability and green initiatives. Over the next nine months, we will spend approximately $8 million in capital aimed at backward integration into the REPREVE supply chain. By moving one step back into the extrusion of recycled chips, we will considerably increase the availability of our recycled raw materials and support the continued growth of REPREVE. This new initiative will not only increase our capacity for utilizing recycled post-consumer bottles, but also offers the ability to recycle fabrics and garments in the future.

In addition, we are announcing an approximately $4 million investment for a 40% interest in a biomass feedstock company. As environmental stewardship and sustainability becomes more important to all companies, we are excited about the prospects of participating in this renewable energy opportunity. The biomass product will be grown primarily in the southeastern United States and be consumed by bioenergy and biofuel operations both in the US and the European Union. We believe this investment gives us the unique opportunity to substantially reduce our corporate carbon footprint while providing positive economic investment economics and we look forward to providing additional updates as the opportunity develops.

To conclude my comments, I am very pleased with the progress we have made against our core strategies and the results they are delivering to our bottom line. We will continue to drive improvement in all of our processes and we remain focused on cash generation and deleveraging our balance sheet, while funding targeted growth opportunities in our global business. At this time, we are reaffirming our adjusted EBITDA target of $55 million for the 2010 fiscal year. And with that, I will turn the floor over to questions. Operator?

(Operator Instructions). [Ian Sachs].

Bill, congratulations. The results seemed particularly good from what I am seeing of you this morning. I want you to please comment -- what kind of capacity are you guys running at right now? Like let's say in your US plants and Brazil?

Okay, I think if I was to put it in general terms, most of our plans are running very near 100% capacity right now.

Right. And then obviously the cash flow that you guys are generating is significant and are you looking towards putting that towards paying off debt because your debt levels have come down quite a bit as well?

Yes, I think you will see in the future us paying down some of our debt, yes.

And then as far as like -- are you seeing like -- do you think this is just like a blip at the moment or do you see this as a continued trend? Do you have contacts out there that you can actually clearly see, let's say, the next two to three quarters?

Are you talking about from a volume standpoint?

Yes, volume, just like revenue.

Yes. We expect to see volume and revenues to steadily increase as the economy improves.

And I think from our perspective, last year, we went through a trough where revenue was off 10%, but as they adjusted inventory, our business was off I think 32% for the December quarter. We have caught back up now basically to the retail environment in the markets that we participate. Bill did mention share gains. We've been pretty aggressive in trying to gain share here over the last six months. So there will continue to be some improvement there, but generally we are seeing kind of volume improvement from the entire market. All of our key segments are kind of improving on a sequential basis and so that's where we would expect to see that.

Revenue line was really good. What about the margin increase? You're saying just by reducing costs that it could improve quite a bit because obviously your EBITDA is excellent, but in terms of the actual margin, the gross margin, do you see --?

Well, what happened, Ian, in this previous quarter is we aggressively gained share at a time when raw materials and polyester -- it's primarily polyester where we gained share and raw materials went up about 12%. We have price increases planned for this quarter, which will recover that margin.

Oh, I see, okay, very good. Thank you very much.

And one other point I'd like to make on the capacity. We are, as I stated, increasing capacity by about 10% by adding eight texturing machines to Central America. In addition to that, through some of the efficiency improvements we've made here, we've picked up another 4% or 5% capacity on our existing equipment.

Uh-huh. That makes a difference. Okay, good, thank you very much.

Brian Hunt, Wells Fargo.

Good morning, gentlemen. I was wondering if you could talk about the incremental capital you are looking to spend on backward integration? How far is that going to take you back into the REPREVE product, as well as when do you plan on spending that capital, what type of ROI are you looking at?

Okay, it will basically take us one step back in the value chain. From the post-consumer plastic bottle standpoint, we will be buying basically flake that comes from plastic bottles and turning it into chip. On the other end with the post-industrial waste, we will start by reprocessing our own waste as we are today through a third party. In addition to that, we will -- we do expect to have the capability to begin recycling both fabrics and garments some time in the future.

As far as the spend-out, we expect to have this operation up and running by January of 2011. Expect to spend about $8 million and the ROI on that would indicate a payback of just a few years.

And likewise, could you discuss a little further your biomass project, $4 million investment there, the timing of the investment, as well as what time of benefits you're anticipating on a cash flow basis?

The investment has been made actually this past week. We don't anticipate any additional investment probably for the next 12 to 18 months or at least any substantial additional investment (inaudible) in the next 12 to 18 months.

From a return standpoint, it's still in a very formative stage here. We believe there is a potential large upside, but we will have a much better view of that probably in the next 6 to 12 months.

Brian, I think the other piece of that is the whole -- as REPREVE becomes more and more important, I think Bill mentioned our REPREVE volumes doubling. Us doing things that are sustainable and helping find ways to help reduce our kind of net corporate carbon footprint was obviously very important in our desire to move into that way, into that operation. And I think it will be limited, our debt agreements limit our ability to do anything like that in a very substantial way.

Got you. And Ron, you laid the groundwork. With regards to your debt agreements and looking at your cap structure, I mean your bonds become callable in the next couple of weeks. The high-yield market is strong, needless to say. What's your anticipation or what's your outlook in terms of extending the duration of your balance sheet and where do you see the optimum type of leverage point for the Company?

I think we are -- what Bill said earlier, obviously the main number we are starting with is net debt. We are focusing the business on generating cash. We are upping investments in PVA products and PVA capabilities. You will see that come through this quarter with what Bill -- or start to come through this quarter like Bill talked about around that recycling project. But we are doing things that have a short, relatively short payback and we are pretty confident in that as we move forward. So cash flow generation I guess is point one. We are absolutely focusing on that in order, if nothing else, to delever from a net debt standpoint.

I think as far as our debt itself and what we are looking to do with our debt itself, we haven't made any announcements about that. There's no specific plans that we have laid forth as far as whether we would do a call or refinancing. We understand the markets are high and that right now is a very favorable market in the high-yield market and at historically low levels, but we haven't made any kind of announcements as far as what we may or may not be doing in the future.

I think the way you should think of it from our perspective is, for us, it's all about cash flow generation and the right time to move on that capital structure. We will make an announcement when we make a decision around that.

Okay. And then lastly, you talked about -- you all talked about implementing best practices, opportunities to reduce working capital, and you did have a nice little working capital bump in this quarter, understandably so with the improvement in the business. But how far do you think you can take working capital down from where we are today with regards to how far -- what type of timeframe in terms of implementing that?

Okay, the majority of the improvements we are making in working capital are really incremental improvements. Looking at some specific numbers. If you look at our domestic inventory turns, they have gone from about 5.5 turns to about 6.5 turns today. And I would anticipate we would be able to increase that maybe up to 7 to 7.5 turns over the next couple quarters.

From an accounts receivable standpoint, we've got a very, very healthy accounts receivable right now. We do have some of our customers where we may be increasing their turns, but we're going to offset that by some reductions in inventory. So overall, I would expect to see slow and steady improvement in our working capital effectiveness, though I don't anticipate a major step change. But that certainly is one of our focuses and as Ron said, our number one focus is cash generation and continuing to deleverage our balance sheet. So you will be seeing us working towards that certainly very, very aggressively.

Thank you for your time.

(Operator Instructions). We show no further questions, so this concludes our question-and-answer session for today. I would like to turn the conference back over to our speakers for any closing remarks.

We appreciate everyone's involvement in the conference call and we look forward to talking to you guys in July where we will be providing some more guidance with what we feel like fiscal 2011 is going to look like. Thanks, guys.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.