Unifi Inc (UFI) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Unifi Earnings Conference Call. My name is [Keisha], and I will be your operator for today. (Operator instructions.)

This call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Ron Smith, CFO. Please proceed.

Thanks, Operator, and good morning, everyone. Joining me for the conference call today is Bill Jasper, our president and chief executive officer.

During this call, we will be referencing a webcast presentation that can be found on our website, Unifi.com. The presentation can be accessed by clicking the "Fourth Quarter Earnings Conference Call" link found on our home page.

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 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 filed with the SEC and our form 10-Qs and 10-Ks regarding various factors that may impact these results.

Before we get to the details of the June quarter and the 2010 physical year, I'd like to turn the call over to Bill, who will provide an overview of the year. Bill?

Thanks, Ron. Good morning, everyone.

During fiscal 2010, as domestic retail sales recovered somewhat across our core markets, most notably apparel and leg wear, our sales and capacity utilization improved, and we began to see the benefits of the improvements we have made to our business model.

Despite sales revenue being 14% less than our pre-recession 2008 fiscal year, our adjusted EBITDA performance for this year was comparable. Gross margins improved across all of our businesses, and fiscal 2010 was our first profitable year since 2000.

Starting back in 2007, we began to instill a culture of continuous improvement in both the creation of customer value and the efficiency and cost of all of our operations. Over the past year, we have expanded our efforts in Lean manufacturing and statistical process control to all operations and businesses, and currently have over 50 active improvement programs, all aimed at providing real and measurable improvements to our cost of operations and our investment in working capital.

As we involve more of our workforce in these efforts, I expect to see an additive effect and continuous improvement through to next year. These efforts, coupled with strategic capital expenditures designed to grow our PVA product capabilities, are expected to result in continued improvement of our financial performance over the next several years.

During the June quarter, net sales performance from our domestic operations was particularly strong, increasing 25% compared to the prior June quarter. This improvement was driven by increased market share and positive market conditions in each of our key segments.

For example, year-over-year retail sales of apparel were up for the third consecutive quarter, increasing 5.4% compared to the prior year June quarter. Consumer spending on apparel has steadily recovered, with spending in the current quarter just 2.9% below the pre-recession June 2008 quarter.

Retail sales of home furnishings remain approximately 15% below pre-recession levels. However, we saw a 2.5% improvement in the June quarter compared to the prior year. And similarly, US auto sales in the current quarter were 20% below levels reported in the 2008 June quarter, but US auto sales grew for the third consecutive quarter, which drove a 76% increase in North American light vehicle production in the June quarter compared to the prior year.

Looking forward, we are somewhat optimistic about the continuation of these trends. The strength of apparel retail sales during the important back-to-school and holiday seasons will be a key indicator as to what we might expect for the remainder of the year, and recent guidance provided by some of the key apparel companies has been encouraging.

Throughout this year, we continued to expand our commitment to sustainable practices and initiatives that provide unique and growing opportunities within the Company's overall portfolio. Our capital project related to the backward supply chain integration of our 100% recycled Repreve product is a natural next step for us.

By being more vertically integrated, we will improve the availability of recycled raw materials and significantly increase our product capabilities, capacity, and ability to compete effectively in this growing segment. This backward integration will make us an even stronger partner in the development and commercialization of value-added products that meet the sustainability demands of today's brands and retailers, like Polartec, Patagonia, and Wal-Mart.

Repreve Renewables, our new joint venture that focuses on the direct sales of Freedom Giant Miscanthus to the biofuel and biopower industries, is aligned with our goal to derive value from sustainability-based initiatives. This new biomass joint venture will not only provide us with a unique revenue stream, but it also helps support our strategy to expand the Repreve brand and product portfolio while enhancing our commitment to being a global leader in sustainability.

While we will continue to explore opportunities to grow and diversify our portfolio, our top priority remains growing and continuously improving our core yarn business. We will continue to pursue growth through mix enrichment, share gain, process improvement throughout the organization, and expanding the number of customers and programs using our premium value-added yarns.

