Unifi Inc (UFI) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Unifi second-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the conference over to James Otterberg, CFO. Sir, you may begin.

Thank you, Latoya, and good morning, everyone. Joining me for the call today is Bill Jasper, our Chairman and Chief Executive officer, and Roger Berrier, our 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 second-quarter conference call link found on our homepage.

Before we begin, I need to first advise you that certain statements included on today's call will 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 of the markets in which the Company operates and other contingent matters. 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-Ks and Form 10-Qs regarding various factors that may impact these results.

Also, please be advised that certain non-GAAP financial measures such as adjusted EBITDA will be discussed on this call, and a non-GAAP reconciliation can be found in schedules to the webcast presentation.

Before we get to the financial details for the quarter, I'd like to turn the call over to Roger, who will provide you with an overview of the Company's markets, raw material trends and other important business updates.

Thanks, James, and good morning, everyone. I'll start this morning with a few brief comments regarding our outlook for our key retail market segments. Retail sales of apparel, which were 3.3% higher than the December 2014 quarter compared to the December 2013 quarter, reflect an overall strong holiday selling period. For the full 2014 calendar year, retail sales of apparel increased 2.1% compared to 2013. And the general consensus among forecasters is that the US economy will continue to grow slightly in 2015, particularly as consumers adjust to lower gasoline prices.

One very positive trend for Unifi is that the share of synthetic apparel from all countries is expected to reach 52% for 2014 once full-year data is reported, which would mark the first time that the share of synthetic apparel will be greater than cotton apparel. This supports the trends we see in retail as more and more brands are incorporating more performance apparel in their products. The growth of synthetic apparel, particularly from the CAFTA and NAFTA regions, is driving our decision to increase our textured polyester yarn capacity in Yadkinville, Madison and El Salvador, as we mentioned in previous investor update.

In addition to increasing our capacity, the 12 texturing machines that we will add in these locations will also improve our manufacturing flexibility, including our small production run capabilities, which will allow us to support the Company's mix enrichment strategies and handle an increasingly complex product mix. We expect to begin installation of the first set of texturing machines in the third quarter and continue to bring more online throughout the balance of the fiscal year.

Looking at other retail markets, on an annual basis retail sales of home furnishings grew 3%, and North American automotive production increased approximately 4% compared to the previous year. Builders are expected to increase the pace of new home construction in 2015, and low interest rates will help support sales of both existing homes and new automobiles.

We are pleased with our sales volumes across all of our business segments. And future orders continue to look promising. James will provide additional sales and revenue details in his comments in just a few minutes.

Prices for our raw materials declined during the December 2014 quarter. And as we depleted our higher-cost inventory, we adjusted prices in January as necessary to maintain our competitive pricing position in the market. We will continue to evaluate pricing during the March 2015 quarter to further adjust as necessary to any continuing decreases in our raw material costs. However, our focus will remain on offering our customers as much pricing stability as possible throughout the shift in raw material costs.

While the gap in polymer pricing between the US and Asia remains in the $0.12 per pound range, we will continue to see pressure from imports on the lower end of our commodity business. As Asian yarn producers are being even more aggressive with their prices for DTY yarn in response to low capacity utilization rates.

As mentioned earlier, we expect to begin the installation of the first of our new texturing machines in March, and we expect to have all the machines scheduled for Yadkinville, Madison and El Salvador operational before the end of our fiscal year in June. We will continue to update you on the progress of our other significant capital expenditure projects, which include the conversion of one of our POY spinning machines into six smaller machines, the expansion of our air jet texturing capacity and the build-out of our solar farm at the Yadkinville facility, as more details become available.

We are also continuing to explore backward integration opportunities into plastic bottle processing to support the growth of REPREVE, which is our brand of recycled products. We will continue to focus on ways to produce REPREVE more efficiently and effectively, including investing in the latest technology in co-developing machinery designed specifically for the production of REPREVE.

Turning to our international business, we are pleased with the performance in Brazil and China - in the December 2014 quarter. Overall volume in Brazil improved in the current quarter compared to the prior-year quarter, however net sales revenue was negatively impacted by lower average selling prices in local currency and the devaluation of the Brazilian real versus the US dollar. However, overall gross profit in Brazil increased in the December 2014 quarter compared to the year-ago quarter based on margin improvements in both manufactured and resale product.

