Unifi, Inc. (UFI) CEO Kevin Hall on Q2 2019 Results - Earnings Call Transcript

Unifi, Inc. (NYSE:UFI) Q2 2019 Results Earnings Conference Call February 4, 2019 8:30 AM ET

Company Participants

A.J. Eaker - VP Finance and IR

Kevin Hall - Chairman and CEO

Tom Caudle - President and COO

Chris Smosna - Vice President, Treasurer and Interim Chief Financial Officer.

Conference Call Participants

Chris McGinnis - Sidoti & Company

Daniel Moore - CJS Securities

Marco Rodriguez - Stonegate Capital

Operator

Good morning, everyone. Welcome to Unifi's Second Quarter Conference Call. Leading today's call is A.J. Eaker, Vice President Finance and Investor Relations. A.J.?

A.J. Eaker

Thank you, operator, and good morning, everyone. On the call today is Kevin Hall, Chief Executive Officer; Tom Caudle, President and Chief Operating Officer; and Chris Smosna, Vice President, Treasurer and Interim 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, and adjusted working capital may be discussed on this call, and non-GAAP reconciliations can be found in the schedules to the webcast presentation.

I will now turn the call over to Kevin Hall.

Kevin Hall

Thanks, A.J., and good morning, everyone, and thank you for joining us today. During the second quarter, we faced the highest Polyester raw material costs in calendar 2018, coupled with significant regional market pressures. As a result, we experienced a tough operating environment that further weighed down our performance.

We did see some revenue growth from our International segment, but it was muted by shortfalls in the Americas. Our miss in the Americas was primarily due to a few factors. One less shipping week in the North and Central American region due to the timing of our seasonal shutdown. The recent spike in global polyester raw material costs, which also contributed to a softer demand environment, continued competitive pressures in the Americas with demand softness and a weaker sales mix. While each of these factors separately impacted our profitability, the combined impact was even more profound.

We remain focused on growing the top line and expanding profitability to drive long-term shareholder value. Leveraging both our PVA and core non-PVA platforms, we are confident in our Partner, Innovate, and Build Strategy to achieve success.

Our PVA sales reached 47% of consolidated sales for the quarter. We continue to believe that the investments we're making to drive long-term growth across the globe are important and are working, but need to focus diligently on competing both internationally and domestically.

I'll start with an overview of the quarter and then Chris Smosna, our Interim CFO will share more granular details on our financial performance.

As we talked about in our first quarter earnings call in October, we had already seen the spike in our raw material costs beginning in September and they continued to rise and peaked in early October. By November, we had begun to see a pullback in those costs, but we had already experienced a meaningful short term impact on our gross margin performance.

Further compounding the effects of this rising cost environment was the continued soft demand in the domestic market, which was exasperated by competitive import pressures and the typical soft seasonality in fact - in the second quarter.

This environment has made for a difficult setting in which to maintain a superior margin profile in our regional markets. We saw particular margin pressure on our high value textured yarn products and the timing of our holiday shutdown exasperated these issues.

As a result, we didn't get the pull-through and fixed cost absorption necessary to keep margins where we need them. As we look forward, it's difficult to predict cost and demand in the short term, but we are seeing signs of a more normalized and less volatile raw material cost environment.

If these trends continue, the same lag that acted as a headwind for the majority of calendar 2018 should turn in our favor as we look to the second half of fiscal 2019. Therefore we expect the benefit of lower cost and seasonal volumes to create a step-up in our recent margin profile.

Now moving on to a high level review of our operational results during the second quarter. International top line performance again excelled with sales growth of 14% over last year, driven primarily by increased volume and more filament programs pulling through.

Chip and staple fiber continued their growth - their growth path, but it is exciting to see our broader sales effort taking hold with more high margin filament sales in Asia. This gives us confidence that our portfolio is creating the stickiness needed to move customers up the value chain on to higher margin platforms. However, international sales expansion was partially offset by unfavorable foreign currency translation impacts, plus ongoing economic weakness in Brazil.

In the domestic market, our sales efforts did not generate growth in polyester products and we saw continuing decline in the domestic Nylon market in our Nylon business segment overall. The decline in the Polyester segment reflects the lower volume because of competitive pressures, a shorter shipping period, and suppressed demand which were partially offset by recent pricing actions.

As it relates to the recent trade petitions that we announced in mid-October regarding polyester textured yarn in our U.S. market, there are no material updates to provide at this time, especially in light of the recent government shutdown. When we are in a position to provide further updates, we will do so accordingly.