Another important part of our core yarn strategy is the ability to capitalize on regional growth opportunities throughout the world. Brazil continues to make substantial contributions to the Company's overall results, and we expect this to continue, given a strong economy in Brazil coupled with a stable currency conversion rate and our initiatives to reduce costs there by modernizing and upgrading our facilities.

We have also seen a recovery of regional sourcing from CAFTA as imports of synthetic apparel increased by nearly 17% in the June quarter. CAFTA's share of all synthetic apparel imports has grown for three consecutive quarters, and we expect the region to hold share for the remainder of the year. Having a local presence in CAFTA, Unifi Central America, helps the company capitalize on growth opportunities in this region and makes us an even stronger partner for companies with split sourcing and replenishment strategies.

And finally, our operations in China reported a net income of $578,000 for fiscal 2010, and development activity there remains very strong, particularly around specialty and value-added products like Repreve.

We owe much of our success in 2010, and our ability to weather the recession of 2009, to the strength of the Company's balance sheet. Maintaining a strong balance sheet has always been a management priority. Our balance sheet focus will continue to be on cash generation coupled with an opportunistic approach to debt reduction.

With all that as a backdrop, I'll turn the call back over to Ron, who will take us through our preliminary results for the fourth fiscal quarter and for 2010 fiscal year. Ron?

Thanks for that update, Bill.

We'll now begin the review of our preliminary financial results for the June quarter and fiscal year, beginning on page three. Net sales for the current quarter were $177 million, an increase of $37 million, or 27% over the prior year June quarter. Net sales performance from our domestic operations was particularly strong in the current quarter, driven by the share and market condition improvements Bill just noted.

The Company is reporting net income of $5.5 million, or $0.09 per share for the quarter compared to a net loss of $6.3 million, or $0.10 per share for the prior year June quarter. The quarter-over-quarter improvement was primarily driven by a 140 basis point increase in gross margin related to our much-improved capacity utilization and the Company's share of earnings in Parkdale America.

The gross margin improvement was realized despite the negative impact of an $0.08 per pound increase in raw material costs over the prior year's quarter. In an effort to recapture these loss margins, we announced general price increases across the domestic business during the quarter, which became effective in June and July.

SG&A expenses for the current quarter increased $1.8 million to $11.6 primarily as a result of increased year-over-year volume levels and higher incentive-based compensation expense related to the improved performance of the business.

Turning to page four, net sales for the 2010 physical year were $617 million, an increase of $63 million, or 11% from the prior physical year, with year-over-year increases in the domestic and Brazilian businesses of 5.6% and 14.8% respectively. Net income for the 2010 physical year is $10.7 million, or $0.18 per share, compared to a net loss of $49 million, or $0.79 per share for the prior physical year.

During the physical year, net income from our Brazilian operation improved substantially, and UTSC, our operations in China, reported positive net income, thanks in part to an exceptionally strong June quarter. Our business in China continues to perform very well, and we're very pleased with the strength and mix of the sales to our customers throughout Asia.

Gross profit improved $43 million in the physical year, almost one-third of which came from improved results in Brazil. Compared to the 2009 physical year, gross margins on a consolidated basis improved 650 basis points to 11.6% as a result of higher capacity utilization and operational improvements realized across the Company.

SG&A expense for the year increased $7.1 million to $46.2 million. In addition to the volume-related increases, SG&A for 2010 includes an accrual for incentive and variable compensation in the current year, based on the improved operating results compared to none in the prior physical year.

Looking at our volume and pricing on slide five, quarter over prior year quarter volume increased 25% on a consolidated basis, driven primarily from the continued retail sales improvements in our key segments mentioned earlier. And overall, we achieved a 1.6% increase in pricing on a consolidated basis.

Quarter over trailing quarter volume increased 13% on a consolidated basis due not only to the positive retail trends, but also the recovery of regional sourcing volumes from the NAFTA, CAFTA and Andean regions, which collectively increased over 15%. This improvement was primarily a result of CAFTA's improving competitiveness, as noted in our April call. Not only is additional infrastructure investment being made by our customers in the CAFTA region, but the region's primary competition, the apparel supply chains of Asia, are continuing to experience labor, material and transportation cost increases.