Volume in China increased in the recent quarter over the prior-year quarter, and we saw an increase in demand for our REPREVE and SORBTEK products based on some programs being commercialized that have been in development for some time. We have also adjusted pricing in China, reflecting the lower polyester raw material costs and also the aggressive pricing for commodity virgin yarns due to the low utilization rates of capacity. Our strategy in China focuses on premier value-added products and keeps us somewhat insulated from the challenges that are being faced today by commodity producers.

We continue our positive outlook for both Brazil and China, and we remain confident in our mix enrichment strategy and our belief that earnings will continue to improve over the next several quarters.

Turning to our PVA products, our first-ever Turn It Green week helped drive awareness and education for REPREVE by generating approximately 240 million media impressions for the brand. Turn It Green week began with REPREVE turning the Dean Smith center from blue to green during the December 3 basketball game between the UNC Chapel Hill Tar Heels and the Iowa Hawkeyes. Four days later, REPREVE turned Ford Field green by giving each of the 65,000 fans of the Detroit Lions a REPREVE green rally towel made with three plastic bottles. Television coverage for these events included ESPN's national coverage of the UNC basketball game against Iowa, the NFL Network and multiple stories on TV stations in Detroit and across the Carolinas.

REPREVE will continue to have a presence on the campus of UNC Chapel Hill as we engage students, faculty and alumni in a campus-wide recycling contest that will lead into the 2015 graduation ceremony, where each graduating student will be wearing a REPREVE-based graduation gown. We will continue to develop new marketing programs to increase the awareness for REPREVE, and we are in the process of assessing several new opportunities. A key benefit of these programs is their ability to attract the attention of brands and retailers that are looking to create more sustainable products. Our development pipeline continues to grow, and we are excited by the new programs that will be available soon.

One new program that is being launched today at the Outdoor Retailer show in Salt Lake City is the result of collaboration between Unifi and The North Face. The North Face will be incorporating three environmental-friendly materials into its popular Denali line of fleece jackets. Including REPREVE recycled yarn, REPREVE WaterWise yarn with color technology and REPREVE Textile Takeback yarn made from fabric scraps and recycled bottles.

Through the REPREVE Textile Takeback program, the fabric waste from the Denali jacket production is collected and sent to our REPREVE recycling center, where it is recycled into new REPREVE Takeback yarn. This yarn, along with yarn made from recycled plastic bottles, is then knitted into new fabric for Denali jackets. So for every 10 Denali jackets made, four new ones could be made using the recycled fabric scraps from those jacket and recycled bottles.

We remain excited about our development efforts and premier value-added product strategy. Other new PVA programs that will be available at retail in 2015 include performance T-shirt and polos from Gildan; mattress covers, pillowcases and sheets that will be available at Macy's and Bed Bath & Beyond; and expanded REPREVE products from Quicksilver and Volcom. Target stores will launch new denim garments made with REPREVE, and Walmart will introduce REPREVE-branded garments under its Russell, Starter and George labels. And even Costco will be introducing an athletic sock program featuring SORBTEK.

With that as a backdrop, I will turn the call back over to James.

Thank you, Roger. I will begin the review of our preliminary financial results for the December quarter on page 3 of the presentation with net sales and gross profit highlights by segment. Net sales increased $2.5 million, or 1.6%, to $163 million for the December 2014 quarter, compared to net sales of $161 million for the prior-year quarter. The increase in net sales is attributable to improved volume in all three of the Company's reportable segments, along with PVA growth within the Company's polyester segment. Consolidated sales volume is higher than the prior-year quarter, driven by varying increases in each segment. The slight quarter-over-quarter increase in sales volume for our polyester segment was primarily due to the continued success of PVA programs offset by lower chip sales and a lower average denier.

International segment sales volume increased from the prior-year quarter due to volume improvements in Brazil for both manufactured and resale products, despite challenging economic and competitive conditions, and higher volumes in China as a result of the rollout of several new sales programs. The quarter-over-quarter price decrease in the nylon segment is mix-driven. The quarter-over-quarter price decrease in the international segment is a result of lower prices in Brazil due to competitive pressure from low-priced imports and lower raw material costs, unfavorable currency translation in Brazil due to the devaluation of the real against the US dollar, and lower pricing in China due to a lower-priced sales mix.

