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Insiders Place Big Contrarian Bet on North Carolina Textile Mills
By Michael Brush
Exclusively for InvestorIdeas.com
November 8, 2007
Insiders have to be the ultimate contrarians. After all, who in their right mind would invest in North Carolina textiles mill right now? That kind of business has more than enough challenges from:
- Competition from producers in low labor cost countries like China
- Weakness in end markets like the auto, apparel, and home building sector which accounts for a lot of demand for yarn used in furniture and floor coverings
- Rising costs because elevated oil prices mean higher pricing for the raw materials used to make polyester yarn
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Given all these challenges, it should come as no surprise that Greensboro, NC-based Unifi (UFI) -- which makes polyester, nylon and specialty yarns -- is posting bad numbers. It reported $116 million in losses on $690 million in sale in its 2007 fiscal year, which just closed. In the most recent quarter volume shipped declined by 7%.
So what in the world are insiders doing buying $1.9 million worth of stock during the past month in this micro cap name, and $1.3 million in the five months before that? Here’s a look at why these purchases may make sense.
Under new management
First off, the company is under fresh management. It parted ways with CEO Brian Parke in August and replaced him with William Jasper in September, after a board room reshuffle. The board now has over 150 years experience, collectively, in the textile industry. The company also appointed a new finance chief and a new marketing and sales director.
Naturally, the new managers are working on a turnaround. “I believe financial performance of the company over the last several years has been unacceptable, and we intend to change that,” Jasper said in the most recent conference call. Chief among the changes are plant closings, cost cutting and development of a joint venture in China. We’ll get to the detail on those changes in a moment.
Some natural advantages
But first, the managers are working with several inherent advantages at the company.
- Unifi has a specialty “premier value products” line that generates better margins than commodity yarns. Sales from these lines are up 600% since 2001, albeit off a small base. “We expect that trend to continue,” says Jasper. These products represent about 7.5% of overall products but that should increase to 20% with time.
- One of the key drivers here is an environmentally-friendly product called Repreve. It is “eco-friendly” because it is made with 100% recycled materials. Repreve is used in several well-known apparel brands. It is getting noticed in the press and on the Discovery Channel.
- U.S. lawmakers have assured a built-in demand for Unifi yarns. Under the rules of the North American Free Trade Agreement, the Central American Free Trade Agreement, the Caribbean Trade Partnership Act, and the Andean Trade Preferences Act, importers from other parts of the Americas can ship apparel duty-free to the U.S. under certain conditions. One of them is that they use yarn made in the U.S. – by companies like Unifi.
- Ufnifi should also benefit from a weakening dollar, which probably has further to decline against emerging market currencies in Central and Latin America. The cheaper dollar should make its product look more attractive to producers in those regions.
The turnaround
Here’s what’s been done, and what’s in store.
- Unifi just shut a plant in Kinston, NC, and it is moving production to a Yadkinville, NC, spinning facility which can run at a higher capacity for better efficiency. Unifi made one of its basic ingredients for yarn, called partially oriented polyester, at its Kinston plant. Now, by purchasing more of it in the open market, it has better leverage in negotiating prices, and the company can get it cheaper than the cost of making it at the recently-closed plant. The company will save about $12 million in working capital due to the plant shut down, to be realized in 2009.
- The company has taken out $9 million in annual overhead, and plans to go after more costs. “If an overhead cost is not adding value to either the product or the supply chain, we are going to either minimize it or eliminate it,” says Jasper.
- Unifi is selling off some other plants, and it plans to run the rest at high capacity levels for more efficiency.
- Unifi has high hopes for its joint venture in China, where demand for polyester and specialty yarns is growing at a rapid rate of 8%-10% a year.
Through efforts like these, the company hopes to turn profitable and improve cash flow soon. “The plan is in place, and now is the time to execute,” says Jasper. “These critical operating tasks will be measured weekly to assure we stay on track and achieve quick and lasting results.”
The bottom line: A lot of this is basic block-and-tackle turnaround stuff. That doesn’t mean it is easy. The key is in the execution, and for that you have to trust management. Given the hefty insider buying here, it seems fair to conclude this team has a lot of confidence in itself. Managers have placed significant personal bets that they can get the job done.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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