Q1 2020 Earnings Call

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I would now like to hand, the conference over to your Speaker today, A.J., Edgar Vice President of Finance and Investor Relations.

Please go ahead Sir.

Thank you operator, and good morning, everyone on the call today is our Kerry Executive Chairman, Tom called President and Chief Operating Officer, and Craig premature Executive Vice President and Chief Financial Officer. During this call management will be referencing a webcast presentation that can be found a unified dot com and by clicking the first quarter conference call week.

Management advises you that certain statements included in today's call will be forward looking statements within the meaning of the federal Securities laws management cautions that these statements are based on current expectations estimates and or projections about the markets in which unified operates these statements are not guarantees of future performance involve certain risks that are difficult to predict.

Actually outcomes and results may differ materially from what is expressed forecast or implied by these statements. You are directly to the disclosure is probably the FCC on unifies forms 10-Q, and 10-K regarding various factors that may impact. These results also please be advised that certain non-GAAP financial measures such as adjusted EBITDA adjusted working capital and net debt maybe discuss on.

This call and non-GAAP reconciliations can be found in the schedules to the webcast presentation I'll now turn the call over to Al Kerry.

Thanks, JJ and good morning, everyone I want to thank you for joining US today, our first quarter results delivered on our expectations and there are positive sign that we're focusing on the right things to move our business forward and to begin to capture the underlying sales and profit opportunities.

The significant year over year improvements, we achieve continue to validate that we're focusing on our core competencies, where revitalizing the Americas and better aligning our cost structure and we're pleased to see that unifies, making progress to fulfill its vision is one of the world's leading innovators in recycled and synthetic yarns.

We believe the recent trade developments, including antidumping and countervailing duties are set to reshape our industry and provide meaningful opportunities over the next few quarters.

The timing of the final determinations of dumping subsidization injury is unchanged and is expected to be by the end of calendar 2019. So we'll provide you with updates when appropriate.

Lastly, we're excited to welcome Craig Korea Tour, our new Executive Vice President and Chief Financial Officer. His skill set in his experience complement the teams operational and strategic focus and with the addition of Craig we feel that we have a very well rounded group of senior leaders that will best position our company for.

Future growth.

Now I'll turn the call over to Tom for a high level discussion of the company's performance during the first quarter Tom.

Thank you al and good morning, everyone.

As Al said, the first quarter came in as expected.

Everything significant improvement in sales volume underlying profitability. Despite one last week or sales for domestic operations. We look forward to carrying this momentum into the remainder of the fiscal year.

Other positives during the quarter includes a continuation of strong performance from PVA portfolio, specifically repreve branded products.

Our cost containment initiatives at a more favorable raw material cost environment in the U.S.

Well, we believe the current business environment in the Americas is still challenging and evolving we foresee improvement and hope to build incremental momentum as the year unfolds.

Continuing the trend from last quarter, our PVA sales now account for 54% of consolidated sales. The significant growth is a testament to our innovative product offering on both our repreve and pro fiber platform.

Notably our operating income saw improvement as a leaner cost structure allowed our top line growth to better flowed through to the bottom line.

This helped to fuel strong operating cash flows, which afford us the ability to best manage our capital priorities.

I'm also pleased to see a significant improvement in our tax rate as expected with improved domestic performance.

As we navigate this fiscal year and beyond we will continue to invest an optimal areas of our business to ensure our competitive position is maintained.

Moving on to our commercial and branding initiatives.

Kate Hudson sustainable fashion brand happy by Nature was released in New York income you retail stores as well as online.

The Hudson has been promoting alone on social media and on National talk shows highlighting that Repreve is made from recycled plastic bottles.

Second we worked closely with the Pac 12, Nike and Stanford University to develop a 32nd commercial airing nationally on Pac 12 network website and social media channels.

The commercial highlights how repreve Nike and Stanford.

Partner to facilitate the circular economy.

Recycling plastic bottles into yarn, repreve, producing recycled performance apparel, Nike and retailing or the recycle merchandise Stamford bookstore.

Lastly, we had another great showing at the entered textiles with that in Shanghai exhibiting several exciting variations of Repreve and we remain busy with over 200 customer meetings during the event.

Turning to a walk through our segment for the performance over the first quarter I'd like to remind everyone of the update we made last quarter drove operating segment.

As a result, the growth of our international operation.

The reporting segments, our polyester nylon, Brazil and Asia.

PVA sales, notably in Asia, where again, a bright spot as our portfolio of Repreve branded products continue to resonate with the world's leading companies.

Burst Asia benefited from a doubling of volume it on your doubling up this revenue dollars.