Turning to our balance sheet highlight slide on page six, the Company ended the physical year with $42.7 million in cash on hand, a decrease of $9.8 million from the March quarter-end and flat compared to the end of the 2009 physical year. Some of the key uses for the cash in the current quarter were $10.3 million in a semiannual interest payment, $2.4 million in cash tax payments, mostly in Brazil, $4.3 million for our investment in Repreve Renewables, our new bioenergy feedstock joint venture, and $5.1 million in capital expenditures related to increasing the flexibility of our [Piowa] operation and our recycled chip project.

Staying for a moment on capital expenditures, there's a certain level of annual maintenance capital expenditures required to sustain our operations and keep them running effectively, which is currently in the range of $6 million to $8 million. To continue developing our product flexibility and capabilities, we have increased our focus on strategic capital expenditures, which upgrade our plants and equipment, modernize our capabilities, and develop new and emerging technologies specifically related to our PVA product portfolio.

As noted on the April earnings call, the Company recently began increasing these strategic capital expenditures, and we plan to continue making these capital expenditures over the next six to nine months, with appropriate $14 million to $16 million of expenditures planned. These strategic capital expenditures, combined with the ongoing maintenance capital expenditures, bring our expected capital expenditures for the physical 2011 year to just over $20 million.

During the quarter, the Company also announced a partial redemption of $15 million of its 11.5% senior secured notes due 2014. The redemption was completed in early -- sorry -- the redemption was completed early in the first quarter of fiscal 2011, and approximately $163.7 million of notes remained outstanding after the redemption.

As a result of this partial redemption, the Company expects to record a one-time charge of $1.1 million in the September quarter from the call premium related to the early extinguishment of the debt and $300,000 of a non-cash charge related to the write-off of the origination cost of these notes. The Company expects this partial redemption to result in annual interest savings of approximately $1.7 million. Under our revolver, we had no outstanding borrowings and an availability of $74 million at the end of the physical year.

Although our working capital increased since March, the health of our accounts receivable continues to improve, with approximately 95% of our receivable balances currently within 15 days from the due date. Similarly, the health of our inventory improved, with a 14% increase in net sales over the trailing quarter, resulting in an inventory increase of only about 4% as we continue our focus on inventory velocity and removing slow and obsolete inventories.

Turning to page seven, the Company recorded net earnings of $5.8 million from equity affiliate partners, which compares to a net loss of $1.2 million for the prior year June quarter. On a year-to-date basis, the $11.7 million total reported for the 2010 physical year reflects an improvement of $8.4 million compared to the 2009 physical year.

The Company reported $5.5 million of earnings in the June quarter from its 34% interest in Parkdale America, which compares to a $700,000 loss for the year-ago quarter. The Parkdale America results continue to show improvement as a result of improved capacity utilization driven by the market improvements in the apparel segments mentioned earlier and the acquisition of the Haynes brand cotton spinning assets in October of 2009. And a higher level of deferred revenue recognition from the EAP cotton rebate program also positively impacted the results.

As previously noted, Parkdale America receives a $0.04 per pound rebate for cotton consumed, but such rebate is required to be utilized for qualifying capital expenditures within a certain period of time. As a result of this condition, the recognition of the rebate into operating earnings is deferred until the capital expenditure condition is met. During the quarter, Parkdale America also began a couple of significant capital expenditure projects aimed at improving its efficiency and cost of production, which resulted in the increase in deferred revenue recognition.

Turning to slide eight, Company is reporting adjusted EBITDA of $14.1 million for the quarter and $55.3 million for the 2010 physical year, which meets the top end of our adjusted EBITDA guidance provided during our earlier earnings calls. The $55.3 million in adjusted EBITDA for the 2010 physical year represents a $32 million improvement over physical 2009 and is approximately the same as the adjusted EBITDA for the physical 2008 year despite net sales being almost $100 million lower than the pre-recession levels of 2008.

