Ladies and gentlemen, thank you for standing by and welcome to Unifi's Second Quarter 2020 Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Mr. A.J. Eaker, Vice President of Finance. Please go ahead sir.

Thank you, operator, and good morning, everyone. On the call today is Al Carey, Executive Chairman; Tom Caudle, President and Chief Operating Officer; and Craig Creaturo, Executive Vice President and Chief Financial Officer. During this call management will be referencing a webcast presentation that can be found at unifi.com and by clicking the second quarter conference call link. 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 Unifi operates. 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 forecast or implied by these statements. You are directed to the disclosures filed with the SEC on Unifi's 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 discussed on this call. I will now turn the call over to Al Carey.

Thanks, A.J. and thank you all for joining us today. I'm pleased to report that the final determinations for antidumping and countervailing duties were finally reached in December, and as expected associated duties are being assessed on imports of polyester textured yarn from both China and India. And as you've heard us discussed in the past, subsidized imported yarns have flooded our domestic market in recent years. So we welcome these announcements as they are critical steps in advancing our efforts to compete on a level playing field. We've already seen a pickup in demand on these specific product line as we entered the third quarter and we're excited about the opportunities we have in our local markets to regain market share and to grow our top line, especially as we enter fiscal 2021. During the second quarter, we are able to achieve solid sales performance and profitability gains across most of our operations with the exception of the Nylon segment and our Parkdale joint venture. Q2 showed sequential improvement in our trends as we turn around our business at Unifi. However, the recovery is a bit uneven and we still have work to do. Price realization and Nylon business need work and we're taking actions to improve our overall performance. We're pleased to see SG&A cost decrease on a year-over-year basis and the team also maintained significant cash flow improvement. This performance validates our strategy of focusing on our core competencies, revitalizing the Americas and also aligning our cost structure. We're very encouraged with the trends on sales volume, cash generation, cost control and our Asian business right now. Additionally, there is broad momentum at the customer and also at the consumer level for environmental sustainability, which bodes well for free. We're disappointed in the Nylon business that it was much lower than we had anticipated and Tom is going to walk you through some more of those details, but we remain committed to this segment as our customers continue to see Unifi as a full-service textile provider. And Nylon plays a critical role in our go-forward innovation efforts. We're going to continue to develop programs that leverage all of our assets and deliver the highest performance for our customers, and we remain well positioned to drive further year-over-year growth in the second half, and we're encouraged with the overall business momentum. I'm going to turn the call over to Tom right now for a high-level discussion of our company's performance during the second quarter. Tom?

Thank you, Al, and good morning everyone. Our second quarter results came in mostly as expected with overall sales, operating income and adjusted EBITDA improving on a year-over-year basis. We also had some meaningful accomplishments this quarter with REPREVE products continuing to lead our sales growth. Additionally, cash flow generation through that first half was meaningfully higher year-over-year continuing the positive momentum we had in the first quarter as our cost structure continues to improve. As Al also mentioned, we finished the quarter with positive news from the U.S. International Trade Commission, finalizing antidumping and countervailing duty rates. These duty rates are generally consistent with the preliminary rates whereas imports from China are assessed 97% on higher duties on top of existing import duties and imports from India at rates of 18% and higher. This represents a culmination of a significant time and resource commitment from Unifi, and it is important to note that we spent approximately $2 million in outside counsel fee over the 15-month process. While costs were significant we believe this was necessary for Unifi to be able to compete appropriately in the U.S. market for polyester textured yarn. We have already begun to see an initial uptick in orders and believe that we have the ability to recapture a minimum of $20 million in sales on an annualized basis as we enter fiscal 2021. That said, recapturing the lost business will take time to ramp up and thus for the second half of fiscal 2020, we have factored in only $5 million. With our continued focus on a fair competitive environment, we are closely monitoring whether polyester textured yarn from China or India is being shipped through third-party countries and then entering the U.S. market. Additionally, on the regulation front, I think it is important to…