Driven by across the board portfolio growth with significant sales above chip and stable fiber.

However, Brazil's economic and competitive environment led to softness in sales and profitability this quarter.

Polyester saw lower sales driven by softness in certain markets, such as industrial and automotive.

Looking to the rest of the fiscal year, we still believe the historic levels of imports experienced in prior quarters will subside with the playing field normalizing after the final trade determinations.

Nylon experienced a challenging quarter is revenues were negatively affected affected from the program that was lost in the fourth quarter fiscal 2019.

Our sales teams are working on back doing that lost volume to return the segment to more normalized levels and we hope new innovations like a reprieve in Iowa.

Helps solidify the segments future.

Overall, we're pleased that first quarter benefited from a more positive raw material environment in the U.S. and hope to see a neutral or possibly positive trend throughout the fiscal year.

Looking outside of our core operations.

Equity affiliates saw lower operating profitability during the quarter.

However, we were very encouraged that part parkdale provided unified distribution of $10.4 million.

As we stated in the past part goes in and investment there has been benefited us historically as evidenced by the cash distribution this quarter.

This cash was applied to our debt, providing a meaningful reduction in net debt levels through the end of quarter.

We remain steadfast in our strategic decision or partnering with part there.

Before would move onto the financial review I'd also like to welcome Craig to the team here at unified.

We were thorough and patient during our search for a new CFO and we're pleased to bring Craig on board.

We're very excited to work with him and Leverages 15, plus years of experience as an executive leader for finance and accounting things that businesses with complex manufacturing global operations.

We see Craig is a great addition to the strong culture and team here at unified.

I will now past call to Craig.

Thank you Tom and good morning, everyone as Tom noted revenue and profitability results met our expectations as strong cash flow performance generated significant momentum to begin the fiscal year.

I'll review the key drivers of our performance in my discussion today, and we'd like to begin with a short overview of the quarter.

Overall for Q1 fiscal 2020.

Our cost reduction efforts flowed through as comparable benefit to ask DNA.

Well the pressure on gross profit and the performance shortfall from Parkdale resulted in pretax income of 4.4 million.

200000, less than the first quarter fiscal 2019.

Dan significant improvement in our effective tax rate.

Decreasing from 61% to 16%.

Allowed for a doubling of net income and EPS from Q1 fiscal 2019 to Q1 fiscal 2020.

Moving to slide three of the webcast presentation, you can see sales and gross profit highlights by segment.

As a reminder, our segment gross profit includes the effect of certain technology related expenses charged by the polyester segment to the Asia segment.

Such amounts of recorded as a benefit to cost of sales for the polyester segment any charged to cost of sales for the Asia segment, thereby impacting gross profit for each segment.

Fiscal 2019 segment results have been revised to reflect comparability for this change as presented on this slide three.

And the full fiscal year 2019 segment results by quarter are shown on slide 11.

Consolidated net sales decreased 0.9%.

The significant volume growth in Asia that nearly overcame one less week of sales for domestic operations.

Polyester segment sales, which declined 11.4%.

The volume decline of 9.6% exhibits one less week of sales plus lower demand from customers in the industrial and automotive market segments.

Nylon sales decreased 27.7% as a result of one last week in sales.

Combined with a larger customer transitioning certain programs overseas.

In Brazil sales volumes were 3.7% lower despite competitive and economic pressures.

Bob declining raw material costs drove down pricing.

Sales results for the Asia segment continued their strong performance as volumes increased 116.7%, despite uncertainty and global trade and international competition.

Sales of Repreve products led the way in Asia, as we continue to attract quality brand programs and maintain a leading position in the recycled market.

The PVA portfolio remains a growth engine as our agent Asia strategy continues to be validated.

Moving on the gross profit at the bottom half of slide three.

Consolidated gross profit decreased from 20.0 million to 17.4 million.

While the associated margin decline from 11.0% to 9.7%.

Overall, the decline is primarily attributable to competitive pricing pressures that we're most pronounced in Brazil in Asia.

Along with a higher proportion of sales in Asia.

The decrease was partially offset by a more favorable raw material cost environment in the U.S.

Looking at this from a segment perspective polyester, primarily benefited from a more favorable raw material cost environment.

Increasing gross margin by 100 basis points from 7.8% to 8.8%.

Nylon, primarily experienced weaker fixed cost absorption due to lower revenues as its margin rate declined from 7.7% to 5.8%.

Brazil face competitive and economic pressures, along with higher raw material costs in inventory during declining cost environment generating a gross margin declined from 23.8% to 17.2%.

