Unifi's (UFI) CEO Bill Jasper on Q4 2014 Results - Earnings Call Transcript

| About: Unifi Inc (UFI)
This article is now exclusive for PRO subscribers.

Unifi, Inc. (NYSE:UFI) Q4 2014 Earnings Conference Call July 24, 2014 8:30 AM ET

Executives

James Otterberg – VP and CFO

Roger Berrier – President and COO

Bill Jasper – Chairman and CEO

Analysts

Chris McGinnis – Sidoti & Company

Allen Zwickler – First Manhattan

Operator

Good day, ladies and gentlemen, and welcome to the Unified Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, an instruction will follow at that time. (Operator instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, James Otterberg, Chief Financial Officer. Sir, you may begin.

James Otterberg

Thank you, operator, 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 fourth 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 about the markets in which the company 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, forecasted or implied by these statements. I direct you to the disclosures filed with the SEC in our Form 10-Qs and Form 10-Ks 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 the schedule 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 and raw material trends.

Roger Berrier

Thanks, James and good morning, everyone. I will start this morning with a few brief comments regarding the retail market.

Recent job growth has expanded the base of employed consumers who can help fuel the economic recovery in the US. Although consumer spending is still somewhat cautious and selective, retail sales in our key segments improved in the June 2014 quarter compared to both in the March 2014 quarter and the year ago of June 2013 quarter.

Retail sales of apparel rebounded from the unusually cold and snowy start of the year increasing 2.4% in the June 2014 quarter compared to the March quarter at 2.3% compared to the year ago quarter.

Auto sales in the US benefitted from the improved weather, the low interest rates and an improving economic outlook increasing 18% in the June 2014 quarter compared to the March quarter. In fact, many industry executives say demand is on track to finish the year with sales of more than $16 million light vehicles, a level that hasn’t been reached since 2007.

And the retail sales of furnishings also increased slightly in the June 2014 quarter compared to both the March quarter and the year ago June quarter.


We are very pleased with the overall results generated from our domestic business during the 2014 fiscal year. Gross profit from our underlying business improved by $6 million compared to the prior fiscal year based in part on continued growth in our PVA products. Success in our overall mix enrichment strategy which is focused on sales of other differentiated products. And margin improvements in our commodity business will all proving pricing stability to our customers throughout the year.

Prices for polyester raw materials declined by approximately 4% in the June 2014 quarter compared to the March quarter, which is also contributing to the improvements in our margins. However, after a decline in prices in April and May, we saw prices of polyester raw materials rise in June and we expect raw material prices to be slightly higher in the September quarter compared to the June quarter.

We continue to offer our customers pricing stability throughout the smaller shifts and prices for raw materials which is something they have come to value from us.

The gap in polymer pricing between the US and Asia remained at approximately $0.14 per pound. This continues to put pressure on the lower end of our commodity business and makes it difficult to compete with imported yarn in market segments that do not require compliant yarn.

Incremental growth of synthetic produced apparel from the NAFTA, CAFTA region as defined by square meter equivalents increased by 6.5% in calendar year 2013 and is projected to increase by 5% to 7% in calendar 2014. This also contributed to the positive results in our domestic business.

There’s been much talk over the past few years about brands and retailers placing more programs into the region. And over the last six to nine months we’ve started to see the conversation turn into reality. Rising cost from China combined with infrastructure growth in the CAFTA region have given brands and retailers the confidence needed to place more apparel production into the region, which in turn is helping them maximize cash flow as they enjoyed the benefits of lower volume commitments and quicker turn times.

Based on the success of our domestic business and the strength of our future orders in the NAFTA, CAFTA region, we expect the increase our strategic capital expenditures in the 2015 fiscal year.

The increase in CapEx spending will allow us to expand our texturing capacity domestically and in El Salvador and continue to support our PVA business. We’re also exploring the backward integration of our REPREVE manufacturing process to include bottle washing [ph].

These projects if implemented would significantly increase our capital spending in the fiscal 2015 in addition to the normal routine maintenance capital of $8 million to $10 million we typically spend each year.

We are excited about the growth these projects would enable and we will provide details on these projects when and if they are finalized.

Turning to our international businesses we are somewhat disappointed in our results from Brazil. Although our volumes are closed to targeted goals, our margins continue to be negatively impacted by price pressures from imported DTY and the devaluation of the Brazilian real which average $2.29 to $1 for the 2014 fiscal year compared to $2.04 to $1 US for prior fiscal year.