Now, before I turn the call back over to Bill to provide an update on the outlook for physical 2011, I'd like to provide a brief update on some key dates. We expect the final results of the June quarter to be filed in our 10-K no later than Friday, September 10th, and our quiet period for the September quarter will begin on Friday, October 1st, extending through our earnings call, which is currently scheduled for October 28th.

In addition, we plan to hold investor update meetings in New York and California during the week of September 20th. And early in September, we will be issuing a press release with specific details and contact information for those interested in attending.

With that, I'd like to turn the call back over to Bill. Bill?

Thanks, Ron.

Over the last three years, we've developed a discipline of Lean Manufacturing and statistical process control and an aggressive cost control culture, which has helped return the Company to profitability, and we'll continue to drive operational improvements over the next several years. We're also investing in the future of our company by focusing on commercializing and marketing new PVA products, the backward integration of the Repreve supply chain, and nontraditional opportunities, such as Repreve Renewables.

In addition, we are poised to capture growth and share in all regions of the world, whether it's Brazil, CAFTA or China. And we're entering the 2011 fiscal year with a strong balance sheet and liquidity to support us as we continue to pursue these strategies.

Based on these initiatives, we're excited about the development of our company over the next few years. We expect the operating results for 2011 fiscal year to show improvement, but, more importantly, we see fiscal 2011 as a critical transition year for us.

Last quarter, we spent over $5 million on capital projects, and as Ron mentioned, we expect to spend approximately $20 million in fiscal 2011 as we reinvest in the future of our company. We expect these projects to have near-term paybacks as they are specifically targeted towards expanding our capacity in our growth markets and improving our capabilities and costs to produce our premium value-added products. Furthermore, we expect the majority of these capital projects to be completed and operational by the end of this fiscal year and to begin realizing the full benefits of these projects in the first quarter of fiscal 2012.

At this point, the Company is estimating adjusted EBITDA for the September quarter to be in the range of $15 million to $17 million and in the $60 million to $65 million range for the 2011 fiscal year.

The past few years have been difficult, and all Unifi employees have worked very hard to return the company to profitability. While we're all proud of our 2010 fiscal year results, there is still a lot more to accomplish in order to assure we build on our recent successes and continue to grow profitability and shareholder value.

And with that, I'll turn the floor over to the operator for questions.

(Operator instructions.)

Bryan Hunt with Wells Fargo Securities.

Good morning, Ron and Bill.

Hey, Bryan, how are you?

Morning.

I was wondering if you could talk about the pricing that you pushed through in June and July and whether you think that's sustainable going into the beginning of this fiscal year.

Yes. Basically, over the first six months of this calendar year, both polyester and nylon raw materials were up in the range of 7% to 10%. We did raise prices in both nylon and polyester and implemented those price increases through June and July, and in the same range, basically. So we've essentially covered the increases over the last six months.

It's hard to say what's going to happen with raw materials. As you know, Bryan, having followed this business for a while, raw materials are pretty volatile. And certainly, we're very confident right now we're able to hold these increases as we go forward. And as raw materials go up or down, we'll certainly react to that, but we're pretty confident we're going to be able to hold the margins we've got right now.

And Bryan, I think the other part of it is volume has came back so well that you've got a lot of the operations, especially on the polyester side, that are running full. So that also has helped from our price increase standpoint.

And with running full, are you able to run the mix, or optimize your mix to a richer mix? And did mix contribute to improved margins in the quarter?

Yes. I think from my standpoint, we're running full. If you go back and look, the last -- I guess back in September when we did an earnings release, we still have quite a bit of our product. I think the numbers, off the top of my head, were somewhere around 45%, 48% commodity, another 35% specialty, what we call specialty, and then the PVA in that 12%, 13% range from a company standpoint.

So we still have quite a bit of room to improve our mix around -- to enrich our mix, and that's obviously the focus of the capital investment that we're talking about, continuing to create flexibility and capabilities around that over the next 12 months. So, yes, I think there's the ability to do that.