Lastly, Asian sales mix included significant chip and deepen fiber sales, which currently carry a lower margin profile.

As these products are used to see new programs and initiate further customer development.

As a result Asia gross margin declined from 13.9% to 9.3%.

On slide four we present, an overview of gross margin.

Here, we present, the changes that stem from each of our four reportable segments polyester nylon, Brazil in Asia.

We can see that the polyester segment performance.

Benefited by raw material costs really helped to lift consolidated gross margin.

While the competitive in sales mix pressures in Brazil in Asia Challenge the overall gross margin profile.

The segment dynamics combined to generate a decline in overall gross margin of 130 basis points.

Resulting in weaker gross profit versus the prior year first quarter.

Moving on to slide five we present equity affiliates.

Pre tax earnings decreased approximately 1.1 million from Q1 2019 to Q1 2020.

Parkdale is results primarily reflected lower operating leverage during a period of elevated costs.

Equity affiliate distributions in the quarter totaled 10.4 million all provided by Parkdale as Tom mentioned earlier.

Slide six covers balance sheet and liquidity highlights.

At September 29, 2019, working capital was approximately 194 million.

And adjusted working capital was approximately 174 million.

Adjusted working capital as a percentage of sales was 24% within our range of expectations and wasn't improvement from both June Thirtyth 2019, and September Thirtyth 2018.

We ended the period at 122 million debt, while net debt was approximately 88 million a 17% reduction from June 32019.

Revolver availability increased to 62.8 million.

And total liquidity increased to 96.9 million.

At September 29, 2019, our weighted average interest rate was 3.5%.

Before opening up for questions Slide seven details our guidance that was contained in today's earnings release, which is a reaffirmation of our original guidance published in August 2019.

With that we will now open up the land for questions.

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Please standby well, we compile the Q and a roster.

Our first question comes sounds a lot of Chris Mcginnis, what's the Dougherty and company. Your line is now open.

Hi, Good morning next quarter, Thanks for taking my questions.

Sure.

Jimmy just sort of with the growth in Asia can you talk is that new relationships are being build or expansion of existing relationships and maybe a make up both.

It straight repreve or is it.

You know maybe have some other offerings will want to reprise it may be higher margins. Thanks.

Chris This is Tom.

Yes.

As weak as we've talked before a large portion of Asia Asia businesses Repreve.

You know we continue to two seeking out new supply chain partners and new meal partners as well as new customers for for new applications of reprieve in the region.

And we as a team over there has done a really stellar job during this quarter expanding your offerings chip slight jam film.

And we're very pleased with the results.

Thank you and then maybe just touch on.

Did you see that you haven't seen your positive impacts from the kind of anti dumping tariffs at this point and when would you expect to see some positive changes from that possibly come into the that's true.

Oh.

We have experienced.

Enquiries.

The impact so far through it through the first quarter has been minimal and that was kind of the way we built a doctor strategy going forward, we felt like the first half would be weaker and we've just started to see more impact in the second half.

Okay. Thank you and then just two quick ones.

Just on yesterday levels in Q1 is that sustainable level orders or.

Can you comment a little bit about maybe any changes going forward.

For a major there thanks.

Yes, Chris This is Greg, Yes, I think that Shannay levels were happy with where that came in for the quarter definitely reflecting actions the company truck to get us to that point to get a cost structure, that's better match to our revenue profile and our business objectives.

We are still thinking that we will be around 51 million or so run rate for the full fiscal year.

We will see some further and investments in SGN as the quarters go on.

But that guidance was that was included in guidance that we published today.

And then just quick one on Powell and that the size of that distribution years, either the dividend.

Do you think that's sustainable level. So I remember right. That's the first time and while that Youve seen something that large from health if I'm correct.

Got it was a great. It was a great distribution you're correct.

With that has been a while since we saw something that magnitude.

We have definitely put it to good use there was definitely a big factor for us reducing both.

Debt and that for this quarter.

So we're very thankful for that.

That we have not exhausted the.

Future dividends that could come to us from Parkdale, but we are glad that said that when did come in and guide it came in that during the just complete accordingly.

Great. Thanks for taking my questions I'll jump back in queue and good luck in Q2.

Thanks, Chris.

Thank you next question comes from the line of Daniel Moore with CJS Securities. Your line is now open.

Good morning, gentlemen, thanks for taking the questions more important Dan one follow up on first one in terms of Asia, obviously exceptional growth there.

Can you give us a little more color Tom on on what's changing if anything is the verification story really starting to really gain holds in terms of traction.