When reviewing our current-quarter gross profit results against the prior-year quarter, the Company is reporting higher consolidated gross profits as well as higher gross profits for each of our three reportable segments. For Q2 of this fiscal year, gross profit improved to $23.3 million from $18.5 million for the prior-year quarter and 14.3% of net sales versus 11.5% for the prior-year quarter.

Gross profit improvement in the polyester segment is due to improved margins as a result of our mix enrichment initiatives, declines in raw material costs and a slight increase in volumes. The increase in nylon segment gross profit is driven by higher volumes and improved margins in our texturing operations. The gross profit increase in the international segment versus the prior-year quarter is due to higher volumes for both Brazil and China, higher resale margins in Brazil on the local currency basis and lower variable manufacturing costs in Brazil as a result of lower net energy costs. Partially offset by unfavorable currency translation in Brazil and a slightly lower margin sales mix in China.

For the six months ended December 2014, when compared to the prior-year six-month period, net sales increased $8 million, or 2.4%, to $337 million. This sales increase is due to higher volumes in our nylon and international segments, partially offset by pricing declines in both segments. Year-to-date gross profit improved to $44.2 million and 13.1% of sales from $38.5 million and 11.7% for the prior-year period. Gross profit increased for all three reportable segments for the year-to-date period as compared to the prior year, with the same factors driving the year-to-date change as those impacting the quarterly comparison.

Turning to slide 4, I will now review our income statement highlights for the second quarter. For the three months ended December 28, 2014, the Company is reporting preliminary pretax income of $12.3 million on $163 million of net sales. Pretax income is $2.2 million higher than the $10.1 million of pretax income generated during the prior-year second quarter. This increase in our quarterly pretax income is primarily attributable to $4.8 million of improved gross profit driven by the factors previously discussed, partially offset by lower earnings from our equity affiliates, which we will discuss on slide number 6, and slightly higher SG&A expenses, primarily due to stock-based compensation, marketing expenses and professional fees.

Increases in year-over-year marketing expenses were due to our recent marketing campaigns with the NFL's Detroit Lions and UNC Chapel Hill, which were slightly higher in the quarter than our expected run rate due to timing.

For the current quarter, we are reporting preliminary basic EPS of $0.52 against $0.34 for the prior-year quarter. Further impacting preliminary EPS is a favorable decline in our effective tax rate, primarily due to the timing of lower taxable versus book income for Parkdale and an overall lower effective tax rate for our foreign operations. The decline in average basic shares outstanding to 18.2 million shares from the prior-year quarter's 19.1 million shares is due to the Company's previously announced stock repurchases. Based on the success of our mix enrichment initiatives and indications of the declining raw material environment net of any pricing adjustments that Roger mentioned, we expect to see continued year-over-year increases in our gross profit dollars and our gross margin percentages for the upcoming quarter.

Turning to slide number five, I will now review our income statement highlights for the six months ended December 28, 2014. For the six months ended December 20, 2014, the Company is reporting preliminary pretax income of $23.2 million on $337 million of net sales. Pretax income is $1.4 million lower than the $24.5 million of pretax income generated during the prior-year period. This decrease in pretax income is primarily attributable to lower earnings from our equity affiliates, which we will discuss on the next slide; slightly higher SG&A expenses; higher net interest expense due to one-time interest income benefit received by our Brazilian subsidiary in the prior-year period, partially offset by $5.8 million of improved gross profits driven by the favorable factors previously discussed.

For the six-month period, we are reporting preliminary basic EPS of $0.90 against $0.80 for the prior-year period. The increase in EPS is partially attributable to a lower effective tax rate and the previous described decline in average basic shares outstanding from $19.2 million to $18.2 million.

Beginning on slide number six, we can review our equity affiliate highlights. As of December 28, 2014, the Company has approximately $106 million recorded for investments in unconsolidated affiliates. These investments consist of our 34% ownership in Parkdale America, a domestic cotton spinner, and our 50% interest in two joint ventures that supply raw materials to our domestic nylon operations.