From a marketing and commercial standpoint, our progress continues. Last week, we announced our 2018 REPREVE Champions of Sustainability Awards, which recognize our brand and textile partners that have achieved plastic bottle recycling milestones as a result of their use of REPREVE performance fibers.

Now, in the second year, a total of 68 companies are being recognized as REPREVE Champions of Sustainability, which includes 18 new brand and retail award winners. This year Nike and Target are joining Polartec in the Billion Bottle Circle for recycling more than 1 billion bottles each and many of our partners reached significant new milestones in 2018.

Unifi and REPREVE will also have a presence at New York Fashion Week in early February, where we will be presenting Mara Hoffman with the REPREVE Champions of Sustainability Leading the Change award.

Mara Hoffman is a well known and respected fashion designer who converted her entire line to sustainable fabrics back in 2015 and she uses REPREVE performance fibers in her textured swimwear collection. Unifi will be hosting a celebratory event to honor Mara Hoffman on February 11th during the Fashion Week festivities.

To support the growth of REPREVE, we introduced three new performance technologies at the Outdoor Retailer Snow Show, which was just completed in Denver. These include REPREVE TruFlexx engineered stretch, which is made with 100% polyester for a more sustainable stretch option that is spandex free thereby enabling a 100% closed loop recyclable stretch polyester fabric.

Another innovative performance product introduced at the show is TruClean, an anti-static yarn which inhibits static and clean. Key applications include denim where the technology keeps dark jeans looking clean and dark and in apparel and home furnishings for pet owners by repelling pet hair lint and other small particles.

And finally, REPREVE Nylon Staple Fiber, which is a new sustainable option for spun yarns that can be used to improve the hand and strength of fabrics. This new product will allow us to better penetrate targeted end users, such as performance apparel, intimate apparel, denim and sports uniforms.

And we are also excited by a significant news Circular Economy partnership announced last week. This partnership takes back bottles from the Atlanta airport and Mercedes-Benz stadium for Unifi to convert into REPREVE fiber which is used in jackets worn by volunteers at the Atlanta airport. The jackets include the REPREVE logo and bottle count on the sleeve and help drive awareness for the brand as visitors and sports fans travel through Atlanta.

Our progress is exciting and aligns perfectly with the recent onboarding of Al Carey, as our new Non-Executive Chairman of the Board. His experience is tremendous and his insight and capabilities will be invaluable as we move forward with our strategic initiatives, including exciting possibilities on REPREVE in Circular Economy partnerships. Lastly, our CFO search is underway and we will provide an update in due course.

I'll now pass the call to our Interim CFO, Chris Smosna to go into more detail on our financial results. Chris?

Chris Smosna

Thank you, Kevin. And good morning, everyone. As Kevin noted results this period are disappointing. I will dive into the drivers of our performance in my discussion today and we'll begin on Slide 3 of the webcast presentation where you can see a high level overview of net income.

Moving from left to right, net income declined from $11.8 million in the second quarter of fiscal 2018 to $1.2 million in the second quarter of fiscal 2019. In the prior second quarter, we recorded the tax benefit of $3.8 million due to tax optimization actions and correspondingly the company's ability to reverse the valuation allowance on certain historical net operating losses.

Additionally, the impacts of implementing tax reform in December 2017 led to a $4.5 million remeasurement of our deferred tax balances and a $1.7 million provisional charge for the tax on deemed repatriation of foreign earnings. These items combined to reflect the $6.6 million net tax benefit in the prior year second quarter.

In the current year second quarter, optimization actions allowed us to recognize the $2 million tax benefit relating to tax returns from prior fiscal years. Both items are presented here separately as they are less relevant to our ongoing tax rate.

As we move to the remaining items in this bridge, note that each our tax affected at a 25% tax rate which approximates the prior year tax rate when excluding the $6.6 million of benefits described earlier. With no material increase in net sales from the fiscal 2018 second quarter, the next impactful item was a decline in comparable gross margin and I'll provide a margin bridge on the following slide.

Next, operating expenses, including SG&A increased approximately $500,000 on an after tax basis when excluding the benefits of foreign currency changes. Strong earnings from Parkdale provided an improvement in net income of approximately $600,000 on an after tax basis, net of lower earnings from our Nylon joint ventures.

And lastly, the benefits of foreign currency impacts were partially offset by higher interest and taxes. As Kevin said earlier, it was a quarter full of headwinds and you see that here with diluted earnings per share of $0.06.