Thank you, Tom and good morning, everyone. As Tom noted, our operational results were significantly improved over the prior year second quarter and we have achieved another strong quarter of cash flow performance. I'll review the key drivers of our performance in my discussion today. And I would like to begin with an overview of Q2, as we experienced several positive financial changes over the prior year second quarter. We will begin on Slide 3 of the conference call presentation. Overall for Q2, gross profit increased in connection with a more favorable raw material cost environment in the U.S., which was partially offset by the nine-month shortfall and global competitive pricing pressures. Our cost reduction efforts flow through as a comparable benefit to SG&A, but we experienced three notable headwinds in operating income. First, an unfavorable foreign currency transaction losses generated a comparable decline of $800,000 from Q2 2019 to Q2 2020. This resulted from comparably weaker exchange rates in both Brazil and Asia. As a reminder, a strong Brazilian real is generally positive for our Brazil business while a strong U.S. dollar is generally positive for our Asian business but neither of those occurred this quarter. Next we commenced a wind down plan for our Sri Lanka sales and sourcing operation and recorded the associated severance and exit costs of approximately $400,000. And the last impact to operating income involved a legal fees associated with the trade petitions. We expected the finalization of those petitions to generate a $500,000 expense in our third quarter fiscal 2020 but the favorable resolution in December 2019 triggered that expense to be to apply to Q2 2020. This does not impact our full year view of fiscal year 2020. Over the course of the trade petition activity, we have undertaken in fiscal 2019…

Thank you. [Operator Instructions] And our first question comes from Chris McGinnis with Sidoti & Company. Your line is open.

Good morning. Thank you for taking my questions. Maybe we could start just with China and kind of the current situation there. Could you maybe just walk through any kind of current issues maybe that could be a positive for you, how you see it playing out maybe impacting your business positively or negatively? Thanks.

Chris this is Tom. I mean we continue to be really encouraged by our business in Asia. It continues to grow and expand. We've talked many times about the product mix and how it affects the overall margin, but we're growing the chip and flake are in staple fiber -- our chip and staple fiber at a much accelerated rate over what we are the higher value film products. So, the margins are a little depressed. But as we've said before, we are cultivating a Malaysian source of raw materials that's going to help us improve the margins on a longer term basis. We probably won't see the effect of that until we are early in 2021. So, we continue to be encouraged. Many opportunities to expand our business and it's a sort of very good growth platform for REPREVE. So, that's kind of where we are.

Sure. And just in relation to kind of a coronavirus and impact on businesses in the region though. Would you -- do you think that that could be a positive for you off hand? Are you seeing anything that input coming your way is that kind of start to impact businesses?

Chris we really don't know. We're asset-like. So, we don't think we'll be substantially impacted by the situation. There have been some announced extended downtime but at this point in time we don't think it's going to be positive or negative to our business situation over there. That changes we'll kind of monitor and let people know as we go forward.

Chris we have no assets on the ground in China, so we won't have any factory shutdowns or any kind of lost shipping days. But I don't know, we're going to dig through that in the next day or two and we'll get a little better handle on it. If I were to bet slightly positive but nothing significant but probably no negative.

Okay. Thanks for that. And then just one last one just around the anti-dumping, I think you mentioned I mean in annual sales is what you think you lost out and you should be able to recapture that over time?

Yes. The end of the year brought the final decision by the International Trade Commission. So, China is at 97%-plus, India is at 18%-plus on a duty -- on anti-dumping rate. We've seen very significant decline in imports from China and a meaningful decline in the imports from India. So, we're very encouraged by what we see. We're continuing to monitoring other countries to see if some of that -- those imports have moved around a bit, but we saw increases in our demand or recycle product at the end of our second quarter and we're encouraged by what we see going into the third and fourth quarter. So, we think we don't get to where we thought we would be.

I wouldn't want to project off of five weeks, but we very definitely have seen a pickup in our U.S. sales or shipments in the last five weeks.

Okay. Thanks. I'll jump back in queue. Thank you for taking my questions.

Thanks Chris.

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

Al, Tom, Craig good morning. Thanks for taking the question.

Hi, Dan.

Good morning, Dan.

I wanted to talk a little bit about the mix. You just alluded to it in detail Tom, so I appreciated. PVA continues to grow now up over 50% of revenue. As you look out over the next four to eight quarters, do you expect chip and flake and staple fiber to continue to outpace higher margin yarn sales and, sort of, PVA products with more benefits if you will? When do we expect that mix to maybe turn a little bit more favorable over the longer term?