We continue to focus on mix enrichment in Brazil and we are working with downstream customers to develop programs using our differentiated products as well as our branded PVA yarns including REPREVE.

However, this development process is a long cycle and the shift to higher margin products will take time especially given the pricing pressures from imports and the challenging economic conditions in Brazil. We anticipate that our volume in Brazil for the 2015 fiscal year will we relatively flat compared to this year.

But we do anticipate improvements to gross profits in the range to $2 million to $2.5 million US based on the raw material duty [ph] reduction that was recently re-enacted by the Brazilian government.

China remains an important part of our global PVA strategy as it allow us to service customers who have global operations by providing them with the flexibility to produce a program domestically in Asia or both.

Although our results in China remain behind targeted goals called the pipeline of development projects in China that utilize REPREVE and other value added products has not come on stream at a pace that meets with our expectations.

Our operations there continue to be profitable. And we remain optimistic about our development projects underway in China. We expect to see incremental improvement from our China operations in our 2015 fiscal year.

Turning to our PVA products. The recently installed third line at our REPREVE recycling center begin operations in the June quarter. And our capacity for REPREVE is now approximately $72 million annually.

We expect to grow into our expanded capacity at that facility over the next 12 to 18 months. At which point we would look at additional expansion options and other strategic prospects to meet future demand for our recycle projects.

One of the growth drivers for our PVA products is the adoption of new programs using our yarns particularly our flagship REPREVE product. A few examples of new programs using REPREVE included the Nike flyknit vapor ultimate football cleat; a women’s yoga wear program at Sports Authority which includes tank tops and pants; a Volcom shorts and pants programs which uses about four bottles per short and 6 to 8 bottles per pant. And the Quiksilver mountain and wave hat and flexfit hat programs which average about one to two bottles per hat.

We’re also continuing to evolve the REPREVE brand to included additional performance and sustainability attributes; some which will be introduced at the outdoor retailer show in early August. One of the latest developments is a recycled yarn that looks and feels more natural. This new version of REPREVE provides the natural comfort, touch and appearance of cotton along with the strength, performance and easy care associated with a filament polyester. It’s like a synthetic cotton. The combination of cotton-like comfort and the functional advantages of polyester in this new yarn is well suited for the trend of performance wear that feels like natural fiber.

We are also incorporating a durable water repellant finish into a line of our REPREVE product that provides minimum water absorption and the fiber and leaves a fabric dry after shaking it off. The finish also provides stain release properties and we’ll be launching this new product initially in the contract and footwear markets while we continue to develop a version suitable for apparel.

We continue to be committed to driving demand for REPREVE by increasing consumer awareness for the brand. As part of this strategy, our hashtag Turn it Green initiative is designed to encourage recycling and raise awareness among consumers that recycled bottles can be turned into cool products they use every day.

We are excited to announce that the Detroit Lions will be the first NFL team to join the REPREVE #TurnItGreen movement. In addition to being there official sustainability partner, REPREVE will help turn their stadium forward field green through instating and recycling initiatives and gain messaging and a series of in-stadium activations. All of which will use our REPREVE product and color. As we continue to grow their REPREVE brand, we continue to explore other activation opportunities including Marvel Universe Live and ESPN X Games.

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

James Otterberg

Thanks, Roger. I will begin the review of our preliminary financial results for the June quarter and year end on Page three of the presentation with net sales and gross profit highlights by segment.

Consolidated net sales of $181.8 million for the current quarter decreased $19 million or 9.5% as compared to the prior year quarter. The current quarter contained 13 weeks for our domestic and Central American operation while the prior year quarter contained 14 weeks.

The one less week of sales is the primary reason for the decline in sales volume in our polyester and nylon segments. The sales volumes for the international segment are the lower as a result of continued pressure from the low priced Asian imports in Brazil and weaker market conditions in China.

Pricing for the company’s polyester and nylon segments improved as a result of the company’s PVA products and mix enrichment efforts. Lower pricing in our international segment was primarily driven by currency translation in Brazil and a lower price sales mix in China.

The Brazilian real for the current quarter averaged $2.23 to $1 versus $2.7 to $1 for the comparable period in the prior year. This devaluation of the Brazilian real accounted $2.5 million for decrease in net sales that will be shown within our international segment.

