Unifi Inc (UFI) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2011 Unifi, Incorporated earnings conference call. My name is Laura and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Ron Smith, Chief Financial Officer. Please proceed.

Thanks, Laura, and good morning, everyone. Joining me for the call today is Bill Jasper, the Company's Chairman and Chief Executive Officer, and Roger Berrier, the Company's President and Chief Operating Officer. During this call, we will be referencing a webcast presentation that can be found at Unifi.com. The presentation can be accessed by clicking the Fourth Quarter Conference Call link found on our home page.

Before we begin, let me 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 results may differ materially from what is expressed, forecasted, or implied by these statements. I will direct you to the disclosures filed with the SEC and our Form 10-Q's and 10-K's regarding various factors that may impact these results.

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

Thanks, Ron, and good morning, everyone. Overall, our results for the 2011 fiscal year were positive and reflect the continued execution against our core strategies. Some highlights include our focus on continuous operational and process improvements in manufacturing and sales, coupled with strategic capital expenditures help drive year-over-year net income and adjusted EBITDA increases of $14 million and $5 million, respectively, despite the fact polyester raw materials increased significantly through the fiscal year to the highest level in over 30 years, ending the year 40% higher than they were last June.

Revenue grew 19% as both prices and volumes increased over last year. We reduced the amount of our 2014 senior secured notes outstanding by $45 million and we plan to redeem another $10 million within the next couple of weeks.

We made strategic capital expenditures to upgrade our plants and equipment, modernize our capabilities, and help develop new technologies, specifically for our premium value-added product portfolio, which included the opening of our state-of-the-art REPREVE recycling center. These investments are critical to achieving our target of doubling our PVA sales within the next three years.

We've increased sales and earnings in our key global growth markets, including UTSC, our operation in China, and UCA, our new production facility in Central America. UTSC exceeded our revenue projections by 20%, and we anticipate an additional 20% growth there in the next fiscal year. We also expect year-over-year volume growth from CAFTA to be approximately 18% for the 2011 calendar year, and are exploring the feasibility of adding additional texturing capacity to our plant in El Salvador, to meet the projected increased demand in that region.

While we're very pleased by the results of the fiscal year, we recognize that there are many challenges still ahead related to inflation, raw material costs variability, weakness of the US and global economies, and soft consumer confidence. But with the fundamental improvements to our business over the past few years, we feel very confident in our ability to grow the business and extract the maximum value from our core markets.

I will talk about our outlook for the 2012 fiscal year at the end of the call. And at this point, I'll turn the call over to Roger, who will touch on the conditions in our key retail segments.

Thanks, Bill. Before discussing the retail environment, I would like to mention some key dynamics and trends in the North American apparel supply chain.

Dating back to year 2000, 56% of the garments purchased in the United States were produced in the North and Central American regions. In 2009, only about 18% of the garments purchased at US retail were produced in this region. In the last three years, that share has stabilized and began to grow on a unit basis. These recent trends support our view that the remaining US and NAFTA apparel production is somewhat specialized and defensible, while CAFTA is becoming a competitive alternative to Asian supply chains for some apparel segments, and is growing significantly on a unit basis.

Our operations in the US serve many diverse market segments. The apparel segments, including hosiery, represents approximately 65% of our sales, while furnishings represents approximately 15% of our sales. Retail sales of apparel continued to improve, with year-over-year retail sales increasing by 5.8% in the June quarter. However, a portion of this increase reflects price increases that are being passed on to consumers, as apparel retail sales adjusted for inflation increased 4.7% on a year-over-year basis, and less than 1% on a quarter-over-trailing-quarter basis.

Although retail inventory levels have remained steady at 71 days for the past six quarters, retailers are pushing their suppliers to carry more inventory -- of the inventory burden. We have seen a steady increase in inventory days at both the apparel producer and apparel wholesaler levels, indicating a buildup of inventory in the supply chain. In fact, with the retailers pushing for their suppliers to carry more of the inventory, inventory days at apparel producers and wholesalers are at the highest levels that we've seen in the last four years, which could indicate the potential for a softer start to our 2012 fiscal year.