Dan the opportunity for chip and staple fiber are so much greater than what the filament is in Asia. We think it's going to continue. So our focus is going to be on improving the supply chain for those products to improve margin, but there's a lot of demand for filament as well and we're going to continue to grow higher value. Really it is just -- it's a situation and the demand for the particular type of products and chip and staple fiber is just outweighing the filament growth. So we're going to remain vigilant and focusing on our supply chain to improve the margins on the lower end of those products.

Is it right to say that the focus will be on continued gross profit dollar growth at least in Asia for the next couple of years?

I think that's fair to say.

Okay. And then shifting gears to Nylon, maybe elaborate on plans or steps you might take to backfill some of that lost revenue? Do you see the trend to offshoring continuing beyond the current customer too? And if it does, are there steps you can take in terms of capacity reduction cost reduction, rationalization. More detail there would be great?

Dan, Nylon has been a very important sector for us for many years. It has been declining year-over-year. We had a couple of customers shut some facilities during the last quarter but we -- it's a very important product line for us. We still have REPREVE Nylon, which we can expand and grow with. We're expanding with other customers and other opportunities that we're talking about and some of them will come to fruition over the course of the third and fourth quarter. We remain committed to growing and getting that business back on track and we think that possibility exist with the -- through our innovation pipeline. And so our customer base that we're working with today.

Okay. And lastly for me maybe just talk about -- expand on the guideposts that you're seeing that give you confidence that as it relates to the anti-dumping tariffs and polyester in North America specifically it sounds like fiscal 2021 you expect to see a larger benefit. Just the conversations or anecdotes or data points that you're seeing that give you that confidence? Thanks.

I think, we feel comfortable in the $5 million mark that we've publicly stated and I think we are also comfortable with recapturing over time, getting to $20 million of sales that we've said as well. So I think we're on track to be exactly where we publicly stated we want to be in there over time.

And in the U.S. we -- when it first was announced back in July. We were waiting to see what would happen in the business. We thought we'd see a positive improvement in the U.S. sales. And nothing really happened. Then it got to be the fourth calendar quarter of last year fall. We saw a little tick up in the business. And then towards the end of the quarter, we saw a little better tick up in the business but once the December 12 announcement was made and I think some of these low priced inventories have probably work themselves through the market. We've seen let's say the last week of December and all of January strong sales improvement, a significant improvement of what we were doing. So we are in the negative column before. Now we're in the positive and I would expect that to continue but I don't know how big. And -- but if I look at back over the anti-dumping on things like staple fiber several years ago, it was a slow build and then it finally took off. I'm hoping that we see that same thing.

It’s helpful. And I'll sneak one more in if I may. Parkdale, obviously, a little bit of a decline year-over-year in terms of the impact on the income statement. Are those assets still generating significant positive free cash flow at least through the first half of the year fiscal 2020? And any changes in your view or thoughts regarding potential strategic alternatives for that investment?

Dan this is Craig. I mean Parkdale definitely has come into a period where they've had some elevated costs. They've had some challenges I think with the cotton crop they continue to operate that business in a really good manner, but they've come up with some obstacles that definitely are different than last year and you're definitely seeing that as you're pointing out in our portion of their earnings. We feel like still a very good investment for us very good strategic partner for us. And really we're continuing to believe in them to continue to make improvements to the business. So no changes anticipated there.

Thanks for the color.

Thank you. Our next question comes from Marco Rodriguez with Stonegate Capital. Your line is open.

Good morning. Thank you for taking my questions.

Good morning.

I was wondering if you can talk a little bit more about some of the pressures you guys have been seeing this last quarter, you specifically brought out international pricing pressures. And I believe you used some verbature in your prepared remarks about the competitive levels being kind of described as aggressive. Can you maybe go into a little bit more color as far as what are the dynamics you're kind of seeing out there the drivers, if this is specific to maybe a region or a particular competitor? Any sort of color around those would be very helpful.

No. Mark, this is Tom. We knew when we file the anti-dumping suite on the international front that there would be some movement around the region and Southeast Asia. Certainly, we've seen an uptick in volume and some lower prices come into our -- into the North America region from Vietnam from Malaysia from Thailand and we are monitoring those volumes. We think because of capacity they will flatten out over time. And everything will normalize and we'll get the benefit out of the antidumping which we anticipated. But if not we always have the option of initiating more action against countries for anti-dumping as well.