Moving to Slide 4, we have provided a bridge for gross margin. Consolidated gross margin was 8.4% for the second quarter of fiscal 2019 compared to 13.5% for the second quarter fiscal 2018. The decrease in gross margin was primarily driven by lower regional yarn volumes contributing to weaker fixed cost absorption and elevated inventory stocks with a less favorable sales mix.

This was exacerbated by the spike in raw material costs leading into the second quarter as raw material pressures were seen around the globe. The weaker sales mix results from the disproportionate growth of lower margin product and softer sales of certain higher value textured and covered yards. These items all contributed to a decline in overall gross margin driving the significant underperformance seen in this quarter. On this slide four we have labeled the major drivers for each segment.

Slide 5 shows the sales and growth profit highlights for the second quarter. Total segment net sales were up $200,000, while gross margin declined 520 basis points. Sales results in our International segment continue to be a bright spot and drive overall revenue growth.

Sales of recycled staple fiber continue to grow in Asia, and these sales are a key component to our long-term brand relationships based on sustainable solutions. The International PVA portfolio remains strong as our strategy there contain [Technical Difficulty]. However this growth was muted by both foreign currency translation and softness in the Brazil market.

In our Polyester segment, we saw declines in higher value yarn and PVA volumes in this quarter, partially offset by incremental volume in our freight business and the impact of selling price increases implemented during calendar 2018 in response to rising raw material costs. Overall Polyester volumes were down 10.9% due to one less shipping week and increased competition.

Nylon sales performance also reflects the impact of the holiday shutdown, plus an ongoing decline in the overall demand for nylon products, partially offset by improvement in some of our nylon textured yarns. The market and competition remain difficult.

For gross profit and gross margin performance, we covered the significant items on the previous slide. Here I will highlight the impact to each segment. Polyester was primarily impacted by weaker fixed cost absorption, weaker sales mix and raw material cost pressures.

Nylon was primarily impacted by weaker performance in high value yarns and fixed cost absorption and the international segment faced some raw material pressures along with a slightly weaker sales mix.

Slide 6 shows equity affiliates, pre-tax earnings from equity affiliates increased approximately $800,000, driven by comparatively better performance at Parkdale due to better operating leverage and a more favorable raw material and pricing environment. Distributions in the quarter totaled $120,000, while the year-to -date amount is $630,000.

Slide 7 covers balance sheet highlights. Working capital is $196 million and adjusted working capital was $176 million. Adjusted working capital as a percentage of sales reached 26.6% driven by higher inventory stocks in combination with lower regional sales volumes and a seasonal shut down period.

We ended the period at $131 million in debt principal and net debt was at $104.5 million. During the quarter, we utilized some of our cash and cash equivalence against our domestic credit facility and subsequently amended the facility.

As a result, higher adjusted working capital primarily for inventory offset the reduction in debt principal. By amending the credit facility, we were able to extend the maturity date to 2023 and generate an average step down in pricing of 25 basis points.

As of December 2018, revolver availability was $64 million while total liquidity moved from $98 million at June 2018 to $91 million at December 2018. As a reminder, using swaps that terminate in May 2022, we have effectively fixed LIBOR at approximately 1.9% on $75 million of our debt principal. At December 2018, our weighted average interest rate was 4.1%. Consistent with our October 2018 announcement, $50 million remains available for share repurchases.

I will now turn the call back over to Kevin.

Kevin Hall

Thank you, Chris. I would like to provide some color around the outlook for the remainder of fiscal 2019 and then we will open it up for your questions.

Looking to the rest of fiscal 2019, we are adjusting our outlook to account for the full results from the second quarter and the macro environment we are still experiencing. We will - while we believe our strategy is the right one and we'll deliver profitable growth as the raw material and demand environment stabilize, there's work to do.

We expect revenues to finish the year at mid single digit percentage growth range. For our second half margin profile, we do not expect to recapture all of loss margin from the recent raw material cost increases, as the difficult regional competitive dynamics will remain for the foreseeable short term, especially as we defend our competitive position on our regional commodity business.

So the second half of 2019 is expected to improve over both the recent first half and versus fiscal 2018 second half and thus we expect fiscal 2019 operating income between $19 million and $23 and adjusted EBITDA between $42 million and $46 million. Our expectations are for capital expenditures of approximately $25 million for the year and an effective tax rate in the mid 40% range and they have not changed.

From an investor's point of view, it is critical to again reiterate that our strategy to partner, innovate and build with our high quality programs remains a top priority. At the same time, we are renewing our focus on our commodity business to ensure that we maintain our significant market position in the North and Central America regions and support our significant asset base and abilities to drive innovation and sustainability for our regional and global customers.