For the current fiscal quarter, these equity affiliates accounted for $3.3 million of the Company's pretax earnings, which is a decline of $1.8 million versus the prior-year second fiscal quarter. Year to date, equity affiliate earnings of $7.0 million declined $4.2 million from the prior six-month period, all of which is attributable to Parkdale America. Lower earnings for Parkdale America can primarily attributable to lower amounts of income recognized under the EAP rebate program. Due to the timing of the recognition of these EAP benefits, the prior-year periods included incentives that were previously deferred until their required capital expenditures were made.

Through the six-months ended December 2014, we have received no distributions from either Parkdale America or our two nylon joint ventures. We are, however, excited about several value-adding capital projects currently ongoing at Parkdale and are forecasting distributions to be limited to the routine tax distributions from the JV to its members for the remainder of this fiscal year.

Turning to slide number 7, the Company's adjusted EBITDA results are presented. For the second quarter of the current fiscal year, the Company is reporting adjusted EBITDA of $16.2 million with an EBITDA margin of 9.9%, in comparison to $12.6 million and a margin of 7.8% for the prior-year quarter. Improved gross profits discussed earlier offset by higher SG&A expenses are the primary reasons for the higher adjusted EBITDA versus the year-ago quarter. For the first six months of the current fiscal year, the Company is reporting adjusted EBITDA of $30.4 million, with an EBITDA margin of 9% in comparison to $27 million at an EBITDA margin of 8.2% for the prior-year period. The year-to-date increases and adjusted EBITDA are driven by improved gross profits partially offset by higher SG&A expenses and a $500,000 bad debt provision recorded in the previous quarter by our Brazilian subsidiary.

On slide number 8, we can review the Company's working capital highlights. The balance of $139 million in adjusted working capital at December 28, 2014 is approximately 21% of annualized net sales. The increase in the Company's adjusted working capital dollars versus the beginning of the fiscal year is primarily due to lower amounts for accounts payable and accrued expenses, due to reductions in amounts due to vendors related to CapEx, lower raw material purchases and payments made under variable compensation programs. These changes were mostly offset by a decline in receivables attributable to the holiday shutdown period and a devaluation of the Brazilian real. And also a slight increase in inventory was due to higher on-hand units primarily to support growth for our regional texturing and recycling business. Partially offset by lower raw material costs and the effects of the weakened Brazilian real.

Total working capital was $155 million, and the slight increase since the beginning of the year is primarily driven by the aforementioned increase in adjusted working capital, cash earned by our foreign subsidiaries, and an increase -- and an increase in other current assets due to the domestic operations ending the period in an income tax receivable position. The increase in other current liabilities is primarily driven by an increase in the current portion of debt due under our ABL facility, partially offset by a decrease in income taxes payable.

Turning to slide number nine, details for the Company's capital structure are presented. The Company ended the quarter with $111.3 million of total debt and net debt of $93.4 million. And net debt has increased approximately $9.8 million from the beginning of the fiscal year. The Company's weighted average interest rate for its outstanding indebtedness at December 28, 2014 was approximately 3%, and our total revolver availability and liquidity were $60.9 million and $78.8 million respectively.

In addition, during the first quarter of the current fiscal year the Company was able to repurchase 149,000 shares of its common stock at a total cost of $4.2 million under our stock repurchase program. As of quarter end, there were approximately 18.2 million shares outstanding.

The various capital spending projects outlined earlier by Roger are primarily related to our core regional polyester and recycling businesses. The Company's anticipated commitments to these projects in fiscal year 2015 is estimated to be approximately $50 million, with the expectation for growth in our PVA and higher-value product lines. A portion of these projects are expected to be funded with the borrowings available under our ABL revolver.

And to conclude, before I turn the call over to Bill, I would like to mention that we expect to file our Form 10-Q for the December quarter on or before the filing deadline, which is Friday, February 6. With that, I would like to now turn the call over to bill.

Thanks, James. Good morning, everyone. I'm certainly pleased that the momentum that we built in our first quarter carried over to our December quarter. In looking at the first half of the 2015 fiscal year, the Company is ahead of last year on virtually every key measure, including net sales, gross margin, net income and adjusted EBITDA.