The current fiscal year contained 52 weeks for our domestic and Central American operations whereas the prior fiscal year contained 53 weeks. For the current fiscal year, the company sales volumes are down slightly versus the prior fiscal year for each of our reportable segments for both the polyester and nylon segments. The decrease reflects the reduce number of sales weeks and for the polyester segment alone a finer 10-year sales [ph] mix and our deficit to exit certain low margin business.


Pricing improvement for the company’s polyester and nylon segments are partially offset their respective volume declines. For the international segment, the decrease in year-over-year volumes is due to lower sales for our operations in China. The lower pricing in the international segment is primarily due to unfavorable currency translation effects in Brazil. When reviewing our gross profit of results, the company is reporting slightly lower gross profit for the current quarter as compared to the prior year quarter due to the impact of one less [ph] sales week in the current period for operations in the United States and El Salvador.

Lower gross profits in the international segment due to lower volumes and margins partially offset by improvements for the company’s domestic operating margins which can be attributed to the company’s PVA products and mix enrichment efforts. Along with the benefits of lower depreciation expenses and lower raw material cost. For the fiscal year, our polyester segment gross profits improved primarily due to higher conversion margins and lower depreciation expenses.

And the results for our nylon segment increased approximately $2.1 million due to the benefits of new PVA programs and improved conversion margins. These gross profit improvements for the current year were partially offset by a $3.6 million decline for our international segment which is attributable primarily to the combination of lower sales margins for our Brazilian operations caused by pressures from imports and unfavorable currency translation effects. And in addition lower year-over-year sales volumes for our Chinese subsidiary.

Turning to Slide 4. I will now review our income statement highlights for the fourth quarter. For the three months ended June 29, 2014, the company is reporting pre-tax income $14.4 million on $181.8 million of net sales. Pre-tax income is $1.2 million lower than the $15.6 million of pre-tax income generated during the prior year quarter. This reduction in our quarterly pre-tax income is attributable to the changes in gross profit discussed on the prior slide as well as lower earnings from the company’s equity affiliates and higher debt interest expense resulting from non-cash mark-to-market adjustments on our interest rate swap that were partially offset by lower SG&A expenses. For the current quarter basic EPS was $0.48 against $0.54 for the prior year quarter.

Now on Slide #5, we can see our fiscal year 2014 income statement highlights. For the 2014 fiscal year, the company is reporting pre-tax income of $47.9 million on $688 million of net sales. The $19 million improvement in pre-tax income versus the prior year is due primarily to the increase gross profits for our polyester and nylon segments lower SG&A, lower net interest and improvement in the earnings from equity affiliates which is discussed on the next slide.

For the current year, basic EPS was $1.52 per share against $0.84 for the prior year. Basic EPS of $1.52 is calculated using $18.9 million weighted average shares outstanding. And as of June 29, 2014, approximately $18.3 million shares were issued in outstanding. The decline in the shares outstanding versus the prior year period was driven by the company’s repurchase and retirement of approximately $1.5 million shares at an average cost of $23.96. As we completed our $50 million stock repurchase program authorized in fiscal 2013 and commenced the new $50 million stock repurchase program that was authorized in April of 2014. Retirements to date from both repurchase programs totaled $55.8 million or $2.6 million shares at an average cost of $21.54 per share.

Beginning on Slide #6, we can review our equity affiliates highlights. As of June 29, 2014, the company has approximately $99 million recorded for investments and 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 2014 fiscal year, these equity affiliates have contributed $19.1 million to the company’s pre-tax earnings which is an improvement of $7.6 million over the prior of fiscal year.

The improvement in Parkdale America’s earnings for the current fiscal year can be attributed to higher amounts of income recognized under the EAP rebate program and improvements on operating income while the decrease in the earnings for the UNF joint ventures can be attributed to lower gross margins. In addition, the company received distributions of approximately $13.2 million during the 2014 fiscal year. Distributions from Parkdale America were $11.3 million which is consistent with the average over the last three fiscal years.

Turning to Slide #7. We can review the company’s adjusted EBITDA results. For the fourth quarter of the current fiscal year, the company is reporting adjusted EBITDA of $18 million with the margin of 9.9% in comparison to $18.3 million at a margin of 9.1% for the prior year quarter. The decrease is primarily attributable to the reduce number of weeks in the current quarter and lower earnings from our foreign operations.

For the fiscal year, the company is reporting adjusted EBITDA of $57.6 million with the margin of 8.4% versus $52.7 million and 7.4% for the prior fiscal year. The year-over-year improvement in the company’s adjusted EBITDA metric is primarily attributable to the improved domestic gross profits that we have previously mentioned.