Our current products and those that we are developing can help our customers innovate with the solutions that today's consumer’s desire which in turn will help them improve their top line opportunities. So we will remain focused on positioning our business for the long-term growth and executing our strategy, while we simultaneously enhance our short term returns.

We will now open the lines for your questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] Our first question will come from the line of Chris McGinnis with Sidoti & Company. Your line is now open.

Chris McGinnis

Good morning. Thanks for taking my question.

Kevin Hall

Good morning, Chris.

Chris McGinnis

Morning. Just kind of digging into the pricing pressure a little bit. Is that more of just a slowdown in purchasing by customers and just a simple supply - supply and demand issue you expect with higher volumes that we will get past that, you know, the kind of the current price environment?

Chris Smosna

Hey, Chris. Let me - I think there's a couple of factors that played into the quarter. And as you say, there's things that we're leaning to as we go forward. You know, if we dial back and go - as we headed into Q2, we had that huge spike in our costs. And you know I think, we'd been chasing increasing costs for a year and I think on any kind of a sustained movement like that all times that have ended in a crescendo if you will, on [indiscernible]. You know we experienced it in September and October, and we had a pretty big move up in the cost.

And so if you overlay that, our quarter two is always - is our lowest demand quarter. I mean, one of the reasons for that is we sell a lot into apparel, footwear, and if you think of the calendar year they sell a lot, starting a calendar year, starting the new sets you go into back to school, then you load in for holiday and then as you come into that quarter two, you're really - you're coming to an end of the holiday build and you're starting to look and you search for the following year.

This year, the retailers and the brands went into the holiday season pretty strong actually. I think you know, as we looked into some of the results, they had good inventory positions, they mostly had strategies to win versus e-commerce on being in stock and you know, being where the consumer wanted them to buy and it was a good start to the holiday season.

With this cost increase and as we went into our quarter two, we definitely saw a reduction in a lot of the retail brand demand going forward. You know, I think that some of the brands bought less, some of the brands just decided to stop and call it a holiday and end with lean inventories going into the next year. A lot of them wanted to watch and see what happened, some pushed demand out and even you know starting up on their new sets for this year just kind of wanted to get that final read on holiday.

If you look at the holiday season it was a good one though, you know, and so I think and most have ended with pretty good inventory positions. So, as we're coming into our Q3, their first quarter we are seeing seasonal demand pick back up globally. You know, we're starting to see a pickup in all markets. It's still a tough macro market. The costs have come down. They are still elevated, but they've come down from that spike position.

So you know, you lay all that out the maneuvering - or going through the quarter, there was this less demand in the overall market. And what was there, we were having to fight for with elevated costs. And just you know it made for an environment where we were not able to get enough demand in here to cover our fixed costs, and really we had a negative impact across the business.

We do feel better about where we're at now. I'm glad to say that for the first time in a long time we're not chasing increasing costs. You know, I do want to reinforce, we're not out of an elevated cost environment, we're still in that. But the costs have come back to you know more where we're priced at. And so you know, it's - you know, it looks better from that standpoint.

Chris McGinnis

I appreciate that color. Also and if you answer this and I didn't understand it, I appreciate - you know, just wondering around existing contracts and how those were priced in a more competitive environment. Does that impact you or can you maybe just dig into that a little bit as this is kind of a little bit of a newer nuance to the story?

Chris Smosna

You mean like in the index pricing?

Chris McGinnis

Yeah, exactly.

Chris Smosna

Yeah. So the way to think of index pricing that we said it’s – it’s done on a quarterly basis, it's like a quarterly average. And so you know, when you get these moves up like we were chasing, you're always kind of averaging - catching up to that average if you will. So you know, in this environment as we went into the second quarter, we have that huge move up. Those average costs were above where our average pricing was at.

They've kind of started to come back down now, so they're averaging back down a little bit. As I said, we're kind of getting into a good price to cost ratio right now where we need to be. We never did really fully recover that full two-month spike because of some of these dynamics. It just happened so quickly, up and so quickly down, so that was one of the things that hurt us. I might be - so that will be there, but as we look go forward our index pricing looks like - it's going to be in a pretty good place.

Chris McGinnis

Okay. And so that's the driving factor I guess for the current contracts you have in place, say with like a [indiscernible] or something like that…

Chris Smosna

Yeah…

Chris McGinnis

And then take a pricing, okay…

Chris Smosna

So if you think about what we're pricing now, where indexes are as I said, the prices - the cost kind of came back down to where they're matching where our pricing is.