Retail sales of home furnishings were up less than 1% in the June quarter compared to a year ago, and less than 0.5% on a quarter-over-trailing-quarter basis. New home sales continues to be one of the weakest sectors of the economy, and existing home sales softened through the quarter, as potential buyers continue to face low appraisals and tight credit.

Other market segments for Unifi are industrial markets, which represents 12% of our sales. This market includes belting, tapes, filtration, ropes, protective fabrics, awnings, et cetera, and automotive fabrics, which represents 5% of our sales. Sales in the industrial market remain relatively flat and slightly up for automotive.

Several of our key downstream customers are still projecting sales growth in the second half of the year, even as price increases caused by the rising raw materials and production costs are passed on to consumers at the retail level. As they are cautiously optimistic about the second half of the calendar year, so are we. One area that we are watching very closely is the raw materials price gap between the US and Asia, which spiked significantly in the June quarter. PTA pricing, which is a major component of polyester, declined by 10% in Asia in the June quarter compared to the March quarter, while it increased by 2% in the US as a result of unexpected supply disruptions. We expect a return to more normalized GAAP levels as we move through the next two quarters. The return to normal GAAP levels will maintain the competitiveness of the CAFTA region compared to Asia.

On May 4, we officially opened our REPREVE recycling center. We remain very encouraged by the growth and the ongoing opportunities for our REPREVE brand. The technology we installed in this operation will allow us to expand the reach of the REPREVE brand opportunities into more textile applications, as we look to grow this recycling business. We set an aggressive goal one year ago to double our premier value-added business in three years. And, as Bill mentioned, we are on schedule to meet this goal, with REPREVE being one of the key drivers.

With that as a backdrop, I will turn the call over to Ron, who will take you through our preliminary results for the June quarter.

Thanks, Roger. We'll begin that review on page three of the presentation.

Net sales for the current quarter were $195 million, an increase of $18 million, or 10% over the prior-year June quarter, as a result of certain mix enrichment across multiple operations, and higher selling prices in the US and Brazil related to raw material pricing. As noted on our April earnings call, the selling price increase required to capture lost margin due to the raw material increases became effective during the first half of the June quarter.

The Company is reporting net income of $13.5 million or $0.67 per share for the June quarter compared to net income of $5.5 million or $0.27 per share for the prior-year quarter. Gross margin in the quarter declined by 130 basis points, as higher-priced inventory at the beginning of the quarter moved through to customers ahead of the previously noted price increases. In addition, during the quarter, the Company experienced approximately $1.5 million of excess converting costs related to the supply chain interruptions Roger spoke of earlier.

Unscheduled shutdowns by upstream producers related to weather and maintenance resulted in raw material allocations for certain of the Company's suppliers. Despite these allocations, we were able to meet shipment schedules. Nevertheless, these allocations did cause significant operational inefficiencies in our plants during May and June. And while these costs did not affect the fourth quarter, these inefficiencies will result in higher converting costs and margin deterioration during the September quarter, as we work our way through this higher cost at inventory.

Net income from the quarter was positively impacted by a $6.5 million year-over-year gain associated with the Company's share of earnings in Parkdale America, which I will discuss later on the equity affiliates slide. Total SG&A expense for the quarter decreased by $900,000 compared to the prior year, primarily as a result of higher operating targets, which resulted in lower variable compensation in fiscal 2011.

Turning to page four, net sales for the 2011 fiscal year were $708 million, an increase of $91 million, or 15% from the prior year. Similarly to the quarter, the primary drivers of the sales increases were increased selling prices related to higher raw material prices; growth of our higher margin PBA products; and volume growth in China, Central America, and the US regions.

Net income for the 2011 fiscal year is $20.5 million or $1.25 per share compared to net income of $10.7 million or $0.53 per share for the prior fiscal year. It is important to note that income tax expense and net income have been positively impacted over the last several years by the Company's utilization of net operating loss carryforwards to offset domestic taxable income. As of the end of the 2011 fiscal year, we have approximately $48 million of net operating loss carryforwards remaining to be utilized.

Year-over-year improvement in volumes, SG&A, interest expense, and the Company's share in earnings of equity affiliate all contributed positively to our net income. These improvements were partially offset by margin pressure from the 40% increase in polyester raw material costs throughout the year, which Bill mentioned earlier.