Regarding the June quarter, if you go back -- I can't remember the call -- probably three, four calls ago, one of the things we saw during the recession was a real slowdown in the development around PVA. So although PVA volumes didn't fall off like we saw some of the commodity volumes fall off, we did see some of the development fall, and that takes a long -- that's kind of a 12-month development-type cycle.

So one of the most positive signs we see about margin growth, going forward, is around that development has picked up really strong, especially in Asia. So we are expecting to see more of that as we move forward. But I don't think the -- kind of the year-over-year improvement June quarter versus June quarter, there wasn't a lot of mix improvement in that number.

And I think the only thing I'd add to that, Ron, is, as you look forward, we are adding capacity in Central America, and then backfilling that capacity here in the US. So we will have some increased capacity in place over the next four or five months.

Expectation is there's going to be continued improvement in some of our markets, so we'll be able to keep running pretty high capacity utilization.

And could you talk about your $14 million to $16 million of strategic CapEx, now what those -- if you could put them in buckets for us, whether it's for PVA or capacity expansion, just so we can understand more about the dollar (inaudible)?

Sure. Roughly half of that, Bryan, is going to be in the backward integration of our Repreve supply chain, going one step back [into] basically taking bottle flake and turning it into chip that can be run through our spinning facility.

The other half is primarily in flexibility in our polyester business, where we're improving flexibility of some of our spinning operations. And we're also spending some money to modernize some of our equipment in Brazil. So I would say it's half and half. Half of it is backward integration into the Repreve supply chain. The other half is aimed at improving cost and certainly improving flexibility for our PVA products in our spinning and texturing operations.

And lastly, I mean, you mentioned capacity expansion. What is the raw percentage increase in capacity expansion you're looking at? And if you--.

--Yes. What we talked about, Bryan, was--.

--It sounds like it's all polyester--.

--You remember -- if you go back to Central America, you know, Central America in our region, what we would consider our home markets here in the US would be kind of North America and Central America. And that Central American region, because of all the things we talked about there, has started to grow fairly well.

So what we're looking at is basically from about a 5% kind of overall top line improvement as a result of moving machines out of (inaudible) into Central America and then replacing those machines with some of the machines we had from when we closed [T4] back in 2006. Those machines were specifically designed for some of the products we're getting a lot of demand for now, some of the higher speeds to run some of the 70 denier products.

So that shipping production out from (inaudible) to Central America and adding those new machines back will have about a net -- net about a 5% top line impact on our revenue.

I'll let someone else ask some questions. Thank you so much.

Thanks, Bryan.

(Operator instructions.)

Brendan MacMillan with Centurion.

Yes, good morning, Ron and Bill. Hey. I just had two quick questions. One was on the follow-on on the previous guy's question about pricing.

So you all have talked about holding margins, but wouldn't it be sort of correct to think about, if you only started your price increase implementation in June, that you've only gotten about a third in the previous quarter, you only got about a third of the most recent round of cost increases back?

Yes. I think it's -- we said June, July. A lot of our customers are typically on some type of "We'll hold your price for a month," or, "We'll hold your price for a quarter." We agree on pricing not on every single shipment, but over a period of time.

So part of our customers -- the monthly customers got it in June, whereas the quarterly customers got it in July. So when you think about, say, the June 2010 quarter compared to the September 2010 quarter, yes, we didn't have as much price increase there at that point in time. But as we move into July -- I'm sorry, as we move into -- yes, as we moved into July and the first part of the September quarter, those price increases did go into effect.

When you think of comparing the guidance we gave of $15 million to $17 million to the $14 million that we did, that doesn't show -- all that improvement doesn't necessarily show up, because September is traditionally -- kind of from a seasonality standpoint, is traditionally one of our lower quarters. That's when most of the textile industry takes its shutdown.

So I think the -- if you try to do a bridge from June to September, you would add in that margin, but then you'd take back off some for volume due to seasonality.

Okay. Would it be fair to say, though, that if costs were up around 7%, that you will -- got maybe 2% of that back in the June quarter?

Oh, yes. Doing the exact numbers on that, yes, I haven't done that calculation.