Chris McGinnis

Okay. So you wouldn't see competitive pressures on that would you? Since you're already in on the program, is that – that’s where I was trying to get at, I apologize.

Chris Smosna

Yeah. So that's always going to be partly demand, we’ll always have pressures. But you know that's going to be part demand driven too, that's why I'm glad that the seasonal demands are moving back up.

Chris McGinnis

Thanks very much, I appreciate. I'll jump back in queue.

Chris Smosna

All right. Thank you.

Operator

Thank you. And our next question will come from line of Daniel Moore with CJS Securities. Your line is now open.

Daniel Moore

Thank you. And good morning. Let me drill down a little bit more when you describe increased competitive pressures in the region. So is Brazil specifically in the captive [ph] region. Are you seeing new entrants? Is there something going on the supply side, as well as, you know a little bit of demand pressure?

Kevin Hall

Yeah. Thanks, Dan. So let me start with Brazil. Brazil continues to be a good market for us. Its volatile. We have a strong leadership team down there. And you know, we always talk about Brazil being volatile and it definitely was in Q2. You know, it was an environment where they had our currency fluctuations, they were hit hard by effect. They had their different political environment situation going on there. It's calm down, going into Q3. So that's good. But we definitely were impacted by FX and some movement there and some of the impacts on our gross margin.

Less so - I guess as you kind of bring it all the way down total EBITDA because there were actually some impacts on the SG&A side of it, but it was clearly an impact on our gross margin side.

We are cautiously optimistic there. As we go forward, the team feels like they have the plans in place and it is much - you know, it's a different environment right now, knock on wood [ph] hopefully it stays there.

When you look at this region, we do have strong competition in Central America. We have a few tax [ph] coming online in Honduras. At the same time you do have more brands still talking about more business in that region. And so we still believe that there's going to be a great opportunity to partner with them and move more REPREVE based our product offerings to them in that region.

So we need to do both. We got to compete on the commodity side to run the assets down there, as we start to increase the mix towards REPREVE. And we think that's going to be the right long-term strategy.

North America you know, it was just a tough demand environment here and I think in that you got more people buying spot and on these imports and you know, again we're approaching that differently. We've got a - it's still the same premise, which is we've got to get very, very close to each of our customers. We've got to partner with them. And we've got to know what they need and when they need it.

So even on our commodity side of our business it's about high quality, it's about speed and it's about getting products to them in a way - in a better way than they'd be able to get out on the open market.

So those are the things we're focused on. We've got – the only thing I would like to add Dan as we've really worked on getting strong local leadership in each of our regions. And so that would include in Central America we got a much strengthened team there and we're really going to push to make sure that we own these local markets.

Daniel Moore

Got it. And then my follow up, you may have answered some of it there Kevin, but you know in terms of being or competing more aggressively on the commodity side of the business, beyond you know simply price, some of those levers that you are thinking about so that you can pull?

Kevin Hall

Yeah. So a big part of what we do is high quality speed. You know, if you think about some of these large commitments that need to get made on some of these seasonal deals, is large production and you know, there is a value to making sure that you're getting that delivered into their supply chains in a high quality dependable way. So we're going to make sure we partner with those customers to get that done.

Daniel Moore

Got it. One more and I'll jump back. But if we think about the guidance for the remainder of the year at least on an EBITDA front, looking at some pretty healthy growth year-on-year in terms of H2 in the 10% to 30% range, maybe just talk about your visibility and comfort and what gives you confidence in that type of growth on a year-over-year basis?

Kevin Hall

Yeah, I think the two macro pieces right now are seasonal demand coming back into place and right now we're not - we're not chasing increasing costs. You know, we're at a place where that is kind of come down and we're matched where we need to be. So that's really what we're looking at Chris, I don know if you have anything else to add?

Chris Smosna

Yeah, I would just say Kevin about the favorable index pricing rolling in the second half will help you know, that one quarter lag and overall improved sales and production volumes from the seasonality that typically lifts our second half will drive improvement.

Daniel Moore

Got it. Appreciate the color.

Operator

Thank you. [Operator Instructions] And our next question will come from the line of Marco Rodriguez with Stonegate Capital. Your line is now open.

Marco Rodriguez

Good morning, guys. Thank you for taking my questions. I have a quick follow up on one of the prior questions there in terms of the competitive environment. I just kind of want to dig down a little bit more. I'm trying to follow through some things here.