Looking at our volume and pricing highlights on page five, quarter over prior-year quarter volume decreased 4% on a consolidated basis. The volume decline in polyester was offset by a 19% price increase related to mix in Richmond and the price increases implemented as a result of the higher raw material prices. Nylon volume was slow, as expected, at the beginning of the June quarter, but did begin to pick up at the end of the quarter, as key customers reached targeted inventory levels and restarted idle production.

Compared to the March 2011 quarter, volume decreased by 3.1% on a consolidated basis and pricing improved by 6.3%. Polyester volumes stayed strong in the first half of the June quarter but softened towards the end, as apparel producers responded to the high days in inventory that Roger spoke about earlier. In addition, the bottom end of our polyester business was negatively impacted by import pricing pressure, as Asian yarn prices dropped sooner and faster than those in the US.

Turning to our balance sheet highlights on page six, cash on-hand increased $8 million during the quarter to $27 million, approximately $18 million of which is in Brazil. The primary contributors to cash during the quarter were $14.1 million of adjusted EBITDA; $1.6 million of dividends from equity affiliates; and working capital improvements. The primary uses of cash during the quarter were $3.2 million of capital expenditures and $7.7 million of interest payments, and $2.6 million of cash taxes.

As of the end of the June quarter, total debt was $168.7 million, $133.7 million of which was the Company's 2014 senior secured notes. As previously discussed, the Company expects to continue utilizing excess operating cash and borrowings under the revolver, to continue to redeem additional amounts of these 11.5% notes. As a part of this plan, the Company announced an additional $10 million redemption of 2014 notes on August 5, 2011. This redemption is expected to result in a one-time pretax charge for early extinguishment of debt in the 2011 first fiscal quarter of $0.5 million or $0.02 per share. As of the end of the June quarter, the Company has $34.6 million of outstanding borrowings under the revolving credit facility and approximately $52 million of remaining availability.

Turning to page seven, the Company recorded net earnings of $12.5 million from our equity affiliate partners in the June quarter, and net earnings of $24.4 million for the fiscal year. As expected, Parkdale recovered from a slow start in the March quarter. The Company's share of net earnings from Parkdale America during the June quarter was $12 million, a $6.5 million improvement in earnings over the year-ago quarter, despite $7.8 million less of earnings related to the timing differences in the recognition of cotton rebate income.

During the quarter, we understand Parkdale America recouped accounting losses recognized in the March quarter, as cotton prices began to fall back to normal -- fall back from record levels. In addition, Parkdale America realized the benefits of strategic operating decisions that it made earlier in the calendar year.

Turning to page eight, the Company is reporting adjusted EBITDA of $14.1 million for the June quarter, which is within the $14 million to [$16 million] range provided during the March quarter earnings call. Adjusted EBITDA for the 2011 fiscal year is $60.5 million, representing a $5 million improvement over the adjusted EBITDA for the prior fiscal year.

As we look forward, we expect continued improvement in adjusted EBITDA, which Bill will discuss in a few minutes. In addition, we expect other improvements to operating cash flows during fiscal 2012. We expect to return to capital expenditure levels of $12 million to $15 million; net interest expense continues to decrease to approximately $15 million; and our investment in working capital will decrease to the extent raw material prices return to more normalized levels.

Now, before I turn the call back over to Bill, I'd like to provide a brief update on some key dates for the June quarter. We expect to file our 10-K for the fiscal 2011 year with the SEC no later than Friday, September 9. And our quiet period for the September quarter will begin on Friday, September 23, and extend through our earnings release conference call, which is tentatively scheduled for Thursday, October 27.

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

Thanks, Ron. Before discussing our guidance, I'd like to make one general point. We're seeing inflation in our petroleum and wood-based raw materials, which will increase considerably the price of many of the consumables we use to produce and ship our products. We estimate the total impact of these increases could be as high as $10 million for the 2012 fiscal year. However, we believe the full-year impact of efficiencies gain through completed process improvement projects across all areas of the Company, improvements from active programs slated for first-half completion, and the benefits created by the strategic capital projects that we have completed and operational by the end of fiscal year 2011, are expected to more than offset these increases.

As we look forward to 2012 fiscal year, we are projecting improved earnings in EBITDA when compared to fiscal year 2011. However, we will face short-term issues in quarter one, as both Ron and Roger mentioned, which will result in a slow start to the year.