On Slide #8. The company’s working capital highlights are presented. The company’s balance of $137.4 million in adjusted working capital defined as AR plus inventory, less AP and accrued expenses was approximately 18.9% of net sales. The adjusted working capital dollars and the dollars as a percent of sales compare favorably versus both the beginning of the quarter and versus the beginning of this fiscal year as the company continues to effectively manage these balances.

Total working capital at June 29, 2014 was $151 million and this balance is also down versus both periods presented on this slide. The increase in other current liability is primarily driven by an increase in the current portion of debt due under our ABL facility and an increase in income taxes payable.

And on Slide #9, details for the company’s capital structure are presented. The company ended the year with $99.5 million of total debt and net debt of $83.6 million. In net debt has declined approximately $5.4 million from the beginning of the fiscal year. Cash flows from operations provided the company with the ability to reduce its net debt position and also utilize $36.6 million to repurchase $1.5 million shares of stock during the current fiscal year. As of June 29, 2014, the company’s weighted average interest rate for its outstanding indebtedness was approximately 3.0%. And as of June 29, 2014, our total revolver availability and liquidity were $61.1 million and $77 million respectively.

With that, I would like to now turn the call over to Bill.

Bill Jasper

Thanks, James. Good morning everyone. I’d like to begin by saying I’m pleased with the company’s results both for the June 2014 ending quarter as well as the entire 2014 fiscal year. Not only we record our highest fiscal year in net incomes since 2000, we were able to increase net income by $12 million over last year despite weekend performance from China and Brazil and one less operating week in our domestic business compared to last year. This speaks that the strength of our operating performance in our domestic and Central American operations. Sales volumes were good domestically, in Central America and in Brazil. Revenue fell from the previous year primarily because fiscal year 2013 had an additional week as James has mentioned. And Brazil currency weekend which caused $13 million in currency translation related revenue loss.

Overall, strong domestic and Central American performance in both nylon and polyester across the majority of our markets we serve more than outweighed disappointing performance from Brazil and China. We are encouraged by the recent trends in the sourcing of synthetic apparel coming from the NAFTA, CAFTA region. After holding share at about 17.5% for the last four years, we expect to see an increase in the share of US retail synthetic apparel sourced from the region in calendar year 2014 compared to previous years.


That will result in volume growth of regional apparel from both this year’s gain and US consumption increases at retail. This bodes well for Unifi and for our portfolio of compliant yarns. We continue to believe that the region will grow in importance to brands and retailers that we serve. And as Roger mentioned, we will increase texturing capacity in the region to meet this growing supply need and service the increasing need of our customers.

We will also continue to focus on driving improved results from our operations in Brazil and China. Both of which did not meet the company’s target goals in the 2014 fiscal year. Our financial results in Brazil and China continue to be negatively impacted by a range of conditions which includes challenging local economies, high inflation and of course the weekend currency in Brazil.

That said we believe that we have the right portfolio of branded value-added products and breathe of development projects in placed to drive incremental growth in both Brazil and China.

However, the pace of our success in these operations has been slower than anticipated. As Roger mentioned, we are looking to increase our strategic capital expenditures in fiscal 2015 to focus on high payback projects that drive revenue growth, improved margins and support additional PVA growth opportunities especially for a REPREVE. We are exploring several exciting growth and diversification opportunities and will provide updates as appropriate.

We will also continue to balance these capital expenditures with our stock repurchase program throughout the year and strategically use excess cash in ways that best enhance both short and long-term shareholder value.

We are fortunate that our strong cash generation and balance sheet and increased liquidity provide us with the ability to pursue several attractive options.

In terms of trade legislation, the Trans-Pacific Partnership negotiation has remained bogged down over several issues, most of which are not related to textiles. This agreement holds the potential to reshape global trade flows in the textile and apparel sector to the greatest degree of any free trade agreements since CAFTA.

The decisions made by the US government over the next several months could significantly impact markets and trade flows related to our industry both positively and negatively. We believe that the final agreement must and likely will contain a strong yarn-forward rule of origin, fair market access duty phase outs and strong customs enforcement rules and implementation.

The textile and apparel industry remains very engaged in the process with the government and we believe that current negotiations are headed toward something that the industry could support.

Regardless of the final outcomes, the industry in the NAFTA, CAFTA regions should have several years to adapt to Vietnam’s entrance before duties are eliminated on important items. This will help minimize any potential impact that the agreement may cause.