I'd also Marco throw in on Central America. Our -- it's gotten very competitive in that market and we've decided to protect our market share. And our sales are up 26%, volume sales. And I think there's an opportunity to not be quite as aggressive. But I think we're working on getting the right pricing in that market.

Got it. And then talking about your guidance here looking at what sort of is implied on the numbers if I'm doing my math right looks like for fiscal '20 it's about a 10.5% gross profit margin give or take a few basis points. Can you maybe talk a little bit about how you see that progressing into the second half of your fiscal '20?

Yes. I think you're right on Marco. I think we're expecting the full year gross margin to be probably just a little bit higher than 10% in total. We do think we'll see some benefit here in Q3 to some of the actions that we've talked about including the anti-dumping, but then we really feel like and seasonally it usually is our strongest quarter that Q4 probably will show quite a bit more growth and we're expecting to be noticeably above that 10% average for the full year in Q4.

That's helpful. And then maybe if you can talk a little bit more about the capital allocation priorities you guys have. I know you talked about a slight reduction in your CapEx just based on some timing aspects but if you can maybe talk about the priorities you see in the next 12 months that would be helpful?

Sure. I think for us we're continuing to be thoughtful on the capital expenditures. We've talked about the larger projects the EVO coolers detection machines that we have that are coming in. Our current forecast anticipates that we will start to spend some dollars in FY 2020 for those the first wave of those machines and then the bulk of that cloying out in FY 2021. We feel like we're investing in the right areas, the right strategic areas, the right maintenance areas. So we feel that $23 million forecast for the year is a very comfortable level for us. We're also anticipating being able to continue to reduce debt or specifically net debt. We've seen a nice reduction in that 13% reduction in the last 6 months. We feel like we'll be continuing to invest a bit in our working capital, especially as we build in Q3 and then on to Q -- that strong Q4 that we're anticipating. However we think that continuing the capital investments capital expenditure investments plus paying down the debt really that's the main prioritizations right now.

Got it. And last quick question if I might. You called out again second quarter in a row here the industrial and automotive market, in terms of their kind of weakness there. Maybe if you can just talk a little bit about anecdotally what you're hearing from those clients? What their sort of expectations are for the remainder of calendar year 2020?

I think the -- in general the automotive industry saw a slowdown during our first and second quarter of our fiscal year. GM -- we're still a strike during that period. Some others announced reduction of models and what have you so. So, I think the industry as a whole saw a slowdown during the period and we are watching what's going to happen in the third and fourth quarters, but we may see a little bit of an uptick, but we don't expect total recovery from where we were before that all that took place in our third and fourth quarters.

Got it. Thanks a lot, guys. I appreciate your time.

Yes. I thought, before I turn over to A.J. to close it up, I just thought I would make a little bit broad comment on so how I see the business moving forward and why we have optimism. So, if you think back about this time last year, we were in a tough spot on many fronts. And I really think the best way I would describe the business in the last two quarters is sequential improvement. And I'd say that, the sequential improvement will continue in quarters three and quarter four and are continuously moving forward a little bit. And -- but the recovery has been uneven with a few surprises. So, I don't want to diminish those. But here's what I would say as far as positives. The sales volume is very positive on many fronts. And I'm particularly encouraged with the overall U.S. business, let's call it the last five or six weeks. So, it looks like the antidumping is finally starting to hit. I don't want to project so much positive on five weeks, but it appears that that's a trend that we can definitely see improving. And if you look at our revenue, which was weak at 1.1%, if you took out the Nylon, it was actually up 6%. So, I'm feeling a little better about our overall trends there. The other thing that our board puts a big focus on is cash generation and cost controls and I'll tell you both of those are in a very good spot and I expect it to continue. Our Asia business is very fast growing. And over the last several, let's call it two months, I think as ESG becomes such an important part of the economy and so much discussion about it in the news in…

Thank you everyone for participating today. Our next earnings release for the third fiscal quarter ending March 29, 2020 is tentatively scheduled for Wednesday, April 29, 2020 with a conference call to follow that same day at 8:30 a.m. 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. Everyone have a great day.