Our balance sheet remains strong, and our ability to generate cash from operations along with our enhanced borrowing capacity continue to provide the foundation to allow us to increase capital spending to pursue profitable growth-related opportunities. We are particularly encouraged by the fact that gross profit for each of our reportable segments increased the first half of 2015, while compared to the prior-year period. Our domestic business continues to benefit from the growth in synthetic apparel production in the NAFTA/CAFTA region, which is driving demand for our broad portfolio of client yarns.

Our plans to increase texturing capacity in El Salvador and the US will help us meet the growing supply needs and better service the needs of brands and retailers sourcing from the region. We will also continue to focus on and support the growth of our branded premium value-added products which include improving our asset flexibility, increasing our production capacity for REPREVE and exploring the potential for the backward integration into plastic bottle processing for REPREVE.

Despite local economic conditions in both Brazil and China and Brazilian currency devaluation, net sales and gross margin improved in our international operations for both the quarter and the first half. As Roger mentioned, we continue to take a long-term view of both Brazil and China and remain confident that our mix enrichment strategy and focus on differentiated products will drive further improvements over the next several quarters.

In terms of trade legislation, we believe that there will be a big push to finish the negotiations on a trans-Pacific partnership in 2015, and many expect that the final text will be send to Congress by the middle to the latter half of this year. There's a lot going on behind the scenes right now with the USTR working bilaterally country by country to resolve the remaining key issues. The National Council of Textile Organizations has been working very hard to help protect the things that are most sensitive to the textile industry in the Western hemisphere, which includes a strong yarn forward rule of origin, fair terms of market access, duty phase-outs and strong customs enforcement and rules of origin.

As we look to the second half of the 2015 fiscal year, we will continue to focus on driving financial improvement to our core businesses through lean manufacturing, physical process control, and a rigorous and disciplined improvement process, and market share gain initiatives. We will also look to capitalize on the increased awareness that we are creating for REPREVE through our marketing and co-branding programs. And we will expect to begin seeing the positive results from some of our growth-related capital expenditure projects that we have discussed as early as the end of this fiscal year.

In addition, as we had discussed at our investor day back in November, we are anticipating spending up to $115 million, over $70 million of which is for growth-related capital projects over the next three years, and expect to achieve significant financial improvement as a result of those projects in the next three to four years. Our adjusted EBITDA in the December of 2014 quarter was at the high end of our expectations and benefited from our strong gross profit results in the quarter. Based on our current outlook and assumptions, we expect adjusted EBITDA for the coming quarter to be in the $14 million to $15 million range, which compares favorably to the $12.6 million adjusted EBITDA result from the third quarter of the prior year. And we do reconfirm our fiscal year 2015 annual adjusted EBITDA guidance in the low to mid 60s.

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

(Operator Instructions). Chris McGinnis, Sidoti and Company.

Good morning. Nice quarter, and thanks for taking my questions. Just I guess -- just to start off maybe with the lower kind of input costs, the decline in oil, maybe you could just talk about that in terms of do you see a benefit in the gross margin in the quarter you just had. And I guess just how does it impact your top line going forward? Could you maybe just dig into that a little bit more?

Chris. Good morning. This is Roger. I'll answer part of that, and certainly James and Bill can jump in and answer the other part. During the quarter, we started to see a decline in our raw material costs that we referenced. If you look at how we flow the raw materials through our operations, certainly our work in process and also our inventory, it takes around 60 days for us to run that fully through our operation and out to our customers. So as we started seeing some of that lower raw material costs, if you look at our cost of goods sold we didn't see all that come through into the quarter. And then certainly we started reacting, as I mentioned in January, to lower prices to make sure that we continue giving good value, good pricing and competitive pricing to our customers.

Yes. I guess, Chris, the only thing I would add to that -- this is Bill -- with regard to your revenue question, certainly since raw materials is such a large part of our cost, as we do adjust pricing to take into account the lower raw material prices, it usually will have an impact on our revenue, bringing it down somewhat. However, we don't expect our margins to be affected and would expect to actually margins to remain the same.

All right. 60 days -- is the push from the customer, or is it more of just the competitive landscape to make you bring your prices down instead?