Are you, perhaps also being a little bit more aggressive on price anymore color on on a on the growth there would be great.

Well I think certainly the notoriety of of Repreve.

And continues to be relevant with brands and retailers.

You know as as is the lower end of the market wood chips and staple fiber.

Outpacing filament as far as growth, although we are.

Growing fill in a much lower rate and then.

A staple fiber in Chile.

But its.

It's and we're seeking out new opportunities as well and people.

Our even a reprieve chip is higher grade than most people need for for recycled applications in it you know it and.

I mentioned before on the last call as well, we're seeking out other meal or supply chain partners and overtime, we expect to see some some improvement in our margin even on the lower end.

Hey, Dan this is al.

One thing I have noticed as many of the companies that we work with the is a retail or brands are now getting closer to those commitments that they've made on environmental sustainability. So you see some of these big retailers by 2023 or 2025 have commitments on the percentage of their apparel, that's going to be and.

In recycled materials Theres, no doubt that that stepping up in many of them are supplied from Asia.

And we have a relatively small share the business over there. So we will be aggressively going after the business and at some point our innovation our future innovation will help us make that up in margin.

Very helpful.

And also there's another thing to keep in mind, we we are asset light in Asia.

So any sale and any volume that we can move it positive margin is a benefit.

Our results.

Understood Indeed.

Taking a step back overall revenue down slightly yeah, obviously had the one on fewer week.

But.

Despite 16% volume growth. So in terms of pricing is it possible to rank order or could give color in terms of the impact of mix versus any competitive pressure versus just pass through of raw material prices was is it really just lower raw materials number one.

And then maybe mix just color on that would be great.

Yeah.

Dan This is Craig I think.

I think you're on Kenner General right track there there were definitely some in our prepared comments I think we tried to point out what was impacted specifically.

Polyester and nylon were impacted by that one week less sales, that's a pretty big impact.

You do the math I mean, roughly we're saying it's about seven or 8% of a difference because of that one last week. So that was pretty significant for those two units and then I think the other units. What we pointed to was really just some competitive pricing pressures that we've seen specifically in Brazil, and Venice, Tom mentioned and now amplified.

We are being aggressive in Asia, and we have provided runway to take share there and so thats an area that we've decided to be.

Aggressive on pricing, so thats really all those factors together, it's probably a little bit of a different story at each within each segment, but I think those are the main components that you're looking for.

And Dan just a little more color on that so look at it in three different for different geographies. That's the way I feel like we need to look at the businesses and geographies otherwise gets very complicated to explain.

Brazil had raw material.

Increases that caused us to have to be competitive and I think that 2.3 million of our 2.6 million Miss on gross profit is all Brazil.

Then you look at I call It Central America, and Asia, where our business is very strong and we have a low share, but we're gaining share. So we're willing to spend a couple of share points to go get that business and then the U.S., we actually picked up some business from the anti dumping a small amount of it but we were offset.

Bye.

Fairly high margin product in North America that is in the category of automotive and industrial and as we talk to our customers they're experiencing tough sales in this first part of the year in their explaining it by the uncertainty this going on with the China U.S. trade negotiations and hope to see that improve.

Move in the next couple of months.

Very helpful and lastly, I know, it's challenging question, but within the PVA portfolio, you've got a lot of moving parts, including the mix shift to chip in staple fiber.

Is there.

An inflection point b the year or two out when you expect to see margins for PVA.

Started to improve again, just kind of again gross margins within PVA.

Or is that just difficult say at this point thanks for the color.

Okay.

Yeah, we we believe the driver for margins and our PVA and were free portfolio is all about innovation or.

Just innovation that we currently have into pipeline and future innovation and in some instances. These these these things take 12 to 18 months to come to fruition and get get a actual program up and running again and again to retail.

I'd say our forecast for margin for the balance of years positive just pause going from here.

Very good good progress I appreciate the color person. Thank you very much. Thank you there.

Thank you. Our next question comes from the line of Marco Rodriguez with Stonegate capital markets. Your line open.

Hi, Good morning, guys. Thank you for taking my questions, Hey, Mark 20 marker, Hey, I was going to kind of follow up here on the on the Asia line of questioning specific to the margin in the mix.

Just wondering if maybe you can provide a little bit more color in terms of what has been driving the mix shift more towards the the chip and filament versus.

Versus your your higher margin PVA product.

[noise] Marco this is Tom one thing to keep in mind that the the staple category.

It is.

Much much larger than filament category or so and it was one that that we were not in.

Two or three years ago that we've developed in Asia and is just there just so many opportunities.