Looking ahead to the 2015 fiscal year, we anticipate continued strength in our domestic business with gross margins continuing to benefit from the growth of PVA products, stability and raw materials and our continued and ongoing focus on lean manufacturing, rigorous process improvement, increase flexibility in all operations and course reduction initiatives.

We also anticipate incremental improvements in Brazil and China as a result of our mix enrichment strategies and as development programs already underway come on spring.

With that, I would expect to adjust EBITDA in the first quarter of this for 2015 to be around $15 million and adjusted EBITDA for the 2015 fiscal year to be in the low to mid $60 million range.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question comes from Chris McGinnis of Sidoti & Company. Your line is now open.

Chris McGinnis – Sidoti & Company

Good morning, gentlemen. Thanks for taking my questions.

Bill Jasper

Good morning, Chris.

James Otterberg

Good morning, Chris. How are you?

Chris McGinnis – Sidoti & Company

Doing well. Thanks. I got a lot of questions and I’ll ask a few and then get off and then come back in but, I guess, can you just touch on international maybe what’s – I understand the issue there but is there a way to help that a little bit more? I know some of it is foreign currency but is there a way to help r push the REPREVE or the PVA initiative quicker through that and maybe how long do you think this lasts in terms of the volume kind of the pressures until we, I guess, until we comp the real issue of the low cost coming from the region.

Roger Berrier

All right. Chris, this is Roger, good morning. I’ll answer part of that and then let maybe James reference some of the currency impact.

But in terms of sort of the volume and I’ll start with Brazil. The issues that we’ve had there is we wanted to maintain our market share position, so we – based on the imports, if you look at global utilization rates of polyester assets, they’re operating at very low rates and there is very cheap price imports coming into Brazil. There’s no trade legislation in Brazil that they have to use domestically compliant yarn. So those low priced yarns coming to Brazil and we have to compete with those low priced yarns; and so we wanted to maintain the volume, so we’ve reduced our price to keep the low and running through our plants and that’s made our margins suffer which we’re reporting on our financial results.

Our strategy there is looking at mix enrichment opportunities and we’ve started some of those conversations and we have positive feedback that there’s opportunities there for mix enrichment but Brazil is a little behind, I would say, the US in terms of adoption of mix enrichment products. Their market there is very commodity-oriented. The economy there is as you know is slowing down, so, certainly lower priced garments and apparel have a stronger foothold than higher priced apparel and garments.

So, we’re attacking that on all fronts. We believe that our mix enrichment strategy especially introducing REPREVE and some of our early products there is a great long-term strategy but as we mentioned in the call, it is going to take a little while to embed that mix enrichment strategy.

But we feel good about our operations there. We have a great management team. We have a very good cost position there, so we can compete with these imports. So long-term and as we mentioned that over the next fiscal year, we do expect to see some incremental improvements.

James Otterberg

Yes, Chris, this is James. The change in the duties that Roger mentioned and then assuming a flat currency almost recovers all the difference from two years ago, so if you make those two assumptions plus the initiatives that Roger mentioned, you get to recovery back to a couple of years ago.

And then in China, that investment has performed well. Some of the slowness and volume here in China can be thought of as programs that are still here in the US that performed very well for us. And we’re encouraged about the outlook for the next fiscal year for the international segment.

Chris McGinnis – Sidoti & Company

All right. You may have said this, I apologize, James, but what is the – I guess, when you look at the volume on the quarter itself, if it’s down 11 roughly, what is the impact of the week itself and then, can you walk through the other components?

James Otterberg

That’s a good question. Thank you. The polyester and the nylon segment is dominated by our businesses here in the United States. In the current quarter if the effect of the week is a natural expectation for a decline of 8, so poly would have overcome that decline – or sorry nylon would have overcome that decline and the poly is slightly larger than that. But most of that would be attributable to changes in the mix to a lighter mix that we believe we recover in margin.

Chris McGinnis – Sidoti & Company

All right. And then, they have no impact on the international operations?

James Otterberg

No, that’s a good question. Thank you. The international segment on that slide is defined as our operations in Brazil plus our operations in China and that follows more of a traditional calendar year schedule so the extra fiscal week does not apply.

Chris McGinnis – Sidoti & Company

All right, thanks. All right. Just on the margin performance in the quarter especially when you look at the polyester, how sustainable is that going forward, obviously with the guidance it seems like it is, as you get that higher mix of the PVA, can you maybe just talk about that improvement at least the 100 basis points year-over-year, the biggest contributing factors and how much of it is sustainable?