Yes, it's definitely a push from our customers. They're getting pressures today from brands and retailers. We are getting calls directly from brands and retailers that know us very well today because of our connection with them, with our premier value-added products. So there's a lot of pressure out there today for the lower prices. People see that oil is dropping significantly, and they know that that's related to our raw materials. And they are asking for the relief. And we certainly look at the timing of what's happening with our inventories and our processes. We also look at the value that we are bringing to the market and reacting accordingly.

Sure. I guess maybe just talking about the expansion of capacity, what is your utilization rate, if I'm thinking about it that way, in the region itself for the moment? And how quickly with the capacity you are expanding can you ramp that up? Or how long of a window do you have until you fill that?

We look at our sort of capacity utilization today, typically the third and fourth quarter, which we just started the third quarter, is our stronger quarters for apparel. And we are running close to 100% utilization today. Now, if you look over the last two or three years, the denier -- that we quote in denier, which is sort of the weight of the polyester, the garments at retail have been getting lighter and lighter, so our average denier has dropped, which requires us to run more spindles to produce the same amount of volume or pounds. So we are adding machinery spindles to keep up with the drop in denier to generate the same amount of volume.

In addition to that, we are seeing volume opportunities as brands and retailers have moved programs into CAFTA, and they are talking to us about over the next one to three years moving additional programs into CAFTA. And they are asking us, they will need more volume from us, and they want to see us making that investment, which we are making that investment and communicating not only to our customers but we are also communicating to the brands and retailers that we are making the investment. We are ordering the machines. And they see us putting in the machines, and it gives them confidence to go ahead and look to move these programs back to the region.

So as we put these machines in, certainly we expect to start running -- out of the 12 machines, we will definitely start running a big portion of those machines. And then over time, probably in the next year to 18 months, grow into that additional capacity.

Great. And what's the driving factor behind their move to the region? Is it just -- is it lead times? Maybe we just dig into that. Is it --

Yes, they are seeing the benefit of certainly CAFTA and getting more comfortable with the production in CAFTA. And actually CAFTA is making more investments in the region to produce more of the complicated type garments. For the last four or five years, people looked at CAFTA as a very simple make, simple garments, simple T-shirt type production. And they had the more complex, complicated apparel type garments in Asia or overseas.

The investment that's taking place now in CAFTA is allowing some of those more medium to complex garments to move back to the region. So speed to market, working capital is extremely important. But also as the new investments take place, making sure those investments can make those little more complex garments is a key to getting more of these programs back.

Great. I guess to move on to the international operations, it's nice to see a rebound there. Is it more of your initiative to put the PVA, that you are seeing that rebound in Brazil?

Yes, I think -- we are continuing to work at our mix enrichment strategy in Brazil. As I think we've commented before, that's a longer-term play when you talk about the development cycle of getting mix enrichment and PVA into these programs. I think the benefit that we saw this fiscal year for the first six months that James was talking about is with the devaluation of the Brazilian real against the US dollar. There's so many imports coming into Brazil, the currency has allowed us to be more competitive with domestic production against these imports. And that has allowed us to increase local produced volumes and compete a little better against the imports.

So that's sort of the short-term pickup. But certainly the longer-term view that we've mentioned that we are excited about is seeing some of the traction and the foundation that we are laying for these mix enrichment strategies. We can see that that's going to pay off to.

Great. I guess just one question on Parkdale. You guys mentioned at the investor day that you expect an investment out of them. Any update on that, please?

I guess the update I would have is they have announced that they have bought the spinning facilities of Fruit of the Loom and are going to go into a supply contract with Fruit of the Loom. So certainly they will be spending some capital there to upgrade those facilities. They have purchased the 50% ownership of ITG in their Mexican operation, and they are upgrading that plant, actually doubling the capacity of that plant, and expect to increase sales in Mexico. In addition to that, they're completing the Raybun Gap plant, which is the large plant retrofit that they began about a year ago. So overall, they are spending a considerable amount of capital. And we would anticipate seeing the benefits of that in their earnings over the next few years.

Great. All right, I think that's it for now. Thank you very much. And, again, nice quarter.

(Operator Instructions). Eric Pisauro, Regency Group.