On the own on the staple fiber side and also chips on the more more and more people are morning to chip to be able to span repreve and sell product under the the Repreve brand.

Those are the primary reason.

And can you then maybe.

Talk a little bit more in terms of you you have some comments that innovation.

That's that's coming down the pipe or that you've already started to to put into your product on on the chip and the stable fiber side that should help margins progress I guess higher can you maybe talk a little bit about how that sort of impacts and.

I guess, what a 12 to 18 month timeframe from today would be sort of a timeframe, where we might be able to expect.

Elite stabilize if not increasing gross margins for Asia.

Well I think it goes back to the partner innovate and Bill strategy or you know, we're working on the supply chain outside of China for for better cost position on raw materials.

We're working on innovation with the brands and retailers on things that potentially will come to market here in the next.

12 months 18 months.

And just building stronger relationships and expanding Oh, no with new customers and and working with customers that we haven't in the past so.

We think a culmination of all that is going to lead us to better margins are better results in our Asia operation.

And I'd I'd add that we're very close with a new supply chain partner in Asia, which is going to be very positive for our business supply as well as costs.

I'd also say some of the.

Well, we met last time I left no maybe weren't here for the meeting a markup, but it was a distant repreve Qadhianis and then some automotive applications for you have great potential and it's more for the second half of this year than it is in the first half.

Understood and then just switching gears here on the expense side.

On the SGN a couple of comments that you guys made in terms of some additional investments in in the latter part of the year. If you can maybe talk a little bit about what those efforts are timing wise and then also just real quick on on the current quarter SGN a were there any sort of timing issues, where maybe some expenses didnt.

Get spend that quarter.

Yeah, I think out for the balance of the year I do think.

That we will see the as you may continue to should move up slightly again, all within the context of having a full year sinead, it's around that 51 million or so.

There will be some further investments in certain areas I think a couple of that come to mind.

In the marketing areas in some other areas that we have some programs that we feel very targeted in very.

Worthwhile to give us both short term benefit and also long term benefit I'm. So we'll see some additional spending in that area.

And there wasn't really nothing that unusual during the current quarter that needed to be called out separately or that we held back a unnecessarily on so it was a pretty typical quarter from that perspective, yeah. We feel confident in that 50 51 million and we won't let it get higher than that I would say that.

There's a couple of marketing opportunities, we got to look at them, but we're also doing a very good job. This last quarter and continue on inventory management, reducing costs watching every penny we spend.

So that we have resources to spend in the future.

Got it and last quick question. If I may you made a comment earlier in your prepared remarks about on the U.S. side at least.

Looking for anticipating improvements as the year sort of unfolds from from the domestic market and I know you've called out that auto industrials have.

Have been weak it impacted.

Your your poly side is the commentary from the autos in Industrials, where you said that you thought that maybe the tariff impacts would kind of a base here in the next couple of quarters. The main driver. There are there other things that you're sort of seen there that is giving you confidence in the U.S. market.

No I think your two separate issues I think there there's definitely uncertainty in the marketplace because of the tariffs and that has affected the industrial and automotive.

And hopefully they will subside, but.

Certainly in the Americas, specifically in Central America. They are there's investment going on today people are expanding or capacity, we're regaining market share down there and we're very excited about what's going on in Central America, and we feel like wants a the tariffs situation is.

Is.

They did that we will see gradual improvement here in the U.S. as well.

You know for a little more on that the.

We've visited with customers, who don't want to mention who they are but they're in the auto industrial segment and.

Often they don't know, what's causing that depressed volume in this first quarter and and then when you probe a little further it seems that there is uncertainty in the market they can't pinpoint it but it isn't automotive and industrial it doesn't appear to be any systemic reason for their decline. So we think when.

And they believe that if there is some more certainty in the trade.

They'll see their business come back.

Also we found that from a few customers that their sales were up at retail these are retailers and their inventories were significantly down.

And and these are in retailers and I know of at least three or four big ones that are having the same success on reducing their inventory and keeping their comps up that is definitely having some impact on this so we don't have an exact.

Projection on this I have my belief is from being in retail for a fair amount I think this will have a well we'll see it come around.

Hopefully this quarter if not this quarter in the second half of the year.

Got it that's great color appreciate your time guys.

Thank you thank you Mark.

Thank you and there are no further questions in the queue at this time.

Okay. Thank you Sarah if there are no further questions, we'd like to thank everyone for participating today. Our next earnings release for the second fiscal quarter ending December 29, 2019 is tentatively scheduled for Wednesday January 29, 2020, with the conference call to follow that same day at eight am eastern time.

Thank you for joining today's call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.