James Otterberg

If I would reference back to the slide in looking at the gross profit for poly for the year, it’s $46 million, up almost $12 million from the prior year; half of that as we’ve mentioned before approximately half is going to be the decline and depreciation, the other half is due to the PVA and mixed enrichment efforts and the raw material cost that Roger mentioned that we’ve talked about before. But with the continued growth in PVA and the capital projects that we’re exploring, we believe that the expansion of the margin is something that can be sustained.

Chris McGinnis – Sidoti & Company

All right. And then just a few more quick ones. Roger, the stand on the PVA maybe can you – or not the material – raw material increase. Can you maybe just talk about how the timing of when you could take the price, it’s been [ph] a little bit of some time since we saw an increase.

Roger Berrier

Yes. As I mentioned, we did experience a small decrease in the fourth quarter and one of the things that we’ve worked with with our customers is that we’ve seen small decreases and small increases. We’ve basically maintained price stability which is something they’ve come to really appreciate.

So we did experience, as James mentioned, a little margin improvement in the fourth quarter based on a declining raw material situation where we didn’t change price; we held price. And then as we’re going in to the first quarter, that price decline is reversing itself. We will see a small increase. So if you net those two together they’re really going to offset each other. So we’ll be having a little less margin as this raw materials go up in the first quarter associated to price.

Chris McGinnis – Sidoti & Company

All right. So there wouldn’t be a price increase just to offset that, the new increase in the raw material itself?

Roger Berrier

No, because if you net those two together it would be the same [indiscernible].

Chris McGinnis – Sidoti & Company

Sure. All right. Just on the PVA strategy, can you maybe just give an update of the percent of sales where you’re at today and with the increase where do you expect to get maybe by end of the year or two years out?

Roger Berrier

Yes, I mean as we’ve talked on our conference call several times, we had a goal four years ago to double our PVA and we’ve been very successful in doing that domestically and for reasons that we’ve talked about on this call and other calls. We’ve been behind that goal internationally but we’re making progress of building our PVA platform in Brazilian channel.

And as we look forward we continue to expect our PVA to the increase and grow at that 12% to 15% year-over-year expectation. And as I mentioned and Bill mentioned, as we run into sort of restraints around our assets we’re looking to the strategically purchase more PVA type assets to support that growth.

Chris McGinnis – Sidoti & Company

I guess it’s the on the thought of the recent expansion for REPREVE, how much of that is accounted for already in terms of new customers coming in and how much is you have to go out and win new business?

James Otterberg

Yes, if you look at the capacity we just put in, we timed it where as we were bumping up to our previous limitation of GBP42 million, as we installed that third machine is pretty much right when we needed the extra capacity.

We’re running that asset now, the third line. And as we mentioned this, as we lay in this new business that were anticipating and talking to our customers about, it will take us probably another 12 to 18 months to realize the full capacity of that third line. So that should push us up close to GBP72 million where as we see that happening with the new business, as we’re talking to these customers about coming in for new business and new programs, that’s when we’ll start looking at another expansion which could be again 12 to 18 months out.

Chris McGinnis – Sidoti & Company

Great. And just one quick question on the – is that comes online, does that impact the margin profile at all as that takes time to kind of reach capacity?

James Otterberg

No, it doesn’t because we’re able to add that in line into our existing manufacturing operations and that actually – it helps us spread cost out so think of it as scalability. As we’re able to grow the REPREVE volumes, it helps us from a cost standpoint. So we’re able to get more and more competitive with virgin [ph] products. And one of the things that were doing is trying to grow REPREVE. And so as we scale REPREVE it actually helps us get more competitive to win new programs.

Chris McGinnis – Sidoti & Company

And one last question and then I’ll jump out, I promise. Just on the CapEx plans, if we’ve already started – we’re already into Q1 here, I guess, what are the deciding factors for the capital allocation program for the year. I guess, what’s holding you back from coming out and saying, “Hey, this is what we’re spending this year and these are the programs,” since you’re on the year already?

Bill Jasper

This is Bill. Basically we’ve certainly got plans in place that we are not quite ready to talk about yet. We’re exploring some options and I would anticipate that within a month or two we will have some of these options.

At least sufficiently vetted that we can make a decision on and certainly when we do that we’ll be ready to make an announcement if there is something to announce. I think realistically, we are looking at increasing our capital spending this year if some of these options pan out, I would anticipate our capital spending this year could be roughly double what it was last year.