Good morning, gentlemen. Well done on the quarter. I've been on these calls for many years now, and so I was listening when oil ran up. While some of you -- I don't know if you were on the management team then, but the story was we've got to take care of our customers, there's a lag. Sure, it hurts now, but on the way down, there will be another lag in our favor. But sure enough, the modern world, everything is harder and more difficult. The customers push back strongly. They want every penny of benefit. Are things different now with them pushing on this? I hear also fabric is lighter and lighter, hurts volumes. I've got to ask the obvious question. Surely, you are pushing pricing in that situation. But you said you're running through the machines, producing less volume. Are you being mindful of the pricing on that output?

Yes. I think, as we talked about our mix enrichment strategy and looking at the lighter denier, certainly producing the lighter deniers falls into part of our mix enrichment strategy. And your comment about historically as raw materials rise, we've been sort of chasing the price and working with our customers and raising the price as our costs have gone up. Certainly on the way down, there's a period in there where, yes, there may be some small benefit to us or a period where we are benefiting, but certainly we do have the pressure.

And if you look at the overall market demand today, the global demand for polyester is down, even though we are experiencing strong demand in CAFTA and NAFTA. There's a lot of producers right now. The capacity utilization across the world is different. It's off today versus in past years. When raw materials are going up, typically the demand may be a little higher, and it's a little more competitive landscape out there. So certainly all that comes into play when we are looking at pricing and market pricing and working with our customers.

This is Bill. I guess what I would add to that is certainly in the past when you look at Unifi eight, 10, 12 years ago, we are primarily a commodity supplier. And we were certainly at the mercy of raw materials going up and down as well as at the mercy of Asian imports, depending on capacity demands in Asia. And I won't call it product dumping, but certainly is selling product from China here at much lower than even the raw material prices.

Part of our PVA strategy and part of our move into more value-added products is to become less and less sensitive to those types of pressures. Now, certainly a big part of our production skill is -- I won't say commodity, but certainly competes with commodities. But as we continue to grow our PVA and branded products, our expectation would be we're going to become less sensitive to the commodity pressures we typically have in the past.

That's great. I applaud that. But let's say the oil recovers dramatically at some point in the not-too-distant future. We won't be whipsawed on our pricing?

No. We are certainly -- with the volatility in the market, we're certainly communicating to our customers that while we are working with you on pricing and market pricing as raw materials are declining, certainly the reverse of that is as raw materials go back up or there is a sharp rise or a small steady rise, we will be working with you to correspond the pricing accordingly.

The purchase commitments from our customers, they are not fixed price, they're sort of cost plus?

Well, typically we have two buckets that we work with our customers. One is index pricing. Some customers want index pricing to raw materials. So in those cases, it's pretty much up and down as raw materials vary. And we have a fixed conversion fee. That represents a percentage of our business. And then the other percentage is market pricing as we compete against our competitors in the market.

Looking at cotton as an alternate product choice for polyester manufacturers and what's been going on in that market, at some point -- does it no longer matter? Is it simply sort of a style trend that's towards the synthetics as opposed to pricing?

Well, I think certainly pricing is always part of that formula. But if you look at also the trends taking place at retail, as we mentioned, we have more and more brands that have been predominantly a cotton type brand. They are looking at the trends at retail and saying, I need to incorporate more performance type of garments in my lineup. Now, they are not going from all cotton to all synthetic. But certainly if they had 100 SKUs of cotton, they're putting in 10 SKUs of performance. And we are seeing those opportunities, and we are seeing traditionally those brands that were 100% cotton contact us and looking for innovation, looking for sustainability, and we're working with them on the programs.

Lastly, if I might, with the international operations, are they -- how are they -- are they financed with local debt or US dollar debt?

In both of the operations that roll up international segment, there are no debts -- external third-party debts, and their growth is funded by local cash.

Okay, great. Thanks very much.

(Operator Instructions). There are no further questions in queue at this time. I'd like to turn the call back over for closing remarks.

Thank you, operator. Just to reiterate, we are certainly pleased with our results to date. We anticipate continued improvement as we continue to invest in our operations as well as our premier value-added products, and we certainly appreciate everyone's interest in Unifi. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.