These issues are -- one, a disruption we experienced in polyester raw material supply due to a BP terephthalic acid plant shutdown, resulted in the Company's curtailing production significantly more than was planned during June and the Fourth of July period. We anticipate that this curtailment will result in a one-time cost variance negatively impacting our results in the September quarter by roughly $1.5 million when compared to the last quarter.

Secondly, our forecast for UTSC in China and UCA in Central America remains strong. However, we expect weaker results this quarter from Brazil, which is being challenged by the strength of its currency, making imports more competitive, and high-cost raw materials running through their inventories. We expect Brazil will be roughly $2.5 million less adjusted EBITDA than last quarter.

We anticipate the $4 million impact of the cost variances and the weakness in Brazil will result in the first quarter being somewhat weaker than the rest of the new fiscal year. However, improvements we've made will offset some of this first quarter impact, and we project adjusted EBITDA in the first quarter will be in the $12 million to $13 million range. Despite the slow start, we estimate adjusted EBITDA will be in the $60 million to $65 million range for fiscal year 2012, and that net income will improve as both operations and our equity affiliate investments continue to show year-over-year improvements. This assumes a slowly improving US economy and retail environment.

In addition, we will aggressively manage cash, and expect to generate $30 million to $40 million free cash flow through the fiscal year, which we expect to use to redeem additional amounts of our 2014 11.5% senior secured notes.

And with that, I'll now open the floor to questions. Operator?

(Operator Instructions). Chris McGinnis, Sidoti.

I just guess, going through the pressure on the apparel side, how do you see that playing out with the inventories where they're at, I guess, on the full-year?

From what we're hearing from the -- on the apparel retail side, we see that moderating somewhat. The retailers are definitely pushing the inventory back to the supply chain. And certainly, one of the key features that we'll be watching is the back-to-school sellthrough. And there is some optimism from the retailers that the second half of the year will be positive.

And what's driving that optimism? I mean, if you're thinking -- is it just lower pricing? Or better pricing, I guess? Or a stronger, maybe, consumer environment?

Well, it is a little bit related to the stronger consumer environment, we believe.

I think the other thing that, as we hear some of the higher projections of growth at retail, a lot of that is higher -- it's the inflation piece of it. When you turn the page and get back behind that to the unit level, you're seeing much more moderate growth on the unit level. I guess our hope is -- our expectation is, as the region continues to stay strong, small growth and picking up share in the region will lead to potential growth for us, especially in Central America.

That makes sense. I guess just on the gross margin side and kind of going forward, how that plays out on the -- do you see the improvement -- how long do you see the improvement from, obviously, the bottom being, hopefully, in Q3 of this last year, but going forward, is it lower in Q1, just because of the issues you talked about? Could you just walk through, I guess, your gross margin, your thought process on the cost, and where your pricing is today?

Yes, I think that the two things that we talked about there in the quarter was around -- as raw materials fell precipitously out of Asia, a lot of our competition in Brazil specifically is Asian imports. And so we have a longer supply chain because we're doing some converting.

So that $2.5 million, $3 million impact that we're projecting in Brazil -- negative impact we're projecting in Brazil for the quarter is certainly going to have an impact on margin, as well as this $1.5 million worth of converting cost variances that, through our inventory capitalization, is basically putting it over into the September quarter. So both of those will have a negative impact on margin.

I think what we would say from a normalized run rate, once we work through this spike in inventory in Brazil and this temporary maintenance issue, I think we would say, we would agree that March was the low point. We began passing those higher raw material prices along in the June quarter, and we were successful in passing those along. So we've recaptured that lost margin, so we will expect to go back to more like the levels from early 2011, the September to December quarter, of gross margin. And that's how we get to, even though we're starting several million dollars behind what we did last year, still getting to improve numbers through that improved gross margin, when you get into the December, March, and June quarters.

All right. That makes sense. Thank you. And I guess just quickly on PVA. Could you just talk about maybe the trends you're seeing in that business? I may have missed it in the opening comments, but maybe -- just maybe some growth rates or some kind of data points in that, and how that's trending towards your plan?