Chris McGinnis – Sidoti & Company

Great. Thanks. I’ll jump back in the queue.

James Otterberg

Okay, thanks, Chris.

Operator

Thank you, (Operator Instructions). Our next question Allen Zwickler of First Manhattan. Your line is now open.

Allen Zwickler – First Manhattan

Good morning, gents.

James Otterberg

Good morning.

Roger Berrier

Good morning.


Bill Jasper

Good morning, Allen. How are you?

Allen Zwickler – First Manhattan

Great. Can I just get a clarification on your last comment. Your CapEx of the year that ended June was about $19 million, is that correct?

Bill Jasper

That’s correct.

James Otterberg

Yes, sir.

Allen Zwickler – First Manhattan

Okay. What you just said if I heard you, right, was that it’s possible that you would double that. Did I hear that correctly?

Bill Jasper

That is correct.

Allen Zwickler – First Manhattan

Okay. So what – and I’m not saying you will and you’re not saying you will but 19 was up from – well, at one point you were down to virtually nothing, which we know was unsustainable. But what would be the actual machinery, products, services – again, I’m not saying that you will, but what would they be that would make you spend that kind of money? Because that is significantly higher than anything you’ve spent since the old day?

Bill Jasper

I think if you go back over to Roger’s comments, and my comments, I mean, certainly, one thing we’re seeing right now is an increase in consumption of polyester textured yarn in this region. And as I’ve said before we’re committed to meeting that increase demand. So certainly one thing we would be considering spending money on is additional texturing machines either here in the US or in Central America where we’ve seen. Yes, we’ve basically doubled our capacity in Central America –

Allen Zwickler – First Manhattan

Right.

Bill Jasper

– in the last year and a half. So certainly adding DTY capacity is a possibility. Also as we look at REPREVE and we look at the supply chain for recyclable polyester, we’ve also been considering backward integration into bottle [ph] washing.

And while that’s not something we’re saying we’re going to do right now, that certainly is a possibility to help secure our supply of plastic bottles going forward as we continue to grow the REPREVE business. In addition to that, you did mention and you were absolutely right we’ve done very little capital expending in some years. I think fiscal year ‘12 we only spent about $4 million or so.

We’ve certainly got a certain amount of maintenance capital that we have to do to keep our equipment in tough condition and running well and efficiently. We would increase a little bit of our maintenance capital also to assure our operations remain very efficient. And certainly at very high yield. So those are three things that we would be looking at and considering. And there may be others.

Allen Zwickler – First Manhattan

And does any of this potentially 30 some odd million have to do with renewal project?

Bill Jasper

No, there wouldn’t be any capital spending in the renewable project.

Allen Zwickler – First Manhattan

Okay.

Bill Jasper

And, I guess, one of the comment I’ll make and I just want to make sure this is clear and we are generating a significant amount of cash at least for us, based – versus the last several years. And we’re going to continue to look for high payback projects that continue to increase our percentage of sustainable non-cyclic business versus the low-end commodity part of our business.

We’re also going to be looking for high payback projects that would give us a little bit of differentiation in our existing business and we’re going to continue to be in the market to repurchase stock as we compare that to the returns of these projects and obviously our intention would be to deploy the cash we generate, so it best improves shareholder value and it’s probably going to be a mix in capital spending for improvements in our business as well as stock buybacks.

Allen Zwickler – First Manhattan

Okay. And then, just lastly, from the US standpoint, I came on the call a couple of minutes late and I apologize, what is the general tone of the poly and nylon business and why is it taking you – and I know, I doubt you’re going to answer this one but I’ll give it the best shot I can, why is it taking so long to have this long-term agreement with Hanes?

Roger Berrier

Yes, our polyester and nylon business, the sort of underlying business, Allen, has been very robust as we mentioned on the call. We’re pointing to the strengths of the NAFTA, CAFTA region. As we discussed, a lot of the brands and retailers now are looking more and more to the region to source apparel goods. And certainly we’re benefiting from that and we’re also seeing our customers being knitters and weavers here in the US and also in CAFTA put in additional capacity to service those needs. And with that extra capacity, they need more yarn needs certainly and that’s driving us to look at some growth and adding some DTY capacity.

And in terms of the HBI contract, we’re still very close with Hanesbrands they’re a key customer of ours; that relationship remains very positive. And if you’re following Hanesbrands, you certainly understand they’ve had a lot of action, transactions going on recently and certainly we’re working with them to update our agreement to make sure that we’re covering their needs as they absorb those transactions.

