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High Input Costs and Weak Basic Yarn Sales Cut Into Unifi’s Bottom Line

Unifi Inc. reported an uptick in sales in its fiscal second quarter, but earnings plummeted on high raw material costs and lower sales on commodity yarns.

In a Nutshell: International growth was offset by headwinds that suppressed profitability in the second quarter and first half of fiscal 2019 for Unifi Inc. However, the Greensboro, N.C.-based manufacturer of recycled and synthetic yarns said the outlook for the second half of the fiscal year includes revenue growth and improved unit costs.

The company said considering profitability pressures from raw material costs that occurred in the first half, as well as suppressed demand in certain regions and a weaker sales mix, its outlook is for moderate gross margin improvement thanks to lower raw material costs, and improved sales and production volume that typically occurs in the second half.

Gross margins in the second half are expected to benefit from a more favorable price-to-cost relationship, but downward pricing pressures are expected to prevent a complete recoup of the recent margin lost from elevated raw material costs in the recent quarters, Unifi noted.

Sales: Net sales for the second quarter ended Dec. 30 increased slightly to $167.7 million from $167.5 million for the year-ago period. Revenue from premium value-added (PVA) products represented approximately 47 percent of consolidated net sales.

International revenue growth was led by PVA product sales, partially offset by unfavorable foreign currency translation impacts and economic weakness in Brazil. Domestic revenue declined primarily as a result of one less shipping week due to the timing of the holiday factory shutdown occurring in the second quarter of fiscal 2019, as opposed to occurring in the third quarter of fiscal 2018, as well as suppressed demand and competitive pressure from imports. This was partially offset by higher selling prices implemented since the second quarter of fiscal 2018, Unifi said.

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Earnings: Net income fell 90 percent to $1.2 million for the quarter compared to $11.8 million for the same period in fiscal 2018. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $4.9 million for the quarter compared to $13.9 million for year-ago period. Unifi said the decrease resulted primarily from lower gross profit.

The company saw an operating loss of $800,000 compared to income of $7.8 million for the second quarter of fiscal 2018, primarily impacted by lower gross profit. Gross margin for the quarter was 8.4 percent compared to 13.5 percent for the fiscal 2018 period, with the drop attributed mainly to higher product costs, lower regional yarn volume and a weaker sales mix.

CEO’s Take: Kevin Hall, CEO of Unifi, said, “As previously announced, the spike in polyester raw material costs in September and October of 2018 and the resulting demand disruption created an even more challenging environment for our regional business and our performance missed expectations. External pressures in the regional business included elevated raw material costs and suppressed demand for certain textured and covered yarns. The volatile nature of these external pressures made navigating the regional environment even more difficult. Internal pressures included the implementation of selling price increases that left us less competitive, elevated inventory levels, and the result of weaker leverage of our cost structure. The combination of these external and internal pressures caused weaker fixed cost absorption and lower operating margins.”

Hall continued, “International PVA sales remain a solid growth engine and the Repreve brand resonates with customers worldwide, as sustainability goals are increasingly imperative for our direct and indirect customers.”

However, he added, “While the ongoing expansion of our PVA portfolio remains paramount to our Partner, Innovate and Build strategy, it is imperative that we compete more aggressively in our regional commodity business to maintain our prominent market position and remain on the leading edge of textile innovation and sustainability. By synchronizing our efforts to strengthen our core yarn portfolio alongside pursuing our PVA growth engine, we will remain the innovative and sustainable solutions partner of choice.”