The overall cost environment for you guys, the raw material costs supposedly should impact most of the players the same way. I understand the import aspect, but I'm just trying to understand here from North America region and Central America. Is there an issue with just your competitiveness in terms of the cost structure or sales aspects? I'm just trying to kind of understand that a little bit better.

Kevin Hall

Well, a big part of this quarter Marco really was overall demand in the region both North America and in Central America just went really low. And so that you know, that was something that we're going to have to deal with. We are - we do have to watch our costs. We have to manage on our cost side very aggressively and we're going to have to do that in both Central America and North America, as well as Brazil and Asia. I mean, we don't actually get a pass from that anywhere.

Moving into more differentiated yarns is going to be critical. We've talked about that. You know, I think getting into more REPREVE is going to be critical for that. The nice thing there is I think what you're going to hear over the next six to 12 months is more and more brands making a commitment. So we've - we're positioning ourselves to be able to supply that in all regions including in Central America at a cost competitive way and as brands want to move into more REPREVE.

So a lot of work to do. We've got to continue to focus on costs. But you know, it's one of things that I think we'll always have to do as we move forward. Again, Chris do you have anything else that would add.

Chris Smosna

No, I think that covered it.

Kevin Hall

All right.

Marco Rodriguez

I guess what I'm still trying to kind of understand here is, is your cost structure perhaps a little bit less favorable to you guys in the North in the Americas or is there a kind of lack of focus on this commodity assets because you're obviously geared more towards the PVA moving that for a long-term perspective?

Kevin Hall

Yeah, so Marco, you know, I think we've talked with in the past, we do have very aggressive imports here and aggressive pricing on them. So we do have - we do face that. Again, they tend to be more spot and oriented, but in certain situations they're able to pick up business. And so where people really want to partner on big run, we need to be able to compete versus that. But you know, but the imports are an issue that we have.

Central America with [indiscernible] taxes coming on, they are very cost competitive, they are a low cost competitor there. And we'll have to play that very sharply. But again in a seasonal down demand environment we think we can do that. And right things look pretty good.

Marco Rodriguez

Got it. Understood. And then also if you could maybe talk a little bit on the working capital aspects, just kind of looking at your inventory here its been kind of accelerating year-over-year for the last few quarters versus your sales growth, obviously understand some of the impacts on sales growth. But if you can talk a little bit about that elevation down inventory levels and how that sort of is going to be impacted in the second half of the year?

Chris Smosna

Yeah. Hey, Marco. This is Chris. You know, just the working capital increased from about $152 million in June to $176 million in December. And as you noted a big piece of that was inventory.

So going through the back half of the year we expect adjusted working capital to remain relatively flat or maybe even down a little bit as reductions in inventory due to anticipated lower raw material cost and a converted effort to lower on-hand inventory levels will be offset by an increase in accounts receivable due to the expected increase of sales that typically occurs in the second half of the year with the seasonality. So that's kind of where we see things going.

Marco Rodriguez

Got you. And last, so just a quick housekeeping item here. I'm not sure if I missed this on the call, but did you give a percentage of your total sales on PVA and growth rate?

Chris Smosna

Yeah. The total sales for the quarter were 47% and the growth rate you know, without the FX impact is or sorry, with the FX impact is about 2% to 3%.

Marco Rodriguez

Got you. Thanks a log guys. I appreciate your time.

Chris Smosna

Thank you.

Operator

Thank you. And we have follow up questions coming from line of Daniel Moore with CJS Securities. Your line is now open.

Daniel Moore

Thank you, again. If I might ask just a little more granularity from the – on the guidance front in terms of SG&A what are your expectations for growth or dollars back half the year and are there any initiatives marketing otherwise that may be pulling back a little bit on just given the difficulty in environment right now?

Kevin Hall

Yeah. We expect small improvement in SG&A as we look for opportunities to reduce unnecessary spending. But the growth rate will be fairly stable in the back half and just down slightly.

Daniel Moore

Got it. And then you touched on inventory, maybe just quickly on Parkdale. What do you see in there? And you know, if that's driving the improvement in environment or net income and how sustainable is that as we look at the back half?

Kevin Hall

Yeah. So if you at the Parkdale results they actually had their spike in raw cost in the second quarter of the calendar year, our fourth quarter. So if you looked at April, May, June time period is where they really had their strong win [ph] up in cotton. So it's come back down. Things look good. As long as it stays there I would expect that they're going to have good performance.

Daniel Moore

Got it. Thank you.

Operator

Thank you. And I'm showing no further questions at this time. Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.