Allen Zwickler – First Manhattan

Okay, I’m slipping in one more, I’m sorry. How about your cotton joint venture, to what extent does your EBITDA you’re saying is going to be in the 60s; that does not include at Parkdale, is that correct?

Bill Jasper

That is correct.

Allen Zwickler – First Manhattan

Okay. And what is your expectation at this point of what they’re going to generate in the current year? Do you have any sense of that yet?

Bill Jasper

Yes, it is typical to have a sense of that right now. There are certainly positives and negatives going on in the cotton spinning market right now. On the negative side, there’s a lot of open-end spinning capacity coming online primarily Gildan [ph] is putting in our lot spinning capacity. So certainly there may be over capacity over the next couple of years potentially. On the positive side, cotton prices have been coming down pretty dramatically which tends to help Parkdale’s results. So it’s difficult for us to say where that market is going to go. I think it’s in a little bit of a flux right now. Certainly, from an earning standpoint, they’ve been positive for us. From a cash standpoint, they are doing a lot of investing.

And so a lot of the EBITDA that they’re generating which you’re exactly right does not get included in our EBITDA, a lot of that cash that it’s generating is being reinvested which is not a bad thing. I mean, in my mind, they’re easily the lowest cost most efficient cotton spinner in the world and I think long term, that’s going to bode well for them. But to say what they’re going to do this fiscal year would be kind of difficult for me right now. Again, because I think the cotton business is somewhat in flux and I can see positives and negatives there.

Allen Zwickler – First Manhattan

Thank you.

Operator

Thank you. Our next question is a follow up from Chris McGinnis of Sidoti & Company. Your line now is open.

Chris McGinnis – Sidoti & Company

Just maybe a couple quick ones. One, just on the REPREVE renewables maybe can you give us an update just on maybe the bedding market and how that’s – I know you’re in some test earlier, maybe just use a quick update on that?

Roger Berrier

Yes, I’ll give you a quick update. And the reason I didn’t really talk about it too much is we’re right in the middle of all this testing, but I can tell you initial test results have been very good. It shows that the miscanthus bedding that we’ve been testing is at least equal to the best wood base bedding in both the chicken and in turkey industries and certainly being a dedicated supply offers some benefits. So assuming these tests continue to do well, I would see probably an expansion of those test and potentially some smaller contracts going forward into the next year. It’s still – again, it’s still a startup business but certainly all of the bedding test we’ve done so far had been really quite good and I guess our planting so far, again, we’re in the middle of the growing season but our establishment has been really quite good with our new planting methods.

So we’re – I’d say we’re cautiously optimistic. It’s probably the best way to put it right now and we’ll know a lot of more within about six months probably.

Chris McGinnis – Sidoti & Company

Great. And then just a follow up on the previous gentleman’s question on the Hanesbrands; were you – did you service Maidenform prior to the acquisition?

Roger Berrier

No, a lot of the Maidenform apparel is sourced in Asia and we were not participating in those programs.

Chris McGinnis – Sidoti & Company

And is there, I guess, just with the cotton [indiscernible] being different, would that, I don’t know if it’s more intense for Maidenform, the operations after it leaves you but could that be additional business for you or is that is kind of neutral kind of event?

Roger Berrier

Yes. Well, we certainly have talked to Hanesbrands. I mean one of their strategies as they absorb Maidenform here, they’re looking at opportunities to bring back a few programs and run those programs in their current assets as they choose to do that and they choose to move some of those programs back to this region. Certainly, our yarns could be utilized in some of those programs. So, we are optimistic about there could be some potential opportunities there, but that’s not something that we can really elaborate on today.

Chris McGinnis – Sidoti & Company

Sure. All right. Thank you very much for the time today. I appreciate it.

Operator

Thank you. And as this time, I’m showing no further questions. I’d like to turn the call back to management for any further remarks.

Bill Jasper

Okay, this is Bill. I’ll just close with a few remarks. I guess, if you look back over the last four or five years, we’ve spent, really spent our efforts and I would say riding the ship. We’ve gotten to the point now where we’re profitable, where we feel very confident about our base business and I think we’re entering a phase now where we’re going to really begin to focus on growth especially in the high-value, non-cyclic parts of our business. So we’re certainly encouraged by our results. We’re optimistic about our future and look forward to continuing to show improvement in the operations of all of our businesses globally.

And with that, I’ll thank everyone for their interest and wish you all a good day.


Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone, have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!