Yes, as we mentioned last year, we set out a goal of doubling our PVA business in three years. And we're on schedule to do that. So we're seeing growth rates in that 20% to 25%. And REPREVE, our recycled product, is a key driver to that growth rate, but we're also experiencing sales on other value-added products in addition to REPREVE. But the Company invested $8 million in our recycling center that we opened in May, May 4. And the response that we're receiving from our customer base has been very encouraging.

One thing I'd add to that -- the important part about that is there -- our 25 per -- you know, in order to do that doubling in three years, you need 25% annual growth. We're seeing that on the volume level, not just on the dollar level with higher prices. So that unit volume level -- all the strategic investments we've made over the last couple of years are certainly giving us the flexibility to be able to stay on track with that 25% volume growth rate.

All right. I'll jump in the queue until -- see if anyone else has questions. Thank you.

Joe Phillips, Kellner DiLeo.

Ron, I missed your remarks about liquidity and availability. Can you repeat those, please?

Yes, we ended the year with $27 million in cash and $52 million of availability. So that's $79 million of liquidity.

$52 million.

Yes.

Great. Thank you.

David Schechter, Perspective Capital [Management].

Thank you. What -- it's not your business, but Parkdale is obviously a big impact. What's your thoughts about Parkdale for fiscal 2012?

The comment we gave back in March, obviously, we spent a lot of time with those guys in March because we were concerned with the results that happened. They went from making, I guess, $15 million a quarter to having a negative quarter. So we spent a lot of time with those guys at that point in time. And their comment was their expectation for calendar '11 -- remember, they're on a calendar year, not our fiscal year -- but their expectation for calendar '11 was that they would be -- roughly at what they were last year, potentially slightly improved.

They got back on that track this year. I think their six-month number on a calendar basis from a net income standpoint last year was around $24 million, $25 million. This year, their six-month number is about $36 million. So they're ahead of pace for last year and they expect to stay ahead of pace. And last year's numbers were $62 million of net income and about $91 million of EBITDA. So we're optimistic about their continued performance.

When you look past December, we've had general conversations, like everyone, it's all about units at retail, but they haven't done -- because of their calendar year, they haven't done any 2012 budgeting.

(multiple speakers) And this is Ron. I guess the only thing I'd add to that is, a higher percentage of their business is in Central America than our business. And that certainly is where the growth is in this region. They've recently modernized a lot of their plants. They're very, very effective managers. So even though we don't give guidance on them, I think, certainly, their prospects are very, very positive, in my mind.

And they've done a great job working through the cotton environment over the last 18 -- or 12 months. I mean, they've really done a great job.

They're very good managers in that business. There's no doubt in my mind about that.

So it wouldn't be unfair then to, if you were going to put $60 million to $65 million in EBITDA adjusted for you guys to add back another potentially $30 million for them as well?

Yes, that's the run rate that they've been on. And we started -- we changed our presentation of our adjusted EBITDA slide back there a little bit, to come down to an EBITDA number now that has Parkdale in it. You can go through and calculate what an EBITDA number with Parkdale -- with our -- with all of our equity affiliates in it would be. But yes, I think the -- Parkdale's expectation is, say, $90 million of EBITDA or slightly better in calendar 2011. So from a normalized run rate, that's certainly what we would consider, our third of that being $30 million.

Thanks very much and great fourth quarter.

There are no further questions at this time.

Okay, Operator, thank you. Just a couple of closing comments. We faced a lot of challenges last year, like polyester raw materials rising very, very quickly to basically unprecedented heights. We had a couple of short-term supply shortfalls upstream, due to some plant shutdowns in the industry. We had rising cardboard and utility costs throughout the last year, and we still improved results. In an uncertain and volatile economic environment, we've demonstrated the ability to react to these issues and effectively improve our business.

Now while I'm a little disappointed that we're having a slow start to this year, again, this is just a couple of other issues that we've proven we can deal with. And I'm very confident that, going through this year, we're going to continue to improve this business as we grow our PVA business; as we see growth in Central America; as we continue to improve our costs, which is something we don't talk much about but we've done over the last four years.

You know, I'm confident that, as long as we have at least a slow recovery in the US economy, and retail stays relatively stable and maybe improves a little bit, that we're going to continue to show improved results as we go forward. And with that, I want to thank everybody for being on the call and thank you.

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