Yes. I think you'd -- I mean--.

(--Inaudible--.)

--Actually, it's fair to say we got maybe a third of it, or maybe 25% of it in June and the rest of it in July.

Okay, great. Thanks.

And the other question just on CAFTA, if I got the numbers right, you all talked about CAFTA growing 17% year-over-year in terms of synthetic imports, and then I think you talked about apparel, total retail sales, or I should say total retail sales being up a much lower number year-over-year. I think you said 2%, but I'm not positive.

Could you just talk about are you being conservative, or was there some one-time items helping CAFTA, or are you being conservative in your discussion about CAFTA you hope will hold share, expected to hold share for the rest of the year? I mean, are there strong trends that might continue? I know you can't forecast that. It's a bit beyond the company, but just any thoughts you have.

Well, certainly looking at the investment that's been made in CAFTA even over the last nine to 12 months, the expectation is that it should at least hold share. Now, you never know, obviously, with what happened last year after -- with the big downturn, but we are seeing some indication that some retail programs are coming back into CAFTA from Asia.

And again, with all of the investment being put down there, it's possible there could be additional growth in CAFTA. We're being a little conservative in our view there, but certainly there's upside potential, and certainly one of our main strategies is trying to grow in the CAFTA region. And we would expect to see some growth over the long-term, certainly. Over the next two to three quarters, it's kind of difficult to predict.

Okay, great. Were there any one-time -- I mean, were there any, let's say, large operators in Central America that either moved machines or volumes from Asia in this quarter that might not repeat, Bill, or were there -- I mean, any one-time items, I guess, that helped, that you wouldn't think to be the case, going forward, or should I--?

--You know, really, there was no one or two specific items. It was very, very broad-based, and many of the mills down there saw increases in their capacity utilization. And certainly, with our starting up of Unifi Central America, we initially -- I think, if you recall last quarter, we said we initially put a warehouse down there, and we're in the process of putting our manufacturing equipment down there.

We've certainly seen an uptick of our share in that market because of our presence there, and we'd continue to see it. We would expect to see that continue.

Okay, great. Thank you very much.

Thanks, Brendan.

Bryan Hunt with Wells Fargo Securities.

Thank you.

Just running through the numbers, $60 million to $65 million of EBITDA, $20 million of CapEx, $18 million of interest, and say a handful, million on taxes, you're still going to generate free cash of -- at least in the mid-teens.

Right.

Is that kind of the way it falls out? And if it does, I mean, what's your plan? Are you going to continue to build cash, or be opportunistic--?

--Yes, I think we'll -- the one piece of that, Bryan, that -- the redemption of those notes didn't happen until the first part of the September quarter. So off the top of that, you would come out with $15 million coming out of that.

I think you should think of us as we saw the strength that we had, going forward. We were confident in it. We went ahead and pulled the trigger on the redemption of the notes to go ahead and get that interest savings in there early. We'll pay that back.

Whether it's using cash on hand or using revolver and leaving cash in Brazil, we'll ultimately generate the cash to replace that cash that we used to pay that off and then go back kind of through that cycle again. But from a cash flow perspective, I think you should look at us as, yes, we're going to generate cash flow. We're going to take that cash flow and pay down debt kind of incrementally over the next couple years.

And if I look at, give or take, $60 million of EBITDA and where your net debt is going to be, it's going to put you in a very favorable leverage position. Have you talked to the agencies, or is that your plan here in the near-term?

Yes. I think that -- typically when we do that investor meeting, before we do that -- the day before we do that, we'll have meetings with Moody's and S&P. So we'll go through that whole process of where we stand. We've got a revolving credit agreement, our $100 million credit facility expires next May, so kind of going through the process of how that's going, how we're handling that, as well as what our forecast is.

And the reason we picked that week in September, because it's a couple weeks after we file our K. So we've given our full kind of market update, business update, and we've given our annual guidance for the following year, so we've got everything out there to have a full kind of exhaustive conversation with both you guys and the agencies.

Very good. Thank you.

This now concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